Report: Extent of Diversification in Saudi Arabia's Non-Oil Sector

This report analyzes the extent of diversification within Saudi Arabia's non-oil sector, examining its current state and potential for growth in light of Saudi Vision 2030. The study investigates various non-oil sectors, including finance, insurance, real estate, construction, and manufacturing, using output gap analysis to identify areas for advancement. The research explores the impact of oil price fluctuations on the Saudi economy and the importance of developing alternative production platforms to reduce dependency on the oil sector. The report also delves into the methodology used, including a mixed-methods approach, research onion, and data analysis techniques. The findings suggest that while the financial sector shows significant growth, other sectors require strategic development and technological advancements to contribute effectively to the national GDP and achieve the goals of Vision 2030. The report concludes by assessing the feasibility of the reform plan and providing recommendations for sustainable economic growth in the non-oil sector.

ASSESSING THE EXTENT OF DIVERSIFICATION IN THE
NON-OIL SECTOR OF THE ECONOMY OF SAUDI ARABIA
& ANALYSING IT IN LIGHT OF SAUDI VISION 2030
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Abstract
The paper is based upon the objective of analysing the extent of diversification in the
non-oil sector of Saudi Arabia and testing the feasibility of the Saudi Vision 2030 in light of
the findings. It is been found that the major plinth of economic sustenance in case of Saudi
Arabia is the oil sector. However, the recent drop in the prices of oil have led to the
importance of developing alternative means and sources of production. The significant
biasness of the Saudi Arabian economy requires creation of alternative production platforms
that can contribute to the GDP of the country. To raise the volume of domestic production it
is important to not only boost the oil sector but also the transportation, construction,
government services, manufacturing, tourism,, whole and retail, hospitality sectors in which
the country possess the capability to develop in the near future. The Saudi Vision 2030 is a
plan undertaken to reduce the dependency of the economy of Saudi Arabia over the oil sector
and focus upon creating alternative means of production. The presence of these alternative
sources of production will help in the sustenance of the economy when the oil prices are
found to get lowered significantly as the dependency of the Saudi Arabian economy have
shifted into other sectors also.
The paper delves into this aspect to understand the presence of market diversification
within the non-oil sector of the economy as well as measuring the segments within the non-
oil sector that can grow significantly in the near future. All of these finding are then studied
coupled with the Saudi Vision 2030, which helped in understanding the feasibility of the
reform plan as well as help to anticipate the extent up to which the Saudi Vision 2030 can get
successfully accomplished based upon the exiting scenario of the Saudi Arabian economy.
From the findings it is been found that among the non-oil sector of Saudi Arabia specifically
the financial sector as well as the insurance and real estate sector are booming significantly
overtime followed by ensuring that if infrastructural development is being effectively
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incorporated in this sector then there is high probability that these sectors will be able to
contribute significantly to the national GDP of Saudi Arabian economy. Moreover, the output
gap analysis revealed that there is scope of advancement in the construction,
telecommunication, storage, wholesale, retail, restaurants and hospitality, manufacturing,
government services as well as transportation sectors, however, these sectors lacks in
implementation of effective planned strategies. Moreover, another sector that needs both
technological advancement and significant support from the government is the agricultural
sector of Saudi Arabia. On a precise note, it has been found that there is presence of
alternative production platforms that can support the national economy of Saudi Arabia in
accordance with the Saudi Vision 2030 irrespective of the fact that the decline in the oil
prices or oil market crash would not be able to break the economic axis of the country of
Saudi Arabia if and only if these sectors are effectively pioneered towards development.
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Acknowledgement
I want to convey my heartiest gratitude to all the people who helped me in carrying
out my research. The road towards accomplishment of the research was a wonderful
experience especially due to the gratefulness of my advisor Mr/Mrs
___________________________ and my supervisor Mr/Mrs
___________________________. There guidance as well as support helped me to channelize
my efforts in the rightful direction followed by overcoming the confronted challenges. I am
also thankful to my friends for helping me out in the process of accumulating credible data.
