Economic Diversification in the Gulf: Lessons from Saudi Arabia and Oman

The Gulf region faces a turning point in its economic journey. Most Gulf states’ government income depends on oil revenues that make up over 70% of their budget. This makes economic diversification crucial now more than ever.

Saudi Arabia and Oman represent this change through their bold national visions and complete economic reforms. These nations actively reshape their economies through strategic collaborations in renewable energy, tourism, manufacturing, and technology sectors. Their journey gives a great way to get knowledge about economic diversification in the Gulf region. It also creates a roadmap to eco-friendly development beyond oil dependency.

This piece heads over to the strategies, challenges, and progress of economic diversification in Saudi Arabia and Oman. It shows their policy frameworks, growth sectors, investment approaches, and success metrics in building resilient and diverse economies.

Understanding the Economic Landscape

The GCC states stand at a crossroads as their economies move away from traditional oil dependence toward diverse economic strategies. Saudi Arabia still relies heavily on petroleum, which generates 80% of export income and over 40% of GDP. Oman faces a similar challenge with its oil reserves expected to run dry within 25 years.

Current Economic Dependencies in Saudi Arabia and Oman

Saudi Arabia controls 17% of global petroleum reserves, which has brought substantial economic benefits but created vulnerabilities too. Oman’s situation demands even more urgent attention since oil and gas resources generate between 68% and 85% of government revenue. Both economies remain vulnerable to global market volatility and price swings due to their heavy reliance on hydrocarbon resources.

Key Drivers for Diversification

These factors are driving the need to expand economic diversity:

• Demographic Pressures: Much of the GCC population is under 30, creating an urgent need for job opportunities across sectors
• Energy Market Changes: Global investment in renewable energy surpassed AED 4.77 trillion in 2022, pointing to new energy priorities
• Technological Advancement: The Fourth Industrial Revolution opens new possibilities in AI, robotics, and nanotechnology

Regional and Global Context

Recent trends show promising signs of economic transformation. GCC’s non-oil sectors showed remarkable resilience and grew by 3.9% in 2023, despite contraction in the oil sector. Private consumption, strategic fixed investments, and supportive fiscal policies continue to fuel this growth.

A fundamental change sweeps through the global energy sector as nations worldwide step away from fossil fuels. Gulf economies can leverage their strategic locations and financial reserves to explore new economic opportunities during this transition. The Paris Agreement serves as a vital blueprint that pushes nations to adjust their energy strategies for a carbon-neutral future.

Strategic Vision and Policy Framework

Saudi Arabia and Oman have started ambitious plans to transform their economies. Each country has created detailed strategic visions that will reshape their economic futures. These frameworks respond to regional and global economic changes, and each nation has created its own path toward diversification.

Saudi Vision 2030 Deep Dive

Crown Prince Mohammed bin Salman launched Vision 2030 in 2016 to transform the Saudi economy. The vision rests on three main pillars:

• A Vibrant Society: Focusing on cultural development and quality of life
• A Thriving Economy: Emphasizing diversification and job creation
• An Ambitious Nation: Promoting effective governance and responsibility

The strategy rolls out in planned phases. The first phase established key reforms across the public sector, economy, and society. The second phase has sped up these efforts and shown clear results. Saudi women’s workforce participation jumped from 17.4% in 2017 to 36% in early 2023.

Oman’s Vision 2040 Analysis

Oman’s strategic framework takes a unique path that positions the sultanate as a developed nation with a productive and diverse economy. The vision accepts new ideas and integrates various roles. It builds on Oman’s competitive advantages by focusing on:

• Smart and environmentally responsible cities development
• Advanced IT infrastructure implementation
• Balanced urban and rural community development

The vision creates an environment that attracts talent and builds partnerships in a competitive business climate.

Comparative Policy Approaches

Both nations want economic diversification, but their strategies reflect their unique situations. Saudi Arabia’s approach moves faster and covers more ground, with the Public Investment Fund leading the transformation. The kingdom’s vision has grabbed more regional attention since its launch. This is a big deal as it means that Saudi Arabia makes up 49.8% of the nominal GDP of all GCC countries.

Oman’s strategy matches its ambition but takes a steady approach. It focuses on sustainable development and gradual change. The sultanate’s vision emphasizes geographic spread and optimal resource use. This reflects Oman’s unique demographic and economic situation.

Both frameworks show a steadfast dedication to private sector growth. Saudi Arabia wants to increase SME contribution to GDP from 20% to 35% by 2030. Oman focuses on building a productive and diverse economy led by the private sector.

Key Sectors Driving Diversification

Gulf nations are moving away from their dependence on oil. Three sectors have become the main drivers of economic diversification. Each sector shows promising growth and offers substantial investment opportunities.

Renewable Energy and Green Technology

Saudi Arabia has taken the lead in renewable energy development. The Kingdom wants to become a global powerhouse in clean energy production. The National Industrial Development and Logistics Program has changed the nation through major investments in renewable energy solutions, especially wind and solar projects. Saudi Arabia’s steadfast dedication to sustainability shows in its goal to achieve net-zero emissions by 2060. The country has minerals worth over AED 9.18 trillion that are vital for green technology development.

Tourism and Hospitality Development

Oman’s tourism sector has shown remarkable growth. Its GDP contribution jumped by 35% to reach RO 2.8 billion in 2023. The sector has created many jobs, with 191,500 individuals hired nationwide. Future projections suggest the sector will grow its GDP contribution to more than RO 3.3 billion in 2024, making up 7.6% of the country’s economy.

