The big problem for Saudi Arabia’s futuristic city? The country doesn't have enough money

Looming in the background: The world’s largest oil exporter is strapped for cash.

Despite its reputation for deep pockets, Saudi Arabia can’t afford the laundry list of glitzy megaprojects and economic initiatives tied to Vision 2030, Crown Prince Mohammed bin Salman’s plan to pivot the economy away from oil.

The board of Neom didn’t provide a reason why it abruptly replaced its CEO Nadhmi al-Nasr over the weekend. But former Neom employees said Nasr frequently clashed with Neom’s owner and funder, the Public Investment Fund, over swelling budgets. Billions of dollars have been spent preparing the desert sands for the remote Megalopolis.

Representatives of the Public Investment Fund and Neom didn’t respond to a request for comment.

Critics inside of Neom say money has been wasted on unnecessary groundworks. At the Line—a pair of horizontal skyscrapers to run longer than the distance from New York to Philadelphia—contractors dug out 60 miles of sand. That is despite the first phase of the project only running 10 miles, which was later downsized to 1.5 miles.

Neom isn’t alone. Projects around the kingdom are poised for a similar dynamic, with builders facing massive funding needs as they transition from low-cost early work to building out the bulk of the projects.

The crown prince announced Vision 2030 in 2016 as a sprint to reshape Saudi Arabia’s economy in 14 years. Money poured into initiatives to become a world leader in sports, videogame production and electric-vehicle manufacturing. The country pushed workers to the private sector, which accounted for 45% of gross domestic product in 2023, up from 40% in 2016.

Giant real-estate projects led the plan. Neom is the largest chunk, where officials vowed to sprout a car-free vertical city in the desert of 1 million people by 2030—and a population of 9 million years later. The price tag was $500 billion, though former executives there said it would in reality cost trillions of dollars.

Elsewhere, work is under way on a massive entertainment district near Riyadh with theme parks, the region’s biggest water park and the world’s tallest roller coaster. There is a more than $30 billion cluster of 50 resorts on the Red Sea and a massive Riyadh development anchored by a giant cube that measures one-quarter of a mile tall.

The spending list has grown. In the past 12 months, Saudi Arabia has announced a $100 billion initiative for advanced electronics, has designs on investing in artificial intelligence and has promised to build 11 futuristic stadiums tied to a bid to host the World Cup, including one atop a skyscraper at Neom.

Together, the price tag of all the plans runs into the trillions of dollars if fully built, far more than the country’s $1 trillion wealth fund—which includes investments that would be difficult to sell—has at its disposal.

While the kingdom has enough revenue for everyday services and kept debt levels moderate, the price of oil has left a gaping hole in its ability to generate cash. Oil sales account for half of Saudi Arabia’s budget and prices of Brent crude are sagging at $72 a barrel, far below the $96 a barrel the International Monetary Fund estimates Saudi Arabia needs to balance its budget. The Saudi Ministry of Finance recently projected budget deficits years into the future, scrapping prior forecasts for surpluses.

Saudi officials have said that the private sector would shoulder the costs of its overhaul.

But foreign direct investment was just $26 billion last year and shows no signs of hitting the kingdom’s 2030 target of $100 billion a year. Investors have said they are put off by the complexity of projects like Neom, and wary of legal structures in Saudi Arabia, which the government recently changed to appeal more to Western investors.

The country still has over $400 billion in currency reserves to keep the Saudi riyal tied to the dollar. But the reserves have shrunk in recent years and dropped by over 7% between August and October.

Karen Young, a non-resident senior fellow at the Washington-based Middle East Institute, said there is a realization in the Saudi government that the expansive list of announced projects won’t be built in full. From the beginning, she said, Saudi officials were clear that if they completed half of what they set out to do, it would be a success.

“We’re now at that point where you start cutting," she said, a move she believes won’t prove controversial with a public accustomed to quick swings in policy.

Mohammed al-Jadaan, the minister of finance, told a podcast earlier this year the government studied all its proposals and found a “gap" where the demands for money were greater than what would be available. Since then, unannounced projects were canceled and others were scaled back, he said.

Still, they have yet to disclose many cuts publicly. The International Monetary Fund said making changes public “will be important to help provide clarity on government priorities to investors and the public."

On an October investor call, the Danish freight company DSV said the start of significant work on a $10 billion planned logistics venture with Neom would be delayed longer than expected, but couldn’t tell investors exactly for how long.

“We will see," said Jens Lund, the company’s CEO. “I’m sure that they want to complete or reach the milestones that they have set out. Otherwise, they will announce something."

The next steps for Neom under its new leadership—an executive who comes from the Public Investment Fund—are unclear.

Work is now under way on early foundation work on another part of the Line, where contractors have dug a massive 150-foot hole and are installing thousands of concrete columns further into the ground. A major boost in spending, though, only starts in the next phase: building up.

Write to Eliot Brown at Eliot.Brown@wsj.com