2009 Index of Economic Freedom

Quick Facts

Population:

• 23.7 million

GDP (PPP):

• $528.0 billion
• 4.3% growth
• 4.7% 5-year compound annual growth
• $22296 per capita

Unemployment:

• 12.0%

Inflation (CPI):

• 4.1%

FDI Inflow:

• $18.3 billion

Saudi Arabia's economic freedom score is 64.3, making its economy the 59th freest in the 2009 Index. Its score is 1.8 points higher than last year, reflecting improved scores in six of the 10 economic freedoms, particularly investment freedom and financial freedom. Saudi Arabia is ranked 8th out of 17 countries in the Middle East/North Africa region, and its overall score is above the world average.

Saudi Arabia scores very well in fiscal freedom, labor freedom, and business freedom and slightly less well in trade freedom and government size. Most personal and corporate income is not taxed; foreign citizens are subject to income tax. There is a special tax on hydrocarbon and oil production. Government expenditure is just under 30 percent of GDP. The labor market is flexible.

Saudi Arabia is weak in monetary freedom, investment freedom, property rights, and freedom from corruption. As in many other Gulf oil states, a large state-owned energy sector supports high government spending. Inflation is low, and government subsidies keep prices low. Restrictions continue to impede investment growth. The legal system remains vulnerable to political influence.

Background Back to the top

Saudi Arabia, the largest Persian Gulf oil kingdom, has been ruled as an absolute monarchy by the Saud dynasty since 1932. King Abdullah became monarch in August 2005 and has continued the cautious economic and political reform that began under his predecessor. Saudi Arabia has roughly one-quarter of the world's oil reserves and, as the world's leading oil producer and exporter, plays a dominant role in the Organization of Petroleum Exporting Countries. Accession to the World Trade Organization in 2005 has led to gradual economic reforms, and the government has sought to attract foreign investment and promote diversification. Efforts to integrate Saudi Arabia more fully into the world economy are opposed by Islamist extremists who have targeted Saudi oil facilities and foreign workers for terrorist attacks.

Business Freedom 79.6 Back to the top

The overall freedom to conduct a business is relatively well protected under Saudi Arabia's regulatory environment. Starting a business takes 12 days, compared to the world average of 38 days. Obtaining a business license takes less than the world average of 225 days. Bankruptcy proceedings are relatively straightforward.

Trade Freedom 81.8 Back to the top

Saudi Arabia's weighted average tariff rate was 4.1 percent in 2006. Import bans and restrictions, export controls, some services market access barriers, some non-transparent and inconsistent standards implementation, domestic bias in government procurement, and weak protection of intellectual property rights add to the cost of trade. Ten points were deducted from Saudi Arabia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 99.6 Back to the top

Saudi nationals or citizens of the Gulf Cooperation Council pay no income or corporate tax, but Saudi and GCC individuals and corporations pay a 2.5 percent religious tax (zakat) mandated by Islamic law. Foreign citizens are subject to a flat 20 percent income tax. Special tax regimes apply for oil production. In the most recent year, overall tax revenue as a percentage of GDP was 5.3 percent.

Government Size 73.4 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 29.8 percent of GDP. State participation in the economy remains substantial. Oil exports generate more than 70 percent of government revenues.

Monetary Freedom68.4 Back to the top

Inflation is relatively low, averaging 3.4 percent between 2005 and 2007. The government influences prices through regulation, extensive subsidies, and state-owned enterprises and utilities. Twenty points were deducted from Saudi Arabia's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom40.0 Back to the top

Foreign investment is generally welcome, but foreign investors must take local partners in certain sectors. Minimum capital requirements have generally been eliminated. All foreign investors must be licensed by the General Investment Authority, and licenses for other projects may be required. Dispute resolution is cumbersome, local hiring requirements are burdensome, and bureaucracy is time-consuming. Residents may hold foreign exchange accounts; approval is required for non-residents. There are no controls or restrictions on foreign exchange transactions or capital payments and transfers. Foreign investors may acquire land for business use.

Financial Freedom50.0 Back to the top

Saudi Arabia's financial system has undergone gradual modernization and transformation. Banking-sector health is largely tied to oil earnings. Regulatory, supervisory, and accounting standards are generally consistent with international norms. Foreign ownership of financial institutions is limited but growing. The government has eased licensing requirements for foreign investment in financial services and has raised the foreign equity ceiling in financial institutions to 60 percent. As of early 2008, there were 12 locally incorporated commercial banks and 10 branches of foreign banks; 11 of the 12 local banks are majority privately owned, but the largest (National Commercial Bank) is majority state-owned. The government offers subsidized credit to preferred sectors. All insurance companies must be locally registered and must operate according to the cooperative insurance principle. Insurance has undergone some liberalization to allow greater competition from foreign insurers. Capital markets are relatively well developed, and the stock exchange is the region's largest with market capitalization of over $500 billion.

Property Rights40.0 Back to the top

The ability of Saudi courts to enforce contracts efficiently is questionable. The court system is slow, non-transparent, and influenced by the ruling elite. Laws protecting intellectual property rights are being revised to comply with the WTO's Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, but enforcement is weak and procedures are inconsistent. Legal and societal barriers constrain women from asserting their limited property rights.

Freedom From Corruption34.0 Back to the top

Corruption is perceived as significant. Saudi Arabia ranks 79th out of 179 countries in Transparency International’s Cor-ruption Perceptions Index for 2007. Government procurement is an area of concern, as is de facto protection of businesses in which senior officials or elite individuals have a stake. Bribes, often disguised as “commissions,” are reportedly commonplace.

Labor Freedom76.4 Back to the top

Saudi Arabia's relatively flexible labor regulations enhance overall employment and productivity growth. The non-salary cost of employing a worker is low, and dismissing a redundant employee is not burdensome. Regulations relating to the number of work hours are relatively flexible.