The impact of government expenditure on non-oil GDP in Saudi Arabia

Table of Contents

Introduction

Literature Review

Impact of Agriculture on the Economy

References

Introduction

Government expenditure refers to the money the public sector or the government spends on providing services such as education and the acquisition of essential goods and services. It entails interest payments, transfer payments, and government consumption categories (Lee, Won & Jei, 2019). In this connection, the government has been developing policies that will make the economy more diversified and thus more stable. The policies aim to strengthen other sectors of the economy to make them profitable enough to contribute to its exports. The government of Saudi Arabia has been formulating and implementing favorable policies that will attract investors and create manufacturing firms in the country. In this regard, this paper examines the impact of government expenditure on non-oil GDP in Saudi Arabia.

The non-oil industry has not been taking part in developing the country's economy. The impact of other industries on the economy has not been felt as it should have. According to World Bank statistics from 2011 to 2013, the country's economic performance has been going down to fluctuating prices for oil in the world market (Hasnul, 2015). Other sectors in the industry have not been active enough to protect the nation's Gross Domestic Product from going down, as they are not well established. According to World Bank Information, the growth rate of Saudi Arabia from 2002 to 2013 has not been steady. The economy's stability depends on the value of products from Saudi Arabia in the international market (Alshahrani & Alsadiq, 2014). The country has had to invest more in its local manufacturing industries to guarantee stable economic growth. One sector the country has invested in to ensure the non-oil industry makes a significant contribution to the growth and development of the economy is encouraging entrepreneurs to set up non-oil commercial activities. Industrialists will help diversify the industry; in the process, more revenue will be generated, which will be used to develop the economy (Hasanov et al., 2021).

The value of non-oil products has been increasing as entrepreneurs invest more in the industry, intending to produce high-quality goods that can compete with goods from other countries in the world market. Entrepreneurs are drivers of innovation, which will transform the economy, making it more vibrant, just like developed nations' economies (Eid & Awad, 2017). Through innovation, new products are made, some of which have never existed in the market. With a new product in the market, the country will be able to fetch foreign revenue in the processing revenue from the non-oil sector will have a significant impact on the economy. Initiatives to increase the number of entrepreneurs in the economy have not been easy. Various challenges continue to affect entrepreneurial activities in Saudi Arabia, thus limiting their contribution to the country's economy (Alshahrani & Alsadiq, 2014).

Saudi Arabia does not have other natural resources apart from oil. Many entrepreneurs are forced to invest in related products and facilities. In the process, some end up selling their product at prices lower than the actual value to avoid competition. The situation has affected the growth of entrepreneurs in the country, with some choosing to invest in other countries with a variety of natural resources (Jiranyakul, 2013). The country's inflation has also been on the rise due to too much circulation of the country's currency in the market. Many traders deal with similar or related goods, with some opting to use unethical methods to acquire and sell their produce. With the government implementing strict measures to protect and encourage entrepreneurial culture, the country will develop, and the impact of the non-oil sector on the national economy will be felt (Irena, 2014). In light of this, it should be noted that there are different government sectors in Saudi Arabia, such as the education, health, housing, and social security sectors.

Education in Saudi Arabia, for instance, consists of 3 years each of high school and intermediate school, respectively, six years of primary school, and a Kindergarten. The students can choose whether to attend high school with vocational programs, the arts and sciences, or the commerce schools. The current education budget in Saudi Arabia is $53.4 billion, with the primary language being Arabic. At the same time, the proportion of males and females receiving education programs is 96.79% and 91.73%, respectively (Nishiyama, 2019). On the other hand, the health sector is considered the largest in the Near East. According to the 2019 fiscal budget, the health and social affairs experienced an 8 percent increase in budget from $42.4 in 2018 to $46 billion. This budget represents approximately 15% of total government expenditure. Similarly, it should be noted that the country has both private and the public healthcare system that provides good quality services (Hasnul, 2015).

