The Hajj and Umrah pilgrimages play key roles in Makkah and Medina's economic growth

The cities of Makkah and Medina, situated near the Red Sea in western Saudi Arabia, are the two holiest sites in Islam. The former is the birthplace of the Prophet Muhammad, while the latter, some 500 km away, provided him sanctuary when he fled Makkah and is where he is buried. It was in Medina that Prophet Muhammad was instrumental in developing the world’s first mosque, the Mosque of Quba. The world’s largest mosque, the Masjid Al Haram, also known as the Grand Mosque, is in Makkah and is home to the Kaaba, a shrine that Muslims consider the most sacred spot in the world. These holy sites attract millions of pilgrims each year, thus religious tourism is central to their economies.

In recent years Makkah and Medina have experienced considerable population growth. In 2020 Makkah’s urban area was home to an estimated 2m people, marking average annual growth of 2.6% since 2015. Actual figures are set to be released after Saudi Census 2020 is completed. The wider Makkah region has 8.6m residents, many of whom (4m) live in Jeddah – one of the busiest ports in the Arab world and the country’s second-largest city, after Riyadh. For its part, urban Medina has an estimated population of 1.5m, representing average annual growth of 2.8% in 2015-20, though this figure is closer to 2.1m for the wider region.

Hajj & Umrah

The main sources of economic activity in Makkah and Medina are the Hajj and Umrah pilgrimages, with millions of Muslims travelling to the holy cities every year. The Hajj is an annual five-day pilgrimage to Makkah during which pilgrims retrace the footsteps of Prophet Muhammad and Prophet Abraham around the city, focusing on the Grand Mosque. As one of the five pillars of Islam, all physically and financially capable Muslims are obliged to take part in the pilgrimage at least once in their lifetime. This pilgrimage can only be completed between the eighth and 13th days of Dhul-Hijjah – the last month of the Islamic calendar. In 2020 it is scheduled to take place between July 28 and August 2, though travel this year may not be possible, due to the spread of Covid-19; the Saudi authorities are expected to make a final decision regarding the pilgrimage in early May. The majority of Makkah’s visitors arrive by air to Jeddah or Medina (see Transport chapter). Given the spike in visitor numbers during the Hajj, the government has put considerable effort and resources into ensuring that the required infrastructure is in place to support the influx of worshippers.

Visitor Spending

Economic diversification is a central pillar of Vision 2030, as the Kingdom seeks to stimulate private sector employment for its large youth population and move the economy away from an over-reliance on hydrocarbons. According to the World Travel & Tourism Council, tourism accounted for 3% of GDP in 2018. The contribution of religious tourism in Makkah and Medina, as well as in Jeddah, is substantial. The Council of Saudi Chambers estimated that from 2018 to 2022 spending associated with the pilgrimages will generate $150bn in income and create up to 100,000 permanent jobs related to the Hajj.

According to “Mastercard’s Global Destination Cities Index 2019” report, Makkah’s annual visitor spend is $20.1bn, for a daily average of $135 per visitor. In 2018 Makkah placed 13th in the rankings for the number of international overnight visitors, with 10m. Although this marks a slight decrease from the preceding year’s 10.5m, the report forecast a rise of 6.6% for 2019, and a more significant increase of 7.9% in spending. As of April 2020, 2019 figures had not yet been released.

Visitors & Visas

According to the General Authority for Statistics, there were 2.5m Hajj pilgrims in 2019, representing an increase of 5% from 2.4m in 2018. The overwhelming majority of pilgrims come from outside Saudi Arabia, accounting for 1.9m, or 75% of the 2019 total. Capacity constraints and related safety concerns have led the Saudi government to impose restrictions on the number of Hajj visas granted to Muslim-majority nation each year. Typically, visas are given to 0.1% of the population. While Pakistan saw 20,000 added to its quota for 2020, a number of nations have considerable waiting lists for Hajj visas. Wait times in Indonesia, which has the largest Muslim population in the world, reportedly range from seven to 37 years.

The government has identified the Umrah pilgrimage as a key area to help boost visitor numbers in the Kingdom, with Vision 2030 aiming to increase overall capacity for international Umrah visitors from 6.8m in 2018 to 30m by 2030. Unlike the Hajj, the Umrah pilgrimage can be undertaken at any time during the year.

