Saudi urged to use high oil price to fund diversification

Saudi Arabia should take advantage of a surge in its revenue due to strong crude prices to boost investment in economic diversification programmes given its heavy reliance on volatile oil sales and the deteriorating unemployment problem, a key Saudi bank said on Wednesday.

Despite the fact that the Saudi economy has been resilient to the financial crisis and was able to withstand external shock with sound macroeconomic fundamentals, the Gulf Kingdom has its own challenges to overcome in line with its robust economy, National Commercial Bank (NCB) said.

It said that one of the main concerns has been job creation and the elevated level of unemployment even though GDP has recorded relatively strong growth figures over the past decade.

In its weekly market report, NCB blamed heavy reliance by the Saudi private sector on foreign labour as well as mismatch between college graduates and market needs, adding that this has kept the unemployment rate over 10 per cent.

The recent launch of a job programme has also caused a larger portion of the female population to announce unemployment to benefit from the King’s decree which drove the unemployment rate higher, it said.

Additionally, the overrun in budgetary expenditure accelerated to reach an estimated 38.6 per cent in 2011 due to the large one-off announcements made during March 2011, the report added.

"Coupled with rising domestic consumption of oil and crude gas as the population grows and industry expands at a rapid rate, the Saudi economy risks future export earnings which raises concerns over fiscal sustainability….the economy’s ability to diversify from oil revenues remains to be a challenge as the private sector only contributed 26 per cent to nominal GDP in 2011,” it said.

“With rising oil prices and production levels, the kingdom should benefit from current surpluses to pursue its investment drive to ensure the sustainability of the economy.”

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