Non-oil boom masks deeper risk as Saudi growth still hinges on state spending

Saudi Vision 2030 deploys several policy instruments to reduce dependence on hydrocarbons. Central among them is the Public Investment Fund (PIF), which serves as the primary capital engine for diversification by investing in strategic sectors such as tourism, entertainment, mining, logistics, renewables, and advanced manufacturing. These investments are complemented by sector-specific strategies (mining as a third economic pillar, renewable energy expansion, and industrial localization), along with fiscal reforms including VAT (Value Added Tax) introduction, subsidy rationalization, and efforts to expand non-oil revenues. Labor localization and skills development policies aim to increase domestic participation in higher-value industries.

Dr. Umud Shokri, Senior Visiting Fellow at George Mason University and Energy Strategist noted that in the short term, diversification has produced measurable results. Non-oil GDP (Gross Domestic Product) has grown steadily and now represents a majority share of total output, and non-oil revenue has increased significantly. In his comment for AzerNEWS, economic momentum remains tied to public spending and oil revenues, meaning fiscal pressure can re-emerge during periods of lower oil prices or constrained production. In the longer term, sustainability depends on whether private-sector productivity, competitiveness, and non-oil exports can replace state-driven investment as the main growth engine. Megaprojects and new industries have long gestation periods, and achieving a knowledge-based economy requires deeper reforms in human capital, productivity, and innovation capacity.

As the expert stated Saudi Arabia has undertaken regulatory and institutional reforms to attract private investment and foreign capital. Key measures include a new investment law that simplifies market entry, strengthens investor protections, and expands foreign ownership rights. Updated corporate regulations, privatization programs, and public-private partnership frameworks aim to reduce state dominance in commercial activity. Incentives such as tax benefits under the regional headquarters program and improved financial market access are designed to encourage multinational firms and institutional investors to commit capital.

According to the Shokri, these reforms have improved investor sentiment and produced tangible outcomes, including increased foreign direct investment in targeted sectors and greater multinational presence. However, investor confidence remains tempered by structural concerns. The economy still relies heavily on government and PIF spending to drive demand, which raises questions about the durability of private-sector growth independent of state support. Execution risks in large projects, regulatory consistency, and broader geopolitical and fiscal volatility continue to influence investor risk perceptions. The direction of reform is clear, but full de-risking requires consistent implementation and stronger private-sector profitability.

Regional economic coordination can accelerate diversification by expanding market size, enabling shared infrastructure, and facilitating cross-border investment. In practice, progress has been strongest within the Gulf Cooperation Council, where customs integration, capital market links, energy cooperation, and coordinated diversification strategies support economic expansion. Regional investment by the PIF and joint infrastructure and energy initiatives illustrate the potential for deeper integration.

However, broader regional integration remains uneven. While economic cooperation in the Gulf provides scale and investment opportunities, competing national strategies, regulatory differences, and geopolitical constraints limit the depth of integration. Stronger alignment in logistics, industrial policy, tourism, and financial markets could significantly accelerate the objectives of Vision 2030, but realizing this potential requires greater policy coordination and reduced economic fragmentation across the region, added energy strategist.

Photo: Bloomberg