Futuristic cityscape of Riyadh with financial charts and oil pipelines, symbolizing Saudi Arabia's economic growth.

Unlocking Saudi Arabia's Economic Potential: How Financial Development Fuels Growth

Soraya Malik in Business & Economy June 2025 • 3 min read.

"Discover the surprising connection between a robust financial sector and economic expansion in Saudi Arabia, and what it means for the future."

Saudi Arabia's economic landscape is undergoing significant transformation, driven by the critical role of its financial sector. As one of the kingdom's most important sectors, finance acts as a catalyst for encouraging broader development. However, the nation's economic growth between 1970 and 2012 has not been consistent, aligning with the typical patterns observed in developing countries.

Research indicates that a well-developed financial sector is a major driver for developing economies, whereas underdeveloped financial systems can hinder economic growth. Some studies even suggest a negative correlation between finance and growth in developed economies (Aghion et al., 1999).

Whether financial expenditure truly promotes economic growth remains a topic of debate in both developed and developing nations. Over the past three decades, the size and function of the public and financial sectors in Saudi Arabia have evolved considerably, especially since the 1980s, when the public sector was most dominant.

Financial Development and Economic Growth: Key Objectives and Analysis

Futuristic cityscape of Riyadh with financial charts and oil pipelines, symbolizing Saudi Arabia's economic growth.

To fully understand the relationship between financial development and economic growth in Saudi Arabia, a comprehensive study was conducted with several objectives:

This study used data from 1970-2012 to investigate the impact of the stock market index and total exports on economic growth. It also considered the positive effects of money supply and bank credit development on economic expansion. The core intention was to determine if there is a link between financial expansion and overall economic health.

Unit Root Tests: Applied to determine if the economic variables were stationary.
Johansen's Co-integration Analysis: Used to examine long-run equilibrium relationships.
Error Correction Model (ECM): Employed to test short-run relationships between financial sector development and economic growth (GDP).
Data Analysis: Annual data from 1970-2012 was analyzed using appropriate econometric methods.

The findings revealed a positive correlation between financial sector development and economic growth in Saudi Arabia. This suggests that improvements in the financial system can positively influence the country's overall economic performance.

Strategic Implications for Saudi Arabia's Future

The study underscores the importance of continued financial sector reforms and strategic planning to ensure sustainable economic development. By acknowledging the interconnectedness of financial health and economic expansion, Saudi Arabia can further diversify its economy and enhance its resilience in the global market. Future economic strategies should consider how each component of the financial system contributes to overall growth, ensuring that all sectors complement each other effectively.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.5539/ijef.v5n3p30, Alternate LINK

Title: Saudi Financial Structure And Economic Growth: A Macroeconometric Approach

Subject: Energy Engineering and Power Technology

Journal: International Journal of Economics and Finance

Publisher: Canadian Center of Science and Education

Authors: Mohammed Moosa Ageli, Shatha Mousa Zaidan

Published: 2013-02-22

Everything You Need To Know

What is the correlation between financial development and economic growth in Saudi Arabia?

Financial development in Saudi Arabia, particularly improvements in areas like the stock market index, total exports, money supply, and bank credit development, demonstrates a positive correlation with overall economic growth (GDP). This suggests that a healthier financial system can lead to improved economic performance.

What analytical methods were used to determine the relationship between financial development and economic growth?

The study utilized several econometric methods to analyze the relationship between financial development and economic growth. These include Unit Root Tests (to determine if economic variables were stationary), Johansen's Co-integration Analysis (to examine long-run equilibrium relationships), and the Error Correction Model (ECM) to test short-run relationships between financial sector development and economic growth. Data from 1970-2012 was analyzed.

What period does the study consider when examining the relationship between financial development and economic growth in Saudi Arabia?

The study covered the period from 1970 to 2012. This timeframe allows for an analysis of how the financial sector's evolution, especially since the 1980s when the public sector was most dominant, has impacted economic growth over several decades.

Why is strategic planning important in the context of financial sector development and economic growth in Saudi Arabia?

Strategic planning is essential to ensure that financial sector reforms are sustainable and contribute to long-term economic development. By focusing on the interconnectedness of financial health and economic expansion, Saudi Arabia can diversify its economy, enhance resilience in the global market, and ensure all sectors of the financial system effectively complement each other.

What are some potential limitations or areas for further research related to the relationship between financial development and economic growth?

While this examination highlights the positive impact of financial development on economic growth in Saudi Arabia, it's important to consider that some studies suggest a negative correlation between finance and growth in developed economies. Future research could explore the specific conditions under which financial development might hinder growth in Saudi Arabia or explore what specific factors could limit the effectiveness of financial development policies. Further study can investigate the influence of global economic events and the effects of specific policies adopted during the study period.