FDI flow and economic reforms
Saudi Arabia has become the highest recipient of foreign direct investments in the region, thanks to its economic reforms and liberalisation policies

By Dr Jasim Husain Ali
 

According to World Investment Report, issued by the World Conference on Trade and Development (UNCTAD), inbound FDI in Saudi Arabia averaged merely $245mn for the period spanning 1990 to 2000. This figure shot upto $12.1bn in 2005 and to $18.3bn in 2006.

In 2007 inward FDI amounted to $24.3bn, showing a hefty growth of 33 per cent. This was the highest amount achieved by any nation in West Asia including fellow members from the Gulf Cooperation Council (GCC). Turkey emerged second with FDI inflows of $22bn. For its part, the UAE attracted $13.3bn of FDI, in turn the third highest amount in West Asia and the second best within the GCC.

Sustained reforms
The extraordinary progress relates to on-going economic reforms designed to turn Saudi Arabia into a key international hub for investment. The reforms gained momentum some ten years ago reflecting an official drive to join the World Trade Organisation (WTO). Saudi Arabia acceded to WTO in December 2005 following a decade-long protracted negotiation. The kingdom was the last GCC state to get membership of the WTO.

Of all the moves, credit must be given to the foreign investment law (FIL), enacted in April 2000. The law allows foreign firms to own a majority stake in companies within the kingdom. The maximum income tax rate for foreign firms has been reduced from 45 percent in 2000 to 20 per cent. In addition, Saudi Arabian General Investment Authority (Sagia), which looks after foreign investments, has put in place a one-stop-shop application process besides a 30-day deadline for decisions on investment applications.

Negative list
Conversely, the bill barred foreign investments in around 22 areas including exploration, drilling and production of oil, and thereby dubbed as a “negative list”. However, officials have since eased restrictions, granting foreign investors the opportunity to invest in such sectors as insurance services, wholesale and retail trade, air and train transport, and communication services. Thanks to the Supreme Economic Council (SEC), currently the list includes 13 barred activities. SEC develops and oversees economic policies in the kingdom.

As part of WTO accession, Saudi authorities agreed to grant 60 per cent foreign equity shareholding to joint projects. In addition it changed laws allowing the setting up of foreign banks in the form of locally incorporated joint stock companies or as branches of international financial institutions.

To be sure, investors like to invest in Saudi Arabia as it has the largest gross domestic product (GDP) in the region. IMF statistics put Saudi Arabia’s GDP in current terms at $380bn in 2007. Saudi GDP is set to cross the $0.5trn mark in the not too distant future unless oil prices drop substantially. Amongst other characteristics, the Saudi economy boasts of a consumer market throughout the year. The country attracts a number of religious tourists for the annual Haj and Umra (little Haj that maybe performed at anytime). Around seven million people visit the Grand Mosque annually, with the figure expected to double in the next 10 years.

Addressing challenges
Inbound FDI should help in overcoming unemployment amongst locals and strengthening the kingdom’s competitiveness. According to the Ministry of Economy and Planning, the unemployment rate amongst the national workforce stood at 11.2 per cent in the first half of 2007. The government needs to create some 160,000 jobs to do away with existing unemployed and to cater to new entrants joining the workforce. Saudi economy needs foreign investments in industrial undertakings, to create employment opportunities.

Undoubtedly, the government cannot overlook the employment problem amongst locals because of its implications. For one, extremist groups often find recruits amongst the jobless. Close to 38 per cent of Saudi nationals are below the age of 14 and hence expected to enter the job market before soon.

A key challenge relates to ensuring the availability of jobs that meet the requirements of Saudi nationals. At stake is not just creating enough employment opportunities per se, but the right ones for Saudi nationals. The Saudis do not just desire some jobs that an expatriate maybe willing to undertake. The fact remains that Saudis do not want jobs like providing menial services in return for relatively low wages, like in the construction sector. The issue is not whether this is right or wrong, but a given in the kingdom. Certainly, such attitudes could change in the end through rehabilitation and training. However, Saudi officials do not have the luxury of letting unemployment rates to shoot up any further.

Aiming high
Saudi Arabia is also looking at breaking into the ranks of the top ten most competitive economies in the world by 2010. To be sure, there is plenty of good news. The Global Competitiveness Report for 2008-2009 has ranked Saudi Arabia at number 35 in the world amongst 134 economies covered in the study. As such, the kingdom has advanced 9 notches in a span of one year. The World Economic Forum issues the annual report that ranks economies based on their Growth Competitiveness. In turn, the index relies on three broad categories of basic requirements, efficiency enhancers and innovation and sophistication factors.

FDI helps in fulfilling long-term commitments such as establishing industrial undertakings. Hence, investments in stock markets do not constitute FDI, as they have the tendency of relocating at any point of time. Countries throughout the world seek foreign investments partly to help them address the job problem for nationals and to improve their economic prospects.

The performance of Saudi economy demonstrates that sustained reforms can improve economic prospects, and in turn help in addressing challenges. To conclude, over the past few years Saudi officials showed determination in streamlining legislations and laws related to foreign investments in the country. The authorities need to continue this path of having a more liberalised economy with limited government intervention.
 

The author is an eminent economist and Member of Parliament, Bahrain

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