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After Crown Prince Mohammed bin Salman announced the kickoff of Saudi Arabia's massive Vision 2030 economic reform plan in 2016, his country's government charged toward implementing many of the sweeping changes it hoped to make over the course of almost a decade and a half. It was going to diversity its economy, boost private industry, make investment easier, reduce unemployment, increase innovation and modernize the country in countless ways both social and economic. Now, only two years later, the mainstream media is already asking if Vision 2030 is failing.

The Big Picture

Since introducing its aggressive Vision 2030 economic reform plan in 2016, Saudi Arabia has faced inevitable barriers. As anticipated, Saudis used to receiving hefty benefits from the government have been reticent to revise their expectations about what they deserve in terms of jobs and services. The country has also struggled to open up its economy – one of the largest and yet most closed off in the region – to greater foreign investment. Now that oil prices have risen, Saudi Arabia's reform drive in some ways is stalling, even while the long-term push to diversify and drum up private sector activity remains a priority, albeit a challenging one.
    
There are reports that the country is delaying its initial public offering (IPO) for the state-owned Saudi Arabian Oil Co., that vague government decrees are confusing small and medium-sized businesses and making them hesitant to invest, that unemployment rates have remained steady and that citizens are unhappy with many of the economic reforms the government has implemented so far, such as a landmark sales tax. But a project as ambitious and all-encompassing as Vision 2030 cannot be evaluated in terms of success or failure at this early stage, especially not based on indicators such as those above.

In some ways, Vision 2030 was designed to be too big to fail. With so many initiatives being pushed across so many industries and sectors of society, it's almost guaranteed that some progress will be made. But the huge project can also be viewed as too big not to fail – and the government knows it. Objectives in the text of the plan, such as building a "vibrant society," a "thriving economy" and an "ambitious nation," are aspirational and intentionally vague. And while some of Riyadh's goals have lofty numbers attached, such as a plan to increase non-oil government revenue to 1 trillion Saudi riyals ($267 billion), others are nebulous and tied to tricky social behaviour changes, like its intention to "close the outputs of higher education and the requirements of the job market."

With Vision 2030, the Saudi government is attempting to restructure the country on extremely fundamental levels, and these changes aren't going to come easily or quickly – especially when they require Saudi citizens to rethink their social contract with their own government.

The Drive to Diversify

Economically, Saudi Arabia has already seen some success in its reform efforts since 2016. One of the main drivers behind Vision 2030 was the need to diversify the oil-producing country's economy – a need that was made painfully clear when global oil prices plummeted in 2014. As it faced decreasing oil revenue in the following years, Saudi Arabia found its budget deficit growing swiftly and its foreign exchange reserves bleeding out. Vision 2030's emphasis on seeking alternatives to oil revenue was an acknowledgment of just how vulnerable the country will be as long as it remains so reliant on oil.



Since 2016, non-oil exports have risen steadily, up 26.5 percent year-over-year in the first quarter of 2018. Thanks in large part to a new value-added sales tax implemented in January, non-oil revenue has also increased substantially: 63 percent year-over-year in the first quarter of 2018. The country is committed to enforcing its new tax, as well as to increasing tariffs for electricity, water and fuel. And even in the face of some popular pushback, the government is sticking to a somewhat aggressive timeline for rolling out new price hikes (the Saudi Electricity Co. estimated in June that the most recent hike increased prices 67 percent year-over-year).

Riyadh's progress toward economic goals have also been helped by its old friend: increasing global oil prices. The country has gotten lucky in this regard. No longer haemorrhaging money from foreign exchange reserves as it was a few years prior, the government has fallen back on an old habit of acting with less urgency when times are good for the oil industry. At the start of Vision 2030, Riyadh was eager to trim expenses, quickly and aggressively, while charging as fast as it could toward the development of an economy that does not rely on oil. But now that it has extra oil revenue, Saudi Arabia is slowing down reform efforts a little, while still moving toward a positive current account balance. It is funneling extra oil revenue into topping up its now stable foreign exchange reserves levels, balancing its deficit and funding an expenditure-heavy expansionary budget.

In the long term, there is still a strong impetus for Saudi Arabia to develop a diverse economy that relies less and less on oil revenue. It and other oil-producing countries are facing a slow but very real transition away from a global dependence on oil to fuel transportation. And Saudi Arabia knows that the commodity will only remain as valuable as it currently is for a certain amount of time. The country's cyclical approach to reform, in which emphasis ebbs and flows, will eventually come up against peak oil demand, an immovable reality of the global energy transition.