Moreover, the co-operation from my parents and their support in encouraging me in the
process of my research is noteworthy. Last but not the least, I am highly obliged to the
authorities of my institution for giving me the opportunity to contribute my efforts in the field
of the research.
Thanking all of you,
Yours Sincerely,
(Signature)
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Table of Contents
Chapter 1: Introduction..............................................................................................................9
1.1 Introduction.....................................................................................................................9
1.2 Background of the Study......................................................................................................9
1.3 Background of the Non-oil Sector of Saudi Arabia...........................................................10
1.4 Rationale of the study.........................................................................................................11
1.5 Problem statement..............................................................................................................12
1.6 Research aim......................................................................................................................12
1.7 Research objectives............................................................................................................12
1.8 Research questions.............................................................................................................13
1.9 Research Hypotheses.........................................................................................................13
1.10 Significance of the study..................................................................................................14
1.11 Structure of the research study.........................................................................................14
Figure 1: Dissertation Structure...........................................................................................14
Chapter 2: Literature Review...................................................................................................15
2.1 Introduction........................................................................................................................15
2.2 Conceptual framework.......................................................................................................15
Figure 2: Conceptual framework.........................................................................................16
2.3 Understanding the general concept of Saudi vision 2030..................................................16
2.4 Various Non-Oil Sectors:...................................................................................................19
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2.4.1 Herfindl concentration index and the Normalized-Hirschman concentration Index
model:.......................................................................................................................................23
2.10 Summary:.........................................................................................................................24
Gap in the Literature................................................................................................................25
Chapter 3: Research Methodology...........................................................................................28
3.0 Introduction:.......................................................................................................................28
3.1 Research method outline:...................................................................................................28
3.2 Research Onion:.................................................................................................................29
Figure 8: Research onion.....................................................................................................29
3.3 Research Philosophy:.........................................................................................................30
3.3.1 Justification for the chosen research philosophy:...........................................................30
3.4 Research Approach:...........................................................................................................30
3.4.1 Justification for the chosen research approach:..............................................................30
3.5 Research Design:................................................................................................................31
3.5.1 Justification for the chosen research design:...................................................................31
3.6 Research strategy:..............................................................................................................31
3.6.1 Justification for the selection of Research Strategy........................................................32
3.7 Selection of Sampling Methods and Sample size:.............................................................32
3.8 Data collection method:.....................................................................................................32
3.8.1 Secondary Research:.......................................................................................................33
3.9 Data analysis:.....................................................................................................................33
3.10 Research ethical consideration:........................................................................................34
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3.11. Research limitation:........................................................................................................34
3.12 Time horizon:...................................................................................................................34
3.13 Summary:.........................................................................................................................35
Chapter 4: Presentation of the Data.........................................................................................36
4.1 Introduction:.......................................................................................................................36
4.2 Qualitative Analysis...........................................................................................................36
4.2.1 PESTLE Analysis............................................................................................................36
4.3 Quantitative Analysis.........................................................................................................50
5. Recommendation & Conclusion..........................................................................................54
6. Reference list........................................................................................................................60
7. Appendix 1...........................................................................................................................63
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List of Table & Figures
Figure 1: Dissertation Structure...............................................................................................14
Figure 2: Conceptual framework.............................................................................................16
Figure 8: Research onion.........................................................................................................29
Figure 1: PESTLE Analysis of the Non-oil sector of Saudi Arabia........................................48
Figure 2: Herfindl concentration index and the Normalized-Hirschman concentration Index53
Figure 3:Output Gap Analysis.................................................................................................54
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Chapter 1: Introduction
1.1 Introduction
The kingdom of Saudi Arabia is the world’s largest holder of the oil resources and
hence the economy preferred to specialise in the production, consumption as well as trade of
oil resources which is of high demand in the global economy due to its scarcity. The
societal development of the country is being boosted through the revenue that are being
earned from the oil sector. The funds acquired through the selling of oil in the international
market and domestic consumption are channelized from to the underdeveloped sectors of the
country. Investments that were being done in those sector helped them to reorganize the non-
oil sectors and initiate new projects can provide a constructive framework of sustainable
growth in the long run. However, the questionable aspect under concern is that the non-oil
sectors are not getting developed as it is expected. They are being funded by the profits
earned through businesses executed by the oil sector domestically and in overseas and this
ensures growth of the non-oil sectors through the funded invested in developmental projects.
