Is Saudi Arabia Moving Toward A Diverse Economy?

Saudi Arabia's economic transformation stands at a critical juncture. As 2025 unfolds, the Kingdom's efforts to shift away from oil dependency are visible in the data, yet fiscal pressures and trade imbalances remind observers how steep the path toward diversification remains.

Non-Oil Growth Takes the Lead

Recent economic data from the Saudi Ministry of Economy and Planning show that non-oil activity grew by roughly 5% year-on-year in the first half of 2025, outpacing the oil sector, which contracted due to production cuts agreed under OPEC+. This performance marks one of the strongest non-oil expansions in a decade, powered by gains in construction, tourism, logistics, and manufacturing.

Tourism remains a standout success. The Kingdom hosted nearly 110 million visitors in the past year, making it one of the world's fastest-growing travel markets. Tourism revenues are estimated to have surpassed 160 billion riyals in 2025, now rivalling key export categories such as petrochemicals.

Meanwhile, non-oil exports continue to climb. Their share of total exports has risen to around 40%, up sharply from 26% just seven years ago. Machinery, electrical equipment, and transport goods have shown the most rapid growth, reflecting the emergence of new industrial capabilities under Vision 2030.

Fiscal Pressures Emerge Amid Heavy Spending

Despite clear gains, the headline numbers reveal growing pressure on state finances. After years of budget surpluses, Saudi Arabia's Ministry of Finance now projects a fiscal deficit equivalent to roughly 4–5% of GDP in 2025, higher than initially forecast. The widening gap stems from lower oil receipts and a sustained push on capital expenditure for major infrastructure and tourism projects.

Public investment has remained robust, particularly through the Public Investment Fund (PIF), which continues to bankroll giga-projects such as NEOM and the Red Sea development. These projects are designed to anchor long-term diversification, but they have also amplified near-term import demand and external financing needs.

The current account, which swung into deficit in late 2024, is expected to remain marginally negative through 2025. Analysts note that, without the sharp rise in tourism income and re-exports through Saudi ports, the deficit could have been far larger.

Private Sector Still Tied to Public Spending

Private-sector expansion is another bright spot, though still heavily influenced by state spending. The non-oil private sector now accounts for just over half of total GDP, compared with about 45% in 2018. Yet much of that growth remains linked to public contracts and PIF-backed ventures.

Job creation underscores the duality. Employment among Saudi nationals in private enterprises continues to grow, reaching nearly 60% of total Saudi employment. However, expatriate labour remains dominant in the overall private sector, particularly in construction, logistics, and hospitality. The challenge for policymakers is to sustain job creation for citizens beyond the construction cycle of Vision 2030.

Revenue Diversification Gains Momentum

Fiscal diversification has progressed more clearly. Non-oil revenues now make up nearly half of total government income, up from about one-third before the introduction of the value-added tax in 2018. VAT collections and fees on business services have become key fiscal anchors, helping offset volatility in oil prices.

However, rising public wages and investment spending have kept overall expenditure growth high. Economists suggest that balancing fiscal consolidation with continued diversification spending will be among the government's biggest tests in 2026.

From Construction to Productivity

The next phase of Vision 2030 will depend on whether the vast construction drive of the past five years translates into sustainable, high-value activity. Manufacturing output, renewable-energy projects, and logistics networks are gradually taking shape, but productivity gains remain uneven.

Observers note that some of the Kingdom's largest "giga-projects" are being recalibrated to better align with more realistic timelines and budgets. This adjustment, though partly driven by financial prudence, signals a maturing phase of the transformation, shifting from headline investment to operational delivery.

Balancing Vision and Reality

Saudi Arabia's diversification momentum is genuine. Non-oil exports, private-sector activity, and tourism have all expanded at double-digit rates. Yet the macroeconomic picture remains dependent on the oil cycle. The 2025 fiscal and current-account deficits are reminders that spending and imports tied to Vision 2030 projects still outweigh the returns from new sectors.

The government's success will hinge on sustaining private investment, accelerating job localisation, and ensuring that new industries can thrive without heavy state subsidy. That means turning Vision 2030 from a spending programme into a self-sustaining growth model.

The Outlook

Heading into 2026, the outlook is cautiously optimistic. Oil prices hovering around the mid-$80s per barrel are helping stabilise revenues, while the non-oil sector continues to outperform expectations. But policymakers face a delicate balance: maintaining momentum on transformation projects while safeguarding fiscal stability.

Saudi Arabia's journey toward a diversified economy is no longer in question; the direction is set. The test now lies in execution: whether the Kingdom can evolve from a state-led investment boom to a competitive, private-driven economy capable of standing on its own once the oil tide recedes.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.