Changing a Way of Life

Meanwhile, Saudi Arabia's increase in non-oil revenue has come primarily from implementing foundational changes to the country's social contract. With Vision 2030, the government is trying to step back from the traditional relationship it has with its population, where it provides all the resources and services Saudis need at very little cost in exchange for high levels of control. In a move that has startled many Saudis, Riyadh has been raising taxes and hiking service tariffs – and that comes with a cost. Price hikes, such as a combined 145 percent rise in electricity tariffs for residential and commercial institutions, are reportedly having a dampening effect on consumption. In 2018, cash withdrawals and consumer spending have both stagnated.

Tax hikes and increased prices for services also reduce the incentives for foreign businesses to set up operations in the kingdom, which had previously been viewed as a tax haven. To exacerbate the consumption issue, Saudi Arabia is welcoming fewer employees from other countries in an effort, also driven by Vision 2030, to employ more Saudis in private sector jobs. And living costs in the country are as high as ever.

In response to these changes, Saudis have been expressing discontent, and the government is now trying to mollify that with countermeasures to soften the blow to citizens. Riyadh is spending billions on a Citizen's Account Programme, which provides cash payments to vulnerable Saudi families who cannot easily afford the new service tariff hikes and taxes. Of course, the money spent on the Citizen's Account Programme was not originally factored into the 2018 budget, and by royal decree, the government can easily order more funds to the programme, so the move is threatening to the government's bottom line. But with the country's overall economic picture improving, Riyadh is willing to make this tradeoff in order to tamp down dissatisfaction.

A Lot of Changes, Not Enough Clarity

Finally, one of the critical pillars of Vision 2030 is the kingdom's goal of increasing foreign investment. In several key ways, Riyadh is successfully laying down the foundations needed to eventually bring in more investment: For the first time, the kingdom has implemented a bankruptcy law, which will streamline the previously labyrinthine process. And the Financial Sector Development Programme, one of the 12 Vision Realization Programs meant to push forward the country's goals in a more granular way, is fiercely focused on setting up a positive regulatory environment for investors. The programme is promoting new regulations such as the bankruptcy law and a new public private partnership regulation. And there have been some concrete positive results: Investment research firm MSCI recently classified Saudi Arabia as an emerging market, making it more visible and accessible on its investment index and thus making it easier for both small and large foreign investors to invest in Saudi stocks over the coming years.



Privatization plans are also a huge part of Vision 2030, so that the government can stimulate growth and innovation in the private sector over time. But progress has been slow. Aside from the slowdown on the landmark Saudi Aramco IPO, many other privatization initiatives are in a nebulous place right now, not fully formed or being clearly communicated to stakeholders.

As a result, some companies have enough of a cushion to succeed amid this uncertainty, while many others are suffering, being penalized for moving too slowly in "Saudization" efforts by having too many foreign workers or, alternatively, eating the loss when undertrained and under-motivated Saudi employees aren't performing at desired levels. Small- and medium-sized business owners have been reporting confusion about how to obtain financing and a lack of resources to help them adapt to changing visa and tax regulations.

Some businesses are indeed successfully navigating the changing environment. The percentage of bank loans to small and medium-sized companies versus larger companies is slowly increasing; it went from 2 percent to 5 percent year-over-year according to reports from earlier this year. This is happening slower than the Saudi government wanted and planned for, but it is happening. Still, the major question of whether investors will play ball within the evolving Saudi economic environment remains unanswered. With all the shifting regulations, many private sector companies in the kingdom remain uncertain about whether or not they should take a risk and invest in Riyadh's promises.

And ultimately, investor sentiment is being dampened by the fact the state is fully in control of each and every initiative. Over the past year, the government has detained Saudi business people, journalists and social activists who have not responded in the desired way to Riyadh's reform efforts, proving that the state is still the only permissible engine for change and growth in the country. In such an unstable environment, where the government still retains so much control despite trying to foster a private sector, individual Saudis and individual Saudi companies are naturally hesitant to invest in the country in the long term.

Looking Forward

It's far too early to judge the success or failure of Saudi Arabia's Vision 2030. At this stage, there is clear evidence of progress in some areas and there are also solid indicators that certain efforts have slowed and faced major challenges. But slowing down is not the same as stopping. The Saudi government has so many plates spinning that it's bound to drop some, but based on results so far, it also seems poised to make some major changes in the coming years.

“Saudi Arabia's Vision 2030 Plan Is Too Big to Fail – Or Succeed” is republished under content confederation between Financial Nigeria and Stratfor.