Resilience of Saudi Arabia’s Economy to Oil Shocks: Effects of Economic Reforms

Abstract

We assess the extent to which the implementation of Vision 2030 policies enhances the Saudi economy’s resilience to oil shocks. Using a dynamic stochastic general equilibrium model that captures the country’s economic diversification policies, we build a resilience index based on impulse responses to shocks. The policies considered have two opposite effects: reforming domestic energy prices, deploying renewables and introducing a value-added tax increase the volatility of macroeconomic aggregates, whereas economic diversification policies stabilize the economy. Overall, with Vision 2030 the economy’s resilience to oil price shocks increases by 10 to 60 percent, depending on how labor market rigidities and the recycling of fiscal revenues are accounted for. Oil prices remain the main driver of macroeconomic fluctuations. Our analysis shows that an oil-exporting country should design policy packages that balance structural reforms with economic diversification, in order to shield its economy against oil shocks while generating long-term welfare gains. JEL Classification: D58, E13, E32, E37, E65, H30, H50, Q43