In September 2019 the government began granting e-visas for both Hajj and Umrah pilgrimages in order to enhance the speed and efficiency of the application process. As of early 2020 Umrah visas were free of charge and valid for a period of two weeks. However, the Covid-19 outbreak is expected to significantly impact 2020 participation numbers. In late February the authorities announced that there would be a temporary ban on entry for Umrah visa holders. The Kingdom has also suspended entry to Makkah and Medina for GCC residents, even though they do not require visas for the pilgrimage. Following this, the government announced the temporary suspension of tourists visas for those coming from countries where Covid-19 was particularly widespread, and in early April it began urging people to delay making travel plans for the 2020 Hajj. “We have asked our brother Muslims in all countries to wait before concluding contracts [with tour operators] until the situation is clear,” Mohammed Banten, minister for Hajj and Umrah, told local media on April 1. As of early April international passenger flights had been suspended until further notice. For those already in Makkah and Medina before Umrah visas were suspended, the authorities have implemented measures in an attempt to contain the virus. For example, prayers have been banned at mosques, and entry and exit from Jeddah, Riyadh, Makkah and Medina has been restricted.

KEC

As part of efforts to boost economic diversification and job creation, six economic cities were under development as of February 2020. One of these is the 6.9m-sq-metre Knowledge Economic City (KEC), a $7bn mega-project located in Medina, 8 km from Prince Mohammad bin Abdulaziz Airport. It is also adjacent to the Haramain High-Speed Rail, which was launched in October 2018 and connects Makkah with Jeddah, King Abdulaziz International Airport, King Abdullah Economic City in Rabigh and Medina.

KEC will offer opportunities for investment in residential, commercial, hospitality, edutainment, services and tourism spaces, and provide an example of urban planning for other regions to follow. It also seeks to empower small and medium-sized enterprises (SMEs) by allocating space for local businesses to sell their products within pedestrian zones. The growth of local SMEs should help to raise Medina’s socio-economic profile and encourage entrepreneurship. Indeed, the segment is already on a promising trajectory: SMEs in the Medina region posted 31% growth in 2019, Rami Hajjaj, the CEO of Namaa Almunawara, a company which focuses on SME empowerment, told OBG. “It is necessary to build the Medina brand and to give a high degree of credibility to Medina-based products and services in order to foster local entrepreneurs and improve the entrepreneurial ecosystem,” Hajjaj added.

The economic city has seen a number of deals reached in recent months. In July 2019 KEC signed a 12-month memorandum of understanding (MoU) with the Saudi Public Transport Company to explore the feasibility of developing transport links within KEC, as well as to connect it to the Haramain High-Speed Rail. In August of that year KEC awarded a $3.6m project to Canadian firm IBI Group, tasking the firm with engineering and design work across some 3.7 ha for a period of 42 weeks. Furthermore, in late 2019 a deal was inked with Hilton to operate the 300-room DoubleTree by Madinah Gate, a hospitality and entertainment project slated to open in 2022. In February 2020 KEC signed a similar two-year MoU with India-headquartered hospitality firm OYO for the operation of 1500 hotel rooms within the Islamic World District of Medina. Wasat Almadinah joins Madinah Gate and Islamic World District as KEC’s top development projects.

One member of KEC is the Madinah Institute for Leadership and Entrepreneurship, a non-profit organisation that aims to build leadership and entrepreneurial capacity in the Arab and Muslim world. It has welcomed hundreds of senior executives from more than 25 countries to discover new leadership and management practices to grow in their careers.

Grand Mosque Expansion

In addition to the current focus on economic cities, a large-scale expansion of Makkah’s Grand Mosque was launched in 2011 in response to the growing number of Hajj pilgrims. The $26.6bn project seeks to expand the mosque complex by 3000 sq metres, thus raising capacity by an estimated 300,000 to a total of 2.2m worshippers. Measures are also being taken to protect visitor safety through upgrades to the mosque’s hospital and security buildings, and 79 electronic gates will be installed to ease crowding. Public officials reported that the third expansion was 85% complete in August 2019.

Hospitality

In Makkah a mega-project operated by Jabal Omar Development Company (JODC) is set to complement the expansion of the Grand Mosque. The SR20bn ($5.3bn) development is within walking distance of the holy site and will cover a 2.2m-sq-metre plot, including 93 commercial units and 38 hotels. As part of the project, the DoubleTree Makkah Jabal Omar hotel opened its doors in late 2019, and many other hotels are slated to open in the near future, including the Jumeirah Jabal Omar in 2020. Upon completion, the project is expected to have the capacity to accommodate 34,000 guests, with this number reaching as high as 100,000 visitors during the Hajj season. The group reported an occupancy rate of 84-85% during the fourth quarter of 2019. “Although construction slowed during this period, the pace picked up again in early 2020,” Khalid Al Amoudi, CEO of JODC, told OBG.

