KSA “must reinvent its economy beyond the age of oil”, says McKinsey
Author: PM Editorial | Date: 16 Dec 2015
A changing global energy market means a new economic culture for Saudi Arabia
Saudi Arabia’s economy has reached an inflection point and must actively consider a future beyond oil resources, says a new report released by the McKinsey Global Institute.
According to the report, the Kingdom will no longer be able to rely on growth in the oil revenue that supported it between 2003 and 2013, and responding to the challenges in the industry with reactive policies such as budget freezes is likely to result in rising unemployment and falling household income.
Instead, the region needs to introduce a “productivity-led transformation” of the economy, and prepare for a changing workforce demographic.
McKinsey’s thoughts on the Saudi economy will be seen as a significant intervention, as the consultancy is globally renowned for the depth of its research and the accuracy of its macroeconomic predictions.
Over half of the Saudi population is under 25, and the report estimates that a predicted demographic “bulge” could result in 4.5 million new working-age Saudis joining the labour market by 2030. Taking full advantage of this new workforce requires both an economic shift, and a move away from the region’s current reliance on foreign nationals to focus on Saudi men and women.
The report has identified eight non-oil sectors of the economy with the potential to harness this changing demographic and reaccelerate growth within Saudi Arabia. These include manufacturing and mining, retail and wholesale trade, tourism and healthcare. With the correct investment – the report estimates $4 trillion is required – these areas could account for more than 60 per cent of GDP and job growth to 2030.
Achieving these goals will mean a significant shift from the current government-led model of Saudi Arabia to a market-based approach, and all areas of the economy will need to be invested in the transformation, the report says. While the transition will be challenging, it could result in a more sustainable economy than the previous oil booms, with the potential to double the region’s GDP by 2030.
“Over the next 15 years, the Kingdom is likely to face critical challenges, both fiscally and in its demographics, with heightened competition in the energy market and a big increase in the number of Saudis reaching working age,” the report says. “As a result, the economy is at a transition point. While much of the outside world has focused on the very real challenges, we believe there are also substantial opportunities for the Kingdom to transform its economy to become more sustainable and less oil-dependent.”