However, excessive dependency on the oil sector is ensuring growth in the non-oil sectors by
providence of capital, land and labour but is not able to ensure sustainable development for
the long run in the non-oil sector that will itself be able to generate revenue earning and
raise the country’s GDP followed by supporting other sectors.
This paper aims to understand the new Saudi Vision 2030, related to the diversification
of the non-oil sectors within the country and delves into the factors that impacts upon it. In
order to accomplish the process it is important to identify whether the goals of the plan
undertaken are realistically achievable within the stipulated time frame as well as the best
possible and feasible measures that will be able to actualize the objectives of strengthening
the non-oil sectors of the country substantially.
1.2 Background of the Study
The objective that the country of Saudi Arabia used to remain abided by is to enjoy the
comparative advantage that they have on the commodity oil, but this is leading the economy
towards a special commodity. Notably, it is been seen in the consecutive years of 2014-15,
the price of oil was 107 US dollars per barrel while it dropped to 30 US dollars per barrel by
the beginning of 2016, whereas he latest price of oil by 2019 is 50.6 US dollars
(Indexmundi.com. 2019). If in case oil prices drops in future drastically due to change in
business cycle or economic catastrophes that will pioneer the economy of Saudi Arabia
towards a financial crisis within the country due to its dependency upon the oil sector and
non-availability of alternative business initiatives in other socio-economic segments that will
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be able to back the economy as well as country’s GDP in times of crisis periods. When the
country confronted with the decline in the oil prices as well as in the volatility in the
international market then the economy of the country became vulnerable due to the lack of
its diversification.
1.3 Background of the Non-oil Sector of Saudi Arabia
The non-oil sector of Saudi Arabia is a superset of many sectors that are moderately
developed or developing apart from the oil sector of the country. The wholesale, retail trade,
hotels and restaurant sector have 16.1 % share by the year 2018 in the economy of Saudi
Arabia where it as having a performance growth of 2.8 % by the year 2017 and -1.2 % by the
year 2018. The other sector is the non-oil manufacturing where the percentage of share is
14.90 % with a growth potential of 3.1 % by 2015 and – 1.2 % by 2016 respectively. The
transport, storage and communication sectors are other non-oil sectors that possess sufficient
potential as well as necessity in order to accomplish an overall economic growth within the
country. Real estate or the ownership of dwellings is another important sector apart from the
oil industry within the country that have 14 % share with a growth potential of 4 % by the
year 2017 and 2.6 % by 2018 respectively. Along with that the construction sector has a
percentage share of 9 % within the overall sectorial division of the economic segment except
the non-oil sector. The growth performance of the construction sector is 3.4 % by 2017 as
well as 3.6 % by 2018. Thee economy runs based upon the business initiatives it undertakes
and able to actualize the financial, social, technological and economic initiatives that it have
executed. Notably, on this regard the sector for insurance, business services as well as finance
is of crucial importance both for the oil and the non-oil sectors of the economy.
