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Kingdom stays committed to economic diversification
By Saudi Gazette Staff
Published in The Saudi Gazette on 22 - 05 - 2009

The current economic crisis marks the first true test of the Kingdom's ambitious diversification drive of recent years, NCB Capital, the investment banking arm of National Commercial Bank, Saudi Arabia's largest bank, said.
The rechanneling of oil revenues has been highly effective in kick-starting the development of the non-oil sector of the economy, however, much of this progress was critically dependent on oil as an input or a source of liquidity. As a result, the traditional oil-dependency of the economy has not substantially changed as yet and the government now has the opportunity to take stock and refocus its efforts.
Dr Jarmo Kotilaine, chief economist of NCB Capital, said “according to our research, only one third of the economy is reasonably insulated from fluctuations in the oil sector today so the government's expansionary deficit budget for this year is critical to ensuring a continued flow of funds into key social and infrastructure projects.”
In that regard, the bank notes the commitment of the authorities to push forward with the diversification agenda.
But while the focus to date has been on further developing petrochemicals and real estate, sustained development requires a greater focus on other sectors and long-term human capital development, something that government policy now clearly recognizes.
“The government has prioritized investment in education and healthcare in order to boost the presence of nationals in the economy and to stimulate the development of knowledge-intensive sectors. Indeed, Saudi Arabia's young population is likely to be one of its key advantages going forward” Kotilaine added.
The economic crisis is likely to lead to a greater focus on sustainability and stability and reduce the relative funds devoted to large-scale and costly ventures. The key focus going forward will be on infrastructure, services and non-oil manufacturing. Sectors of importance as investment priorities will also include financial services, tourism and mining,
The main recipient elements of this investment will be:
Creation of six integrated economic cities.
These contribute some $150 billion to Kingdom's GDP by 2020, and will house around 5 million people and create over one million job opportunities. The Economic Cities Act will simplify implementation and drive completion and the previous success of industrial zones such as Jubail and Yanbu are good showcases.
Retail and real estate sector investment.
Both these sectors are expected to benefit from a young and growing population with high disposable income and growing housing needs. The affordable housing segment is already outpacing luxury developments in Riyadh, for example.
Health and education reforms to develop social infrastructure.
Flowing from both of the above elements are reforms to drive the knowledge services economy and reduce the reliance on expatriate labor, combined with an upgrading of the healthcare system to cope with the needs of a growing, and more health-aware, population. These factors are critical to the long-term success of economic diversification.
Transportation, energy and utility infrastructure.
Taking advantage of the Kingdom's strategic location between Asia and Europe is key, as is developing a capability to provide secure energy supplies for the growing population, perhaps through the break-up of the Saudi Electricity Company. Water demand will grow and new infrastructure will be required.
Mining to become a pillar of growth.
Saudi Arabia's vast mineral resources in bauxite, phosphates, zinc and copper hold huge potential and the government is taking rapid strides towards becoming the world's largest supplier of phosphate-based fertilizers.
Hence, Kotilaine said, “today the Kingdom's competitive advantage obviously lies mainly in hydrocarbons. However, the government has a clear vision for addressing this reliance and is focusing on the changes needed to bring about a more broad-based economy. At the heart of this lies a drive to develop a skilled local workforce through educational reforms.” __


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