Saudi society has changed drastically. Can the economy change, too?

Twenty years ago Buraidah was a showcase of Saudi Arabia’s problems. Religious police roamed the city’s streets, making sure that shops stayed closed for the five daily prayers, that women only left their homes accompanied by a male relative and that the sexes did not mingle anywhere. There were no cinemas or concerts; most restaurants catered only to men. Two decades of relatively low oil prices had called into question the assumption that Saudis could simply swan into well-paid government jobs. Dissatisfaction at the disintegrating social contract helped propel another Saudi export: Islamic fundamentalism. In 2005 a local militant cell battled the security forces for nearly 48 hours.

Today Buraidah is scarcely recognisable. On a warm Friday evening the high street bustles, with women wandering as freely as men. Couples stroll along together or sit side-by-side in restaurants. A cinema screens Arabic and Hollywood blockbusters. A women’s driving school on the edge of town does a brisk trade. The religious police are nowhere to be seen and terrorism is a dim memory.

But Buraidah is still emblematic of one enduring blight: a lack of economic diversification. It has a few new jobs in services, including the cinema and the driving school, and still lots in the bureaucracy. Buraidah’s only other notable industry is date-farming, which is sustained chiefly by migrant labour.

A royal warrant

Muhammad bin Salman, the crown prince and de facto ruler, often known as MBS, has been trying for a decade to ease Saudi Arabia’s stultifying social strictures and to reduce the economy’s dependence on oil and the state. The first half of this formula has proceeded with astonishing speed. But the second is making little headway. And the pressures that made Saudi Arabia’s old system of generous state handouts, enforced piety and commodity dependence seem unstable and unsustainable—volatile oil prices, lurching fiscal deficits and inadequate job creation for a youthful population—have not gone away. MBS’s social reforms have won him lots of goodwill, but only the economic elements of his “Vision 2030” can bring lasting stability.

The crown prince’s plans stretch from the grandiose to the granular. Most attention-grabbing are the “giga-projects”, into which officials planned to plough nearly $900bn by 2030: a vast, futuristic “linear city”; a ski village overlooking baking desert; 50 luxury hotels strung along the Red Sea; the world’s biggest building in Riyadh. Less spectacular but perhaps more important are the government’s efforts to foster new industries, from tourism to carmaking. Civil servants, once dozy in their sinecures, are hastily rewriting rules on everything from divorce to foreign investment. All told, more than 600 packages of reforms have been initiated.

MBS’s social revolution has not only expanded personal freedoms, it has also boosted economic activity. Since 2018 women have had far more freedom to move around, to work and to start businesses. Discriminating against them in hiring or pay is now illegal. Women’s participation in the workforce has shot up from 20% to 36%. It has risen fastest among those with only high-school diplomas, many of whom have joined the private sector, notes Jennifer Peck of Swarthmore College. The number of dual-income families has grown, pushing up household incomes.

Whether through luck or foresight, these changes came just as society was ready for them. When MBS sidelined the religious police there was some fear of a conservative backlash. In practice, as research by Leonardo Bursztyn of the University of Chicago and colleagues has shown, married men tended in private to support the idea of allowing women to work, but wrongly assumed that society as a whole was too conservative to accept it.

Latifah Altamimi, an entrepreneur who went to university in America, explains that Vision 2030 encouraged her to return to the kingdom. She was surprised to discover that her elderly, conservative father had reconciled himself to the social changes. “I experienced culture-shock twice: once when I got to America and again when I returned,” she says.

The state has also played an active role in promoting the sports and entertainment industries. A catsuit-clad Jennifer Lopez performed before the Formula 1 Grand Prix in Jeddah earlier this year. More mundanely, at Boulevard City, an open-air mall in Riyadh, the capital, a DJ presides over a crowd of young dancers—a scene that was unimaginable 20 years ago. The parts of the non-oil economy that have grown fastest in recent years include retail and hospitality. According to the central bank, the share of household spending devoted to eating out, recreation and culture rose from 12% in 2017 to nearly 20% in 2024.

Officials are also proud of the growth in tourism, which has risen from around 60m overnight stays in 2016 to more than 100m in 2023. The bulk of these are staycating Saudis. In 2017 Ms Altamimi founded Gathern, Saudi Arabia’s version of Airbnb. The company, now one of the kingdom’s biggest startups, helps large families find holiday accommodation. Foreigners, meanwhile, account for only a tiny fraction of the increase, despite heavy investment in flashy resorts and attractions.

