How Did the Saudi Economy Tackle the Volatility of 2020 So Far?

Published September 23rd, 2020 - 03:00 GMT
How Did the Saudi Economy Tackle the Volatility of 2020 So Far?
COVID-19 has disrupted most Saudi plans to develop and diversify the economy. (Shutterstock: esfera)

By the beginning of 2020, plans for the Saudi economy were promising decreased reliance on oil revenues and more investments in other economic sectors; through expanding spending on tourism, manufacturing, art, culture, and entertainment activities. However, the COVID-19 pandemic hit the world including the Saudi Kingdom in March, wreaking havoc across the largest Arab economy.

Despite a very promising start of the year especially as Saudi Arabia had already made progress on multi-billion projects included in its 2030 Vision, such as the NEOM city and the King Abdullah Financial District, the Coronavirus outbreak came to interrupt all plans during Q1 of 2020, putting all projects on hold and causing damage to well-established sectors in the country.

On the 15th of March 2020, Saudi Arabia imposed a very strict lockdown on all cities and towns hoping to control the spread of the deadly virus in the country. Now, six months after the lockdown was imposed for the first time, Saudi authorities have reported more than 300k confirmed cases, but only 4,512 deaths, making it amongst the countries with the lowest mortality rate.

However, the 3-month lockdown that had stopped travel completely, inspired curfews in several cities, and stopped most business activities, resulted in acute consequences on the Saudi economy.

One of the very early signs of the financial damage caused by COVID-19 was evident in the freefall witnessed in oil prices in April 2020, with oil indexes going negative in some cases, pressured by competitiveness between oil producers in the spring and the sharp drop in demand for oil in light of worldwide restrictions. 

This drop in oil prices at a time other sectors are struggling to develop as per plans, have added more pressure on the government's efforts to carry out development plans. Oil export revenue has been reportedly 21.9% down in Q1 2020, compared to that of 2019.

Even the sectors that Saudi Arabia was planning on investing in throughout the year, such as tourism and the entertainment industry, have been greatly impacted; especially as the country continues to impose travel restrictions that are being gradually lifted in the coming weeks.

The travel ban imposed by the Saudi government since March has stopped the religious tourism sector almost completely, as short-term trips to Mecca known as Umrah have been halted for the last six months, while pilgrimage rituals were held symbolically when local authorities have allowed around 10k residents to travel to Mecca last July, after years of welcoming more than 2 million people a year for the same purpose. This major decline has also had a negative impact on the Saudi government's annual revenues.

According to the International Monetary Fund (IMF), the Saudi economy is estimated to contract by 6.8% this year.

In their attempt to make up for the financial losses resulting from the coronavirus pandemic, the Saudi government had increased the VAT rate from 5% to 15% last May.

Despite these negative numbers, that are not surprising considering the negative effect of COVID-19 all around the world, Saudi Arabia continued to draw interest from foreign investors during 2020.

According to a report published by the Ministry of Investment of Saudi Arabia (MISA), 506 new international companies have been granted investor licenses during the first half (H1) of the year, which shows stable confidence in the Saudi economy despite the current meltdown.

Additionally, speculations of an approaching peace deal between Saudi Arabia and Israel following the ones signed between the UAE, Bahrain, and Israel last week suggest an increase of international investments in the country as a result of such agreement. Yet, Saudi official statements have denied similar reports and stressed a deal within Saudi's previous conditions.

Saudi Arabia continues to follow an optimistic approach in terms of economic recovery, especially as the country's measures to limit the spread of COVID-19 achieve success curbing the average number from several thousands a day, a few months ago to only a few hundreds a day now.

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