The percentage of share that this sector have within the economy is 8.50 % while the
growth of performance in this sector is 5.6 % by 2015 while it degraded to -3.1 % by the next
year 2016. The agricultural sector along with forestry and fishing is a vital sector of the
economy due to the reason that there are lots of lands that are not properly utilized. If land
utilization for agrarian purpose takes place without deforestation by for agricultural related
activities, fishing, etc. then it will be effectively boost the non-oil sector of the economy. 4.2
% share the sector already possess within the economy and 0.6 % growth rate has been found
by 2017 and by 2018 respectively. The natural gas, water and electricity sector on the other
hand have almost 2.3 % share within the economy and the growth is very slow by 2017 and
2018 as it was 5.3 % and 0.8 % respectively. The government services focuses on Healthcare
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with 24.90 % off share within the economy and the performance growth of 2.3 % by 2016
and 0.3 % of 2017. The non-oil mining and quarrying sector have 0.70 % share with a
retarded growth performance of 4.1 % by 2017 to 2.9 % by 2016. This are the existing
scenario prevailing in the non-oil sector of the economy of Saudi Arabia which needs to be
addressed in order to boost these sectors and to ensure that the sole dependency of the
country only upon oil gets reduced.
1.4 Rationale of the study
The issue under consideration is to accomplish a research regarding the economic
development and social restructuring of the economy of Saudi Arabia which is found to be
dependent sufficiently upon the oil sector of the country due to the reason that it is one of the
most demanded commodity throughout the world as well as Saudi Arabia is the largest
exporter of oil. The country have a significant amount of oil resources and due to this reason
years after years it have preferred to specialize themselves in the production and trade of oil.
It is a great source for their revenue earning and economic strengthening of the country.
However this lead to the fact that the country become solely dependent upon the production
of oil only and other sectors like transportation, agriculture, non-oil mining, quarrying,
healthcare, electricity, water, gas, financial services, insurance, retail, wholesale,
communication, information technology, hotel, restaurant, real estate, storage, etc. sectors do
not getting developed as compared to that of the oil sector. Creating spaces for developing the
other sectors beside the oil sector will boost the overall economic condition of the country
designing alternative means of production as well as alternative source of revenue generation.
As it is being found that after consecutive price shocks in the market value of oil, the
result have led to lower revenue earning from the selling of petroleum as well as its
complementary products too. The same amount of oil that when sold by 2014 was priced by
107 US dollar per barrel though now by 2019 it cost nearby $ 50.5 per barrel. Such price drop
is able to earn half of the revenue by selling the same amount of oil compared to that it was
previously earning. Thus the GDP earned from the oil sector is lowered. However, the
revenue earning is still high as compared to other countries that have less absolute advantage
in the export of oil compared to that of Saudi Arabia yet the better choice for Saudi Arabia in
order to sustain at the same level of revenue generation requires the development of
alternative sectors in the country that will not only remove their dependency over oil only but
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also will create opportunity to earn revenue when the oil market faces lowering of selling
price of oil both domestically and internationally. Thus, the research will be able to shed
light upon the impact of Vision 2030 as well as will be able to delve into the feasible areas
from where the country will acquire the capability to boost its other sectors like
transportation, agriculture, non-oil mining, quarrying, healthcare, electricity, water, gas,
financial services, insurance, retail, wholesale, communication, information technology,
hotel, restaurant, real estate, storage, etc. apart from the oil sector only along with providing
scopes for future study.
1.5 Problem statement
The problem arises due to the fact that in order to ensure that an economy is able to
grow from all respect, it is important to facilitate implementation of oil as well as the non-
oil sectors of Saudi Arabia. Their excessive dependency towards oil sector is not allowing
the country to strengthen its other economic segments. In order to do so the problem
statement encompasses the necessity to boost the non-oil sectors along with the oil sectors
unless when the oil sector deteriorates in performance then the economy of Saudi Arabia
slows down. To keep it at a sustainable level and to ensure the overall growth and long run
development of the economy, it is essential to implement developmental initiatives that will
be able to ensure that alternative opportunities are available for the economy to continue its
growth when the oil sector faces an uncertain economic downturn.
1.6 Research aim
The aim of the research is to ensure the feasibility of vision 2030, while reflecting
the importance of the non-oil sector beside the oil sector. It is crucially important that to the
economy of Saudi Arabia do not faces economic devastation when the oil market both
nationally and internationally gets affected. However, the purpose lies in creating alternative
opportunities through which the non-oil sectors will be able to develop and ensure the
overall growth of the economy in place of only the development of the oil sector.
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