Saudi Arabia and Bahrain Economy - Essay Example

Saudi Arabia and Bahrain Economy Affiliation: Saudi Arabia and Bahrain Economy Part Current situation of Saudi Arabia Saudi Arabia is an economy heavily reliant on oil and proved to contain the largest oil reserves globally at 266.7 billion barrels, which represents 20% of global reserves, 29% of OPEC, and 57% of GCC reserves. Saudi Arabia serves as among the largest producer and exporter of petroleum and related products globally, and plays a major role in OPEC for it accounts for approximately 28% of oil production. In 2009, production of oil stood at about 8 million barrels every day, less than a number of barrels recorded in 2008 by 1.1million. The oil industry accounted for about 90% of the overall earnings in export, government revenue 80%, and 45% GDP. Approximately 40% of the GDP originates from the private sector. On average, the basket oil price for OPEC was about $77.20 for every barrel during the first quarter of 2010 and $44.79 in 2009 in the same period. It recorded about 77.4 percent in global recovery based on revived demand for energy in the world and increased confidence in business (GulfBaseb, 2015). In April 2010, the basket oil price for OPEC was $82.33 for every barrel compared to $50.20 per barrel in 2009 and $105.16 in 2008. During the peak levels, the prices of oil were at $147.27 per barrel in the international market in 2008 because of a rise in energy demand and geo-political risks witnessed in the Middle East. The prices of oil plunged more due to the economic and financial crisis witnessed during the same period (Heritage, 2015). In an aim to diversify its economy and attract foreign investment, Saudi Arabia has started off with huge projects, such as establishing six economic cities in various parts around the Kingdom to facilitate balanced growth. From 2003 to 2008, Saudi Arabia has witnessed considerable growth in its economy regardless of the high production and oil prices. The other sectors, particularly real-estate and construction industries have contributed significantly to the economy. Both the public and private sectors have played a major role, since increased spending by the government and foreign direct investment (FDI) have supported a sustainable and effective non-oil economy. After realizing exceptional growth due to oil revenues fostered by external forces for six years, the demand for world energy declined considerably because of the economic and financial crisis, leading to a tremendous decline in prices of oil. All countries globally felt the influence including the Kingdom of Saudi Arabia in 2009. Nonetheless, Saudi Arabia was slightly affected among GCC countries as a result of the timely and wide policies the government implemented (Heritage, 2015). Presently, the economic freedom score for Saudi Arabia is 66.1, making the country emerge as the 77th freest economy according to the 2015 index. This score has not changed since 2014. The high score for the country dwells on trade freedom and eradication of corruption because of declines in business freedom, labor freedom, as well as efficient management of public expenditure. Saudi Arabia ranks eighth out of fifteen countries in the Middle East while its overall score is beyond global average (Crosston, 2015). Over a period of five years, only one of the economic freedom scores of Saudi Arabia has increased. From 2011, 5 economic freedoms led to a drop by 4.1 points, whereas government spending dropped by 12 points and business freedom by 20 points. This has set the economy of Saudi Arabia aside from its Persian Gulf neighbors who are more freedom minded (Crosston, 2015). These trends have played a major role with regard to undermining the already uneven structural and institutional framework. Taxation and government spending are still well maintained, while profits generated from oil contribute to more than two-thirds of the government’s revenue. Nonetheless, the rule of law is enforced in a weak manner, while the royal family influences the decisions of the judiciary. Since Saudi Arabia is a closed economy, it limits investment and technology transfers that are essential with regard to diversifying the economy (Heritage, 2015). In the world today, countries are becoming highly competitive by investing in a broad range of sectors to boost the growth of their economies. In this case, it is appropriate for Saudi Arabia to introduce both short-term and long-term strategies for it to compete effectively in the global business environment. In terms of short-term strategies, the country should aim at stabilizing its micro economy and improve the production sector conditions (Crosston, 2015). With regard to macroeconomic stabilization, the country needs to enhance its monetary and fiscal stability in order to ensure low and stable inflation, regardless of the unpredictable oil prices, which governs most of the country’s operations. It should also enhance its absorptive capacity by attracting foreign talent and investment to boost its competitiveness, growth, and stability. Furthermore, the country should aim at developing the SME sector to increase its share of the GDP and enhance employment conditions of the nationals. In terms of improving production sector conditions, Saudi Arabia should implement strategies of enhancing capital and labor productivity in both private and public sectors by investing considerable in education and technology. This way it can manage to enhance its competitiveness in diverse sectors by improving competence of organizing and supervising agencies as well as develop its capabilities and independence (Crosston, 2015). In order