In a discussion paper published recently, the King Abdullah Petroleum Studies and Research Center (KAPSARC) analyzed the impact of fiscal policy on
non-oil gross domestic product (GDP) in Saudi Arabia from 1989 to 2018, which covers the low oil price period.
The study, conducted by KAPSARC’s researchers (Fakhri Hasanov, Nader AlKathiri, and Ryan Alyamani) along with a Deputy Minister for Macro-Fiscal Polices at the Ministry of Finance, Dr. Saad Alshahrani, found that the government’s current and capital expenditures have statistically significant positive impacts on non-oil GDP in both the long and short run.
The empirical analysis showed that a 1% increase in the government’s current and capital expenditure led to a 0.25% and a 0.02% increase, respectively, in non-oil GDP in the long run.
Additionally, the estimated short-run elasticities of the former and latter are 0.13% and 0.01%, respectively. However, derived multipliers indicate that an additional 10 Saudi riyals (SAR) increase in current and capital spending led to 4.5 SAR and 5.6 SAR increases, respectively, in non-oil GDP in the long run. This 10 SAR increase also creates respectively 2.8 SAR and 1.8 SAR additional non-oil GDP increases in the short run.
The paper also found that a 1% increase in non-oil labor and non-oil capital leads to an average increase in non-oil GDP in the long run by 0.51% and 0.26%, respectively.
The paper presented five insights related to fiscal policy that would support the development of the non-oil sector in the Saudi economy and increase the positive impact of government expenditures on non-oil economic development, which aims to support the stakeholders with the best insights specialized in public finance and macroeconomics.
The insights include providing the private sector with the opportunity to play a greater role in implementing and financing projects, applying more financial reforms to enhance the efficiency of government capital expenditure, continuously improving the Kingdom’s business environment, involving the private sector in investment and job creation projects, and working on reprioritizing government spending, increasing local content and reducing imported goods and services.
The study concluded that government expenditure would have a greater positive impact if it is directed toward projects that enhance non-oil investments for the private sector, and investment in education, vocational training and capacity building to contribute to human capital development.
It is noteworthy that this paper falls under the project of managing oil wealth to maximize the welfare of current and future generations. KAPSARC has almost 100 projects within 10 research initiatives that the center’s experts focus on as it continues to develop solutions in order to diversify energy sources and economy, and address future energy challenges.
It is also noted that KAPSARC made progress in the list of the best research centers regionally and globally, as it jumped 14 ranks in the ranking of the Middle East and North Africa (MENA) research centers. It ranked 15th out of 103 research centers regionally, and 13th out of 60 research centers globally specializing in energy policy.
This article originally appeared on Arab News