This is not the only large-scale project put forward to accommodate greater tourism inflows to Makkah. The Rou’a Al Haram Al Makki project will add 70,000 keys across 84,000 sq metres. The first phase is expected to be fully operational by 2024, and once complete it could contribute up to SR8bn ($2.1bn) to the national economy, based on estimates from real estate consultancy JLL. Furthermore, in December 2019 a real estate development fund was formed by the Kingdom’s Umm Al Qura for Development and Construction Company, and Alinma Investment, a subsidiary of Alinma Bank. The fund’s capital exceeds SR17bn ($4.5bn) and is primarily directed towards projects in Makkah such as three-, four- and five-star hotels, as well as apartments and two malls, as part of the city’s 1.2m-sq-metre King Abdulaziz Road urban development project.

This pipeline of projects suggests that the real estate sector is poised for growth, fuelled by demand in Makkah. “Demand in the residential and commercial segments is currently present, and the right kind of private funding will provide an important boost,” Al Amoudi told OBG. “The long leasehold format, from a regulatory standpoint, will prove pivotal in the Kingdom’s real estate developers’ market.” Real estate development within the holy cities is closed to foreign investors.

Transport

The SR60bn ($16bn) Haramain HighSpeed Rail has reduced travel time between Makkah and Medina by around two hours to two hours and 45 minutes. This may encourage visitors to make both destinations part of their itinerary. Operations were forced to halt in September 2019 after a fire damaged the main station in Jeddah, but a number of related works resumed in December (see Transport chapter).

According to Khalid Baghdadi, CEO of Hafil Transport, the transport sector is gradually being liberalised. “The government is increasing the number of tenders and encouraging the private sector to increase competitiveness,” he told OBG. Growing levels of digitalisation could help encourage further liberalisation. The technology used on buses already includes passenger counters, which improve conditions for passengers and maintain safety. The counters may allow data collection and analysis, which will help maximise the efficiency of transportation logistics. This will be pivotal in meeting growing demand during the Hajj, and ensuring the sustainability of operations for the rest of the year.

Shared Benefits

A number of sectors benefit from growing visitor numbers, including retail. “During the Hajj, the sale of watches increases substantially in the Makkah region, because many pilgrims buy watches as gifts for their families,” Abdulrahman Al Hussaini, CEO of Al Hussaini and Al Yahya Investment Group, told OBG. “The price of watches for international pilgrims is lower than in their own countries, because value-added tax is lower in Saudi Arabia.” In an encouraging indication for the Kingdom’s retail segment, Indonesia – Makkah’s second-largest visitor source market – has a growing middle class that is pushing up consumer spending at home. This suggests scope for the Kingdom to further tap into the spending power of Indonesians abroad. Growing global interest in modest fashion in particular offers a potential avenue for expansion – spending on Muslim footwear and apparel reached $283bn in 2018, a figure which is anticipated to grow by 6% annually to $402bn by 2024, according to “The State of the Global Islamic Economy Report 2018/19”, produced by Thomson Reuters and DinarStandard.

Another promising sector is education, where the government is actively encouraging public-private partnerships; it signed an agreement for private companies to fund the development of buildings within the industry in late 2019 (see Education & Training chapter). Medina has considerable potential to raise the Kingdom’s education profile internationally. According to Nabil A Alrajeh, rector at the University of Prince Mugrin, some 8m people visit Medina per annum. This exposure, along with Vision 2030, attracts several multi-billion mega-projects from around the world, which require substantial human capital development. The local educational system tailors its programmes to the needs of sectors including industry, health care, education, tourism and entertainment, and fosters connections among investors in the Middle East and beyond.

The cooperation between the public and private sectors ensures an improved business ecosystem and greater employment opportunities, necessitating advances in the tourism and hospitality offering in particular. Indeed, there is currently no public university that offers a hospitality degree within Medina. However, the students participating in its only private hospitality course typically receive a job offer before graduation, indicating firm demand for graduates with this skill set. “In addition to manpower and entrepreneurship, the Medina region is also taking practical steps to revitalise sectors such as investment and consulting through the creation of multiple digital platforms,” Abdullah A Abualnasr, secretary-general of the Madinah Chamber of Commerce and Industry, told OBG.

Outlook

While uncertainty remains surrounding Covid-19’s impact on the 2020 Hajj season, the bigger picture looks positive for the Kingdom’s two holy cities. The real estate sector is expanding alongside the Grand Mosque’s capacity, and more streamlined visa processes and regulations should encourage a larger annual influx of visitors. The key challenge for the government going forwards will be to ensure that transport and hospitality infrastructure keeps pace with this anticipated growth.