Overall, however, the economic transformation has been slow to arrive, to officials’ chagrin. Oil still accounts for the lion’s share of exports and government revenue. Its share of economic activity remains high, too, although it has fallen from 36% of GDP in 2016 to 26% last year (see chart 1). A liberalisation of mortgage-lending means that construction is booming, alongside retailing and hospitality. But the growth of other industries championed by the authorities has been lacklustre.

Why the slow progress? One answer is that, whereas social change can happen overnight, economic restructuring takes longer. Some industries do show promise. The kingdom has a competitive advantage in mining, thanks both to geology and to the many similarities between extracting hydrocarbons and digging up minerals. Ma’aden, a company owned by the PIF, Saudi Arabia’s sovereign-wealth fund, hopes to start exploiting bauxite reserves soon; it is already extracting gold. Vedanta, an Indian firm, plans to invest $2bn in copper-processing facilities.

Renewable energy may, in time, become another industry that takes root, given the scope for solar installation and hydrogen production. The PIF has entered into joint ventures with Chinese firms such as LONGi to develop solar projects. Hotels along the Red Sea could eventually attract more foreign tourists: rumours swirl endlessly that the kingdom may try to boost international arrivals by lifting its ban on alcohol in such places. Some basic industries have been spurred by new local-content requirements in public procurement. Bullets for the army are now being home-made, for example, as they have long been in most industrialised countries.

But there are other industries in which Saudi Arabia simply lacks the know-how to make progress. Carmaking is one. The PIF has a goal to produce 500,000 electric vehicles a year by 2030. By the end of 2023 the kingdom’s sole car factory had reassembled just 800 vehicles in total using kits imported from America, according to Reuters. A push into semiconductors faces similar challenges, says Farouk Soussa of Goldman Sachs, a bank. In some areas the kingdom is competing with other oil-rich places, such as the United Arab Emirates, which have a head start.

Progress in advanced manufacturing requires skilled labour and corporate expertise. Yet despite a charm offensive, foreign investors are not flooding in. Inflows of foreign direct investment actually fell in 2024 compared with the year before. As a share of GDP, they will need more than to double to reach the target for 2030.

A princely ransom

Foreign investors are wary for a number of reasons. The memory lingers of MBS holding many rich Saudis hostage in a luxury hotel in Riyadh in 2017-18 until they handed over huge sums to the government. So too does a worry about the reputational risk of doing business with a government that had a prominent critic killed and dismembered in 2018. Political connections remain vital to doing business in Saudi Arabia, say analysts at Capital Economics, a consultancy. More prosaically, payment disputes and delays are not uncommon with government contracts.

Donald Trump’s trade war will hamper the foreign-investment push, too. Assuming that the overall effect of America’s new tariffs is to chill the world economy, global trade and capital flows will fall. Mr Trump is due to visit the kingdom on May 13th. During his stay he and MBS are expected to announce hundreds of billions of dollars in American investments in Saudi Arabia and Saudi investments in America. But both sides are keener for the money to be spent in their own country: Mr Trump has talked about attracting $1trn from Saudi friends.

The realignment of trade brought by Mr Trump’s tariffs could lead to some benefit to Saudi Arabia. He has imposed only the minimum, 10% levy on Saudi goods, far below the levels threatened for most countries and already visited on China. The kingdom’s petrochemicals industry might find itself replacing American firms as supplier of certain products to China, for instance. Yet Saudi Arabia will not have a cost advantage in many goods, even after accounting for tariffs. And it will not be considered as stable a place to set up new manufacturing facilities as its neighbour the United Arab Emirates.

Another constraint is human capital. Half of Saudi men work as bureaucrats. Women’s participation rates remain low despite the recent growth. Schoolchildren across the Middle East score well below the OECD average in maths, reading and science. Saudi pupils, in turn, perform worse than their Emirati or Qatari counterparts, despite hefty investment in education. The heavy past emphasis on religious instruction may be partly responsible. And the security of cushy public-sector jobs may have blunted incentives to study hard.

To its credit, the government acknowledges that change is needed. Education has been modernised, with the number of hours of religious education in middle school cut by 60%. A new law on investment, which seeks to define contractual rights, has recently come into force, although it has not yet been put to the test.

