Saudi Arabia - Part One: Changing Landscape

In this first post of a series of four focusing on the Kingdom of Saudi Arabia, we provide some insights on how the Kingdom has reformed and evolved over recent years based on what is available in the public domain, and my own knowledge gained as Head of Employee Benefits (“EB”) at Lux Actuaries and Consultants (“Lux”), an independent actuarial firm that provides EB services to over 100 clients in KSA.

In the second post of the Series, attention will be given to one change/development in particular; that is the implementation of International Financial Reporting Standards (“IFRS”) in KSA a few years ago. In the penultimate post, consideration will be given to setting the actuarial assumptions required under IFRS. Finally, the last of the Tetralogy will bring us forward to the present/near future; which inevitably leads to a discussion on the COVID-19 pandemic. The focus here will be on impact assessment and, linking into the previous IFRS post, how the virus in Saudi has changed financial reporting in the context of actuarial EB liabilities.

KSA Developments (2016 to present)

The citizens of Saudi Arabia have witnessed monumental change and sustained reform since 2016, in terms of political, economic and legislative developments.

Below are just some of the challenges and changes that have altered the nation’s landscape:

• Political-Economic:
  • Reduced dependency on oil. Whilst KSA owns around 15% of the world’s proven oil reserves and is the second biggest producer of oil behind only the US, with oil and gas accounting for half the country’s GDP and around 70% of its export earnings, measures have been taken to move away from dependency on oil (see Vision 2030 below)
  • Significant reforms to boost foreign investment and encourage local players in the Kingdom. The reforms have permitted international and local investors to participate in a growing number of commercial activities. In addition, Saudi Arabia now allows trade activities in areas such as e-commerce, education and health care to be conducted 100% by foreign investors
  • Introduction of VAT. Initially this was set at a rate of 5%, when it was brought in at the start of 2018. However, with effect from July 2020, the rate tripled to 15%. This has been seen as one of the measures to counter the economic implications of the coronavirus and intended to address the fiscal imbalance caused by a decrease in consumer and commercial spending, the loss of oil and tax revenues, and the cost of healthcare initiatives put into place in response to the pandemic
  • Restructuring. New infrastructural programmes have been prevalent over recent years, ranging from luxury leisure resorts, theme parks and transport systems to the world’s tallest structure and world’s largest shopping and entertainment development.
• Socio-Economic:
• Launch of Vision 2030. This is considered to be a comprehensive development strategy, consisting of a plurality of economic and social programmes, aimed at steering the Kingdom’s economy away from oil and towards sectors such as tourism and healthcare
• A policy implemented by the Ministry of Labour, whereby Saudi companies are required to hire Saudi Nationals on a quota basis, to reduce the reliance on expat workers. Over the last 5 years the Saudi government has made certain roles exclusively for Saudi Nationals. The authorities have reserved a total of 72 professions exclusively for Saudi Nationals
  • Skill Shortages. The number of expats has significantly reduced, largely due to Saudization (see above). The shortage of skills is seen to be in the more technical roles reserved for engineers, architects, IT specialists and healthcare practitioners. This has led to the Saudi Arabian government implementing new eligibility requirements on its multibillion-dollar scholarship program for young Saudis who want to study for university degrees abroad
• Legislative/Regulatory:
• Enhanced legal infrastructure. A commercial courts system has been in place since 2019 in Saudi’s three largest cities
• Regulatory Reform. The extent of change is too vast to cover here – indeed this is a full post in itself!
• Modernisation/Liberalization:
  • Increased female empowerment. One example of alleviating the gender gap, was the lifting of the driving ban, officially enforced in June 2018
  • Easing of the strict rules on gender separation. For example, allowing women to spectate at football matches from January 2018
  • Lifting on a decades long ban on cinemas. This took place in December 2017, as part of the Crown Prince’s vision to boost the country’s entertainment industry

In Conclusion

Most of the recent changes reflect positively on the national identity of Saudi, improving perceptions of the Kingdom.

The Kingdom has humbly identified its weaknesses, vulnerabilities and inherent risks and found inventive ways in which to modernize, diversify and alter the economic and fiscal function of the State; perhaps leading the way for other Middle Eastern and developing nations to follow suit.

What’s Next

I hope this initial “setting the scene” post has piqued your interest in Saudi to a sufficient extent that you are encouraged to read on to post 2, then post 3 and finally post 4.