By Ziad Daoud (Economist)
High oil prices will lift Saudi Arabia’s growth into double-digits this year, the fastest pace since 2003. The Kingdom will pump crude at near-capacity to meet rising global demand. Higher prices are also filling the government’s coffers, providing room to increase spending on activities such as construction and services.
Oil output is set to rise more than 10% this year, even if Saudi Arabia keeps production at the May level. Volumes will actually climb above this mark — both the US and the UK are asking for higher output. With crude extraction accounting for nearly half of the economy, that alone will push overall growth to high single-digits.
The Kingdom’s non-oil sectors are more reliant on oil than mining — petrodollars fund most of these activities. Historically, when international crude prices rose above $100 per barrel, annual non-oil growth ranged between 5% and 8%. We’ve penciled in 4.2% growth for this year, contributing 2.5 percentage points to the overall level.
Why did we forecast slower non-oil growth than the historical range? The government has indicated it will save the surplus until the end of the year before deciding how to spend it. This may delay the transmission of higher oil prices into faster growth.
High crude prices are a boon for Saudi Arabia given its dependence on the commodity. But they also increase demand from citizens for the government to spend more and lower taxes — including the value-added tax, the rate of which was tripled in 2020. Authorities recently earmarked $5.3 billion to support citizens. More could come.
