Saudi Arabia's ambitious jobs push could help drive up wages and encourage more vocational training, but it could also put firms out of business, economists warn
Ghazi al Gosaibi, Saudi Arabia's former labour minister, who died last August, famously served burgers at a fast-food restaurant in Jeddah to lead by example and encourage young Saudis to take up jobs usually filled by foreigners. As labour minister from 2005, Al Gosaibi had struggled to lower unemployment, despite introducing quotas to persuade private companies to hire Saudi nationals.
Today, only one out of ten private sector jobs are held by Saudi nationals, a dangerous imbalance which Riyadh is desperately trying to reverse. Unemployment in the kingdom is around 10.5 per cent, the highest in the Gulf Co-operation Council. Saudis - almost 70 per cent of whom are under the age of 30 - make up 69 per cent of the total population of 27.6 million.
As the Saudi population is swelling by around two per cent a year, the need to grow private sector opportunities, and wean companies off cheaper foreign labour has become more urgent. Figures from the International Labour Organisation show that Saudi's youth unemployment level is in worse shape than those of Tunisia, Jordan or Egypt.
Last month, the kingdom's Saudisation drive was dramatically stepped up. As the Arab Spring continues to send shockwaves throughout the region - prompted in part by a lack of jobs - Riyadh has moved to set in motion an ambitious job-creating private sector push.
The government's goal is to create 1.12 million new jobs for Saudi nationals by 2014. Under the scheme known as "Nitaqat" firms that fail to employ a sufficient number of locals will face tough penalties.
According to Banque Saudi Fransi, last month the government started to inform companies which of four categories - "excellent", "green", "yellow" or "red" - they fall into based on the quantity of Saudi nationals they employ. Companies which achieve more than 30 per cent nationalisation are classified as "excellent".
Firms that fail to meet quotas face visa caps, and limits on foreign recruitment. Companies in the 'red' category for example, would be barred from renewing work visas for expatriate staff entirely, says Banque Saudi Fransi. 'Green' companies on the other hand could, for the first time, recruit foreign workers from the 'red' and 'yellow' categories and transfer sponsorship visas without the current employers' consent.
While the new laws are expected to have some positive impact - helping to push up wages and encourage vocational training - the added costs could be too much for some smaller businesses, economists warn.
"The initial shock of Nitaqat, if enforced with vigour, could lead numerous smaller businesses to shut down, shake already feeble foreign investor confidence in the economy, and further stall the private sector's recovery," cautions Banque Saudi Fransi's chief economist, John Sfakianakis, in a research note.
Although Nitaqat assigns different nationalisation rates according to the size and activity of companies, Banque Saudi Fransi expects that up to 30 per cent of private sector businesses will struggle and possibly be forced to