Saudi Arabia and the role of fixed capital

It is amazing what we see in terms of growth in the size of the Saudi economy, which exceeded $1 trillion at current prices for the first time, achieving the highest growth among all the G20 countries for the year 2022, with a real output growth rate of 8.7 percent, accompanied by positive growth rates in various economic activities.
Two important points can be drawn from the GDP data that have important indications. The first is that the participation rate of the non-oil sector in the GDP is large, as it is close to 60 percent, and most of this percentage comes from the private sector, not the government. That is, about 1.2 trillion riyals of the non-oil output amounting to 1.7 trillion riyals goes to the private sector, or it results from private sector activity, while the government’s contribution to that is only 472 billion riyals. The other point is no less important than the strong participation of the private sector in the GDP, and it is related to a very important macroeconomic indicator, which is the volume of fixed capital formation, amounting to 800 billion riyals in 2022 in real prices, constituting about 27 percent of the gross domestic product.
The importance of fixed capital formation lies in the fact that it is an important indicator of the size of investment in the infrastructure and productive assets of the state, and measures the size of these investments in relation to the size of the economy as a whole, so it looks at the size of the economy from the angle of investment in productive assets and not from the angle of consumption. The fixed capital formation index is taken as an indicator of the economic mobility in the country and the future outlook of the economy and the extent of confidence in it. Therefore, there is often a decline in the volume of these investments in the event of signs of economic recession, and investment in them increases when the economic signs are encouraging and expectations are positive towards economic growth for the years. the next few. As a global average, the percentage of fixed capital formation is about 25 percent of the size of the economy. However, this percentage varies from one country to another, according to the volume of investments directed towards fixed assets in the country, the extent of the completion and modernity of the infrastructure, and whether there are new investments in developing Infrastructure and its maintenance.
While the global rate is about 25 percent, we find it less than that in the countries of the European Union, Canada and America, where it ranges between 20 and 22 percent, while it decreases in old countries such as the United Kingdom to 17 percent of the size of the economy, and similarly we find low levels in A number of Arab countries, for example, Egypt, at less than 15 percent, and the UAE between 18 and 20 percent. On the other hand, there are countries that have a need to develop their investments in fixed assets in order to improve their internal conditions, raise their levels of production and compete globally, such as Turkey and India, whose fixed capital formation rate is close to 30 percent. While China leads the proportion of the volume of spending in this aspect on all countries by investing more than 40 percent of the size of its economy in the development of its productive assets. The positive thing regarding the formation of fixed capital in the Kingdom is that 87 percent of the fixed capital formation amounting to 800 billion riyals comes from the private sector, and not the government sector as some might think.
It is important to point out that what is spent on fixed capital formation is an investment in the country’s future, but it does not include investment in financial assets or lands, but only includes investment in productive assets, those used in production and not finished products ready for consumption. Also, only productive assets estimated to be more than a year old are included in the calculation of this item, in order to avoid calculating any consumer assets that expire within a short period. Finally, what is measured here is not the cumulative volume of investments, but only the increase in what is spent on those assets included in the fixed capital account during the relevant period.