Manufacturing and Industrial Growth

Manufacturing is the life-blood of Oman’s diversification strategy. The sector has achieved notable success:

• GDP growth contribution of 7.6% in 2018, reaching OR3bn
• Hired 236,951 workers, making up 12% of the private-sector workforce
• Houses 35,596 registered small and medium-sized enterprises

Saudi Arabia’s manufacturing sector has grown impressively. Industrial facilities have increased by 60% since 2016. The number of establishments grew from 7,206 to 11,549 by 2023. The Kingdom’s National Industrial Strategy aims for approximately 36,000 factories by 2035. Recent growth includes major investments across various subsectors. Food processing leads with 244 licenses, while non-metallic mineral goods manufacturing follows with 176.

Both countries have built industrial cities and special economic zones to boost manufacturing. Oman’s zones host manufacturers of all types, from Indian alloy wheel producers to textile manufacturing clusters. These developments highlight the success of their industrial diversification efforts.

Investment and Financial Infrastructure

Saudi Arabia and Oman’s financial infrastructure is going through a major shift. Their sovereign wealth funds lead the way toward economic diversification. These institutions have altered the map of investments and promote sustainable economic growth.

Sovereign Wealth Fund Strategies

Saudi Arabia’s Public Investment Fund (PIF) stands as the life-blood of economic change. The fund’s assets showed a remarkable 29% jump in 2023. Domestic infrastructure and real estate investments grew 15% year-on-year. Foreign investments saw a 14% increase. The PIF wants to grow its assets to over SAR 4 trillion by 2025. It plans to create 1.8 million jobs directly and indirectly.

The Oman Investment Authority (OIA) showed equally strong results. Its assets grew by more than RO 1 billion to reach RO 19.240 billion. The authority earned profits over RO 1.7 billion with a 9.95% investment return. Through its National Development Fund, OIA manages over 160 companies in more than 10 sectors.

Foreign Direct Investment Initiatives

Both countries have rolled out detailed reforms to attract foreign investment. Saudi Arabia targets AED 367.19 billion in annual foreign direct investment by 2030. The kingdom’s updated Investment Law helps boost FDI by:

• Equalizing foreign investors’ rights with citizens
• Streamlining registration processes
• Enhancing judicial procedures
• Promoting technological innovation

Banking Sector Development

The banking sector in both nations shows substantial growth and modernization. Saudi Arabia’s banking system remains strong. Commercial bank deposits reached SR2.7 trillion in the second quarter of 2024. This marks a 9.4% increase from last year. The Financial Sector Development Program guides the sector’s changes by:

• Developing state-of-the-art financial solutions
• Enhancing digital banking capabilities
• Strengthening financial inclusion initiatives
• Promoting fintech development

Oman’s banking sector advances through the “Estidamah” program. The program has 74 initiatives across six strategic pillars. It strengthens the financial sector by creating policies for investment and green project finance. The program also boosts liquidity and local investor participation in stock and debt markets.

Measuring Success and Impact

Success measurement of economic diversification needs a complete analysis of both quantitative and qualitative metrics. The Global Economic Diversification Index (EDI) helps evaluate progress in output, trade, and government revenue for 112 nations.

Economic Indicators and Standards

GCC region has showed its most important progress in economic diversification in the last two decades. The progress reflects in several key indicators. Saudi Arabia’s private sector workforce grew remarkably and reached 2.6 million in early 2023. The Kingdom’s non-oil sector has grown faster since 2021 and averaged 4.8% in 2022.

Key economic indicators that highlight diversification success include:

• Oil and gas share of GDP dropped from 41% to 33%
• UAE’s investment in industrial infrastructure increased by 400%
• Services and financial sectors now contribute more to GDP

Social Development Metrics

The workforce transformation and gender inclusion numbers tell a story of substantial progress. Saudi women’s participation in the labor force stands out as a remarkable achievement. The numbers more than doubled from 17.4% in early 2017 to 36% in the first quarter of 2023. This increase happened at all age groups and education levels, while unemployment rates decreased.

Oman’s social development shows positive trends too. Employment growth reached 2.5% in 2023 and should maintain 2.4% in 2024. Women’s employment in Oman grew twice as fast compared to men.

Future Growth Projections

Both nations show strong momentum in their diversification efforts. Oman’s GDP should grow faster during 2025-26 and reach 2.7% and 3.2% respectively. Three main factors will drive this growth:

• Oil and gas production recovery
• Services sector expansion
• Agricultural and construction activities bounce back

Saudi Arabia looks promising too. Non-oil growth should stay close to 5% in 2023. The Kingdom expects substantial productivity gains through better regulatory quality and government effectiveness.

The World Bank’s latest Gulf Economic Update predicts GCC economic growth at 1.6% in 2024. The numbers should strengthen to 4.2% in 2025-2026, with non-oil sector growing at 3.7%. These projections show the region’s successful move toward diverse economic structures, though reducing dependence on hydrocarbon revenues remains challenging.

Saudi Arabia and Oman lead the Gulf region’s economic diversification with their exceptional vision and decisive action. These nations showcase how complete national strategies and substantial investments in renewable energy, tourism, and manufacturing sectors can revolutionize an economy.

The numbers tell a compelling story. Saudi Arabia’s private sector now employs 2.6 million people. Oman’s tourism sector adds RO 2.8 billion to GDP. Manufacturing facilities continue to expand rapidly in both countries. These achievements show a real shift away from oil dependency.

Modern financial infrastructure and sovereign wealth funds create strong foundations that accelerate growth. Social development metrics reveal unprecedented progress, especially when you have more women joining the workforce. The region expects 4.2% growth by 2025-2026, with non-oil sectors leading the charge.

Saudi Arabia and Oman prove that well-laid-out economic diversification succeeds in oil-dependent economies. Their experience provides great insights to nations that want to build resilient, diverse economies ready to tackle future challenges.