DUBAI: Saudi Arabia’s decision to open its stock market to foreign investors is part of an accelerating series of economic reforms that may culminate in the most far-reaching change yet: higher domestic energy prices.

In the past four decades, the economy of the world’s top oil exporter has stayed inefficient and backward in many areas even as it has boomed. Poorer Saudis struggle with high unemployment and shortages of housing and quality medical care.

The kingdom remains deeply dependent on oil exports, leaving it vulnerable to any big downturn in global energy prices and the time, decades from now, when its crude reserves begin running out.

The opening of the $550 billion stock market to direct investment by foreign institutions, announced on Tuesday, is part of efforts to correct this — along with other changes introduced in the past three years including labour market reforms and a new mortgage lending law.

All these have followed the Arab Spring uprisings of 2011, which rocked other countries in the Middle East and increased pressure on Saudi authorities to improve social welfare.

The reforms carry risks; opening the stock market could destabilise the financial system as foreign funds flow in, and may expose the government to the politically sensitive charge that foreigners are profiting unfairly at the expense of locals.

For these reasons, the government delayed the stock market reform for years and is expected to allow foreign investors to enter the country only gradually, starting in the first half of next year.

But Saudi authorities now appear to be calculating that significant changes to the economy can wait no longer — and that with high oil prices swelling state finances, they have an opportunity to make reforms that could become more difficult later, when conditions are less comfortable.

“I expect more efforts in the reform process over the next five years, given the huge wealth and forecasts that oil prices will remain over $100,” said Abdulwahab Abu Dahesh, a prominent Saudi economist.

“The political jitters around us helped to raise wages, reform the labour market, allocate 250bn riyals ($67bn) for housing and speed up the launch of the mortgage law,” he said.

PAIN Since 2011, the government has shown it is willing to see considerable short-term disruption to the economy as it pursues long-term reforms.

Labour market quotas and fees have made it harder for firms to hire cheap foreign workers; around a million foreigners left Saudi Arabia last year because of a crackdown on visa irregularities. The country’s population is about 30 million.

The earnings of companies which rely heavily on foreign labour — particularly in construction, retail and transport — have been hit hard, more than halving in some cases.

In recent months the impact has started to feed through into the economy as a whole; the growth of Saudi Arabia’s non-oil private sector slowed to 4.4 per cent year-on-year in the first quarter of 2014 — the slowest pace in at least a decade — from 6.2pc in the previous quarter.

Saudi authorities have largely resisted pressure from the business community to water down the labour reforms.

Published in Dawn, July 25th , 2014