At the same time, the housing demand in Saudi Arabia is expected to grow to 153,000 units by 2030 from 99,600 units in 2021. At the same time, the housing sector has been experiencing a rise in public-private partnerships (PPPs), which is part of the plan by the national government to encourage more private sectors and entities to invest in the sector. Nevertheless, the current social security rate in Saudi Arabia is 22 percent. This is contributed by the unemployment insurance, occupational hazard, social insurance, unemployment insurance and the employer, and employee social insurance at 1%, 2%, 12%, and 9%, respectively. The country's social security covers different types of insurance that include gratuity, maternity benefits, disability benefits, health insurance, and pension (Nishiyama, 2019).

Literature Review

According to Hasanov et al. (2021), the economic diversification of Saudi Arabia can be measured in four ways, which include the Economic complexity index, International Monetary Fund Diversification index, International Monetary Export Quality Index and Manufacturing Value-Added Gini. The economic complexity Index evaluates the number of products produced in a country and compares it with other nations to determine if they produce a similar product (Alshahrani & Alsadiq, 2014). A high complexity score is given when goods are manufactured by a country no other country provides similar products. When Saudi Arabia is compared with other nations' provide, the complexity score is low because many other countries produce oil and its non-oil industry is not well developed to provide goods no other country is producing. International Monetary Fund Diversification Index is determined using intensive and extensive information that reveals the nature of products country exports and which countries buy the goods (Hasanov et al., 2021). The methods consider Saudi Arabia's economy less diversified because the country's export revenue is dominated by the oil sector only. Increasing the number of exports through diversification of the country's economy by developing the non-oil products will increase the country's export earnings and make non-oil earnings impact the country's economy (Lee, Won & Jei, 2019).

IMF Export Quality Index, on the other hand, describes the quality of export of a country. The method estimates quality based on the price of the commodities. Saudi Arabia majorly exports crude oil, while its non-oil industry is not well developed to export high-quality goods compared with export from developed nations (Eid & Awad, 2017). According to this criterion for evaluating the diversity of the economy, Saudi Arabia needs to develop its non-oil industry further for income from the non-oil sector to have a considerable impact on the country's economy. According to Manufacturing Value-Added Gini, value-added to products in different manufacturing industries within the economy is evaluated to determine how a country's economy is diversified (Hasnul, 2015). According to the scale, Saudi Arabia is not well diversified because, apart from oil, its other industry is not well developed to significantly impact the country's economy. The diversity of an economy directly influences the development of the economy. The Gross Domestic Product of Saudi Arabia depends on how over sectors of the economy will function. Developing non-oil industries will ensure the country achieves its development programs. World Bank findings indicate that the country's Gross Domestic Product has fluctuated due to over-reliance on one sector (Lee, Won & Jei, 2019).

Impact of Agriculture on the Economy

The agricultural sector in Saudi Arabia is not performing better to contribute to the country's exports significantly. The country imports more agricultural products than it exports. Many factors contribute to the nation's inability to produce enough agricultural produce for local consumption and export. Saudi Arabia faces some problems that limit the production and exportation of agricultural products (Hasanov et al., 2021). The biggest issue making the country not invest enough in agriculture is the acute water shortage. Saudi Arabia does not engage in too many farming activities that will ensure its surplus production to an extent it can export part of what it will produce. Many areas of the country are either arid or semi-arid, thus not favourable for farming. Farming does not thrive in hot and dry conditions, which are experienced in many parts of the country. The harsh environmental conditions and poor soils limit the size of the population that can take part in commercial agricultural activities (Butkiewicz & Yanikkaya, 2011).

Similarly, many people in the country are not accustomed to farming activities. More than ninety percent of the total population is not involved in commercial agricultural activities that will lead to the production of enough agricultural produce for export. Traditional agricultural areas are no longer productive due to changing environmental conditions such as the spread of desertification (Saad & Kalakech, 2009).

The ability of the country to export the grain in future is at risk, meaning proceeds from the export of wheat in future will be too minimal or not exist altogether. Saudi Arabia has banned the exportation of wheat from ensuring food security, reducing the importation of food products. It is also adopting the cultivation of crops that do not require a lot of water (Eid & Awad, 2017). The country is keen on increasing the size of land under cultivation. The nation is developing programs that will ensure more than eighty percent of water from underground and from its desalination plants is used for agriculture. The country also embraces technology in farming, intending to increase agricultural production (Hasnul, 2015).

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