In other ways, however, the government is becoming a bigger hindrance to private enterprise. Businesspeople talk approvingly of the capable and committed cadre of senior technocrats and ministers. But the sheer scope of what they are trying to do can turn them into bottlenecks. Micromanagement means that even simple decisions can take a long time. The crown prince himself is rumoured to be overseeing the design of models at a state-backed car firm. Further down the chain of command, meanwhile, bureaucrats are too risk-averse to move things forward. The result is stultifying sluggishness.

Moreover, Saudi Arabia has become a textbook example of crowding out. MBS’s giga-projects are sucking up capital, attention and construction materials. These were originally expected to gobble up $879bn by 2030, assuming they came in on budget (which is unlikely). That is impeding other projects that will probably make more difference to the economy in the long run. The opening of mines is being delayed not by the difficulty of obtaining the necessary permits—the usual constraint in the rest of the world—but by a shortage of the right digging equipment. As the economy has overheated, prices and rents have risen across the board.

Borrowing costs have gone up, too. As oil revenues sag, the government has turned to banks and bond markets for funding, pushing up interest rates for everyone, says Mr Soussa of Goldman. A fifth of local banks’ loans are now made to the public sector, up from less than a tenth in 2015. With loan-to-deposit ratios rising, banks are having to borrow commercially themselves in order to meet regulatory requirements, pushing up the rates at which they can lend.

In its eagerness to find worthy domestic initiatives to bankroll, the PIF is elbowing private investors out of the way. Its annual spending is due to rise next year, from $40bn to $70bn (nearly 7% of GDP). So determined has it been to push money out the door that it is funding projects that do not need public support. That, in turn, is driving up valuations and so diminishing the government’s returns. Financiers say they have raised the matter with officials, to no avail.

What may force a reckoning is the rapidly deteriorating fiscal picture. As the government has splurged, the oil price needed to balance the budget has risen from $82 a barrel in 2021 to $96 last year. On average last year the actual price was about $80 a barrel. The consequence has been steady growth in public debt. In 2016 this stood at 13% of GDP. Last year it was 30% and it is projected to swell yet further this year (see chart 2). Last year Saudi Arabia overtook China as the biggest emerging-market issuer of dollar-denominated bonds.

The fiscal outlook is set to become bleaker still, since the oil price has been moving in the wrong direction. The trade war has raised the prospect of a global recession in recent months, sending it lower. It has also fallen in recent years because some members of the OPEC cartel have produced more than their quotas, even as Saudi Arabia has sought to raise the price by trimming production. On May 3rd Saudi Arabia told OPEC it would no longer underwrite such cheating, and would instead open the taps to regain its market share. The price of Brent crude duly slumped to around $60 a barrel.

A royal pain

Even before the latest drop in oil prices, the budget deficit in the first quarter of 2025 was already more than half of the predicted annual shortfall. Declining export revenues and surging construction-related imports drove the current account into deficit last year—an unusual occurrence for a big commodity exporter.

Naturally, spending cuts loom. Officials talk euphemistically of a “reprioritisation”. Some of the flashiest giga-projects are quietly being scaled back; some speculate that a few may even be put on ice. Increasingly the idea is to focus instead on the things that are more likely to provide a return on investment, such as tourism projects. The official line is that no one ever really meant the linear city at neom to stretch across the desert for 170km. It was always going to be a much smaller “proof of concept”. The PIF, too, is reported to be considering spending cuts.

If the oil price forces Saudi Arabia’s rulers to scale back their vanity projects, that may have the added benefit of easing the crowding out. But Saudi economists and businesspeople would like to see a bolder shift: a government withdrawal from certain industries; the faster privatisation of the successful firms in the PIF’s portfolio; more radical changes to education and, perhaps most important of all, a more considered, discriminating and hard-nosed approach to economic reinvention. At the very least, the division of labour between the private and public sectors needs to be made clearer.

Saudi Arabia’s wholesale social transformation has bought the government time and goodwill to reshape the economy. Its youthful population is still revelling in newfound freedoms. But as the novelty wears off, its expectations will grow. Through the will of one man, the kingdom has come further than many would have predicted. A vast state-funded machine is working hammer and tongs to re-engineer the country’s future. The question is whether it can restrain itself.