for the Saudi economy to realize continued growth in the end, the country should set priorities that can enhance development of various human development sectors including health care, education, family care, and infrastructure. In this case, the country would manage to transform the resources available to it into effective capacities of production that contribute considerably to its long-term goals. Furthermore, the Kingdom should ensure that advanced facilities for electricity, transportation, sanitation, water, as well as a well-established network for transporting oil products cover it (Heritage, 2015). In addition, the private sector plays a major role in Saudi Arabia based on the dynamism it portrays. In this case, the country should enhance the financial capabilities of the sector to serve as a major partner in the development process. As such, the country should allow the private sector to participate in privatized projects since the role it plays in the country will broaden in future. Moreover, Saudi Arabia has major seaports that link to three major continents including Europe, Africa, and Asia. In this case, the country should improve its land, sea, and air transit services to facilitate re-export of goods and commodities since they serve as viable development options for the country (Crosston, 2015). Part 2 Memo: Outlining the prevailing economic condition in Bahrain and economic outlook of the remainder 2015 The economy of Bahrain is open and its currency ranks as the second highest valued globally. Beginning late 20th century, the country has made significant investment in the tourism and banking sectors. Based on the success of Bahrain’s finance industry, it is considered as the fastest growing center of finance globally. For instance, the financial and banking services sectors, especially Islamic banking has realized considerable benefits due to the rapid regional boom driven by oil demand (CEIC, 2015). The major product that Bahrain exports is oil, accounting for 11 percent of GDP. 70 percent government revenues and 60 percent export receipts. Production of aluminum ranks as the second most exported product followed by construction and finance products and services. In a report by Index of Economic Freedom, Bahrain is considered as the freest economy in the North Africa and Middle East region and tenth in the world (GulfBase, 2014). In December 2014, the rate of inflation was 2.5% and averaged 2.28% between 2008 and 2014. The inflation rate of the country reached its peak in January 2009 at 5.22% and was lowest in March 2011 at -2.06%. In terms of unemployment rate from 2007 to 2014, the rate of unemployment in Bahrain was 5.6%, 3.7%, 4.0%, 3.6%, 4.0%, 3.6%, 4.0% respectively. In terms of percentage change in levels of unemployment rate from 2007 to 2014, the data is as follows; -33.93%, 8.11%, -10.00%, 11.11%, -2.50%, 10.92%, and -5.39%. In this case, it is evident that the level of unemployment rises and goes down simultaneously meaning that the country needs to implement measures that will help it reduce the level of unemployment in a consistent manner although the state provides financial assistance to the unemployed citizens based on their experience and qualifications for six months. In terms of employment level, about 61% of adults in Bahrain have secured a form of employment. As such, Bahrain ranks as 63rd country with highest level of employment in the world (GulfBase, 2014). The nominal GDP for Bahrain in December 2013 was about 32,890. The nominal GDP rose from 30,756 the previous year. The figure below illustrates the Nominal GDP growth rate for Bahrain from 2002 to 2013. It shows that the nominal GDP has been growing at a consistent pace and will continue to do so in the course of 2015 (Index Mundi, 2015). Source: (CEIC, 2015) As for the real GDP of Bahrain, it was 2.1 percent in 2011, 4.8 percent 2012, and 4.4 percent in 2013. The real GDP of the economy has grown successfully in the past 10 years averaging between 3.1 percent and 8.4 percent, averaging at around 5 percent. Regardless of the shrinking of the oil sector in 2012, the non-oil sector has played a major role in driving the performance of the economy forward. With regard to interest rate, the reported benchmark was 2.25 percent. From 2000 to 2014, the interest rate of Bahrain has averaged at 2.95 percent, although it reached an all-time high in December 2000 at 6.80 percent as well as a record in December 2003 at 1.3 percent (IndexMundi, 2015). After considering Bahrain’s economic variables including unemployment rate, inflation rate, nominal GDP, level of employment, interest rate, and real GDP growth rate, the economy is growing at a constant pace without major disruptions in economic performance. As such, it is true that the performance of the economy will continue growing in the remainder of 2015 based on the stability it has portrayed in its economic variables. References CEIC. (2015). Bahrain Nominal GDP Data. Retrieved from http://www.ceicdata.com/en/statistics/Bahrain/Nominal-GDP Crosston, M. (2015). The Saudi Bait-and-Switch: Incurring Short-term Pain for Long-term Gain. Retrieved from http://journal-neo.org/2015/01/06/the-saudi-bait-and-switch-incurring-short-term-pain-for-long-term-gain/ Gulf Base. (2014). Kingdom of Bahrain. Retrieved from http://www.gulfbase.com/Gcc/Index/4 Gulf Base b. (2015). Kingdom of Saudi Arabia. Retrieved from http://www.gulfbase.com/Gcc/Index/1 Heritage. (2015). Saudi Arabia. Retrieved from http://www.heritage.org/index/country/saudiarabia Index Mundi. (2015). Bahrain Economy Profile 2014. Retrieved from http://www.indexmundi.com/bahrain/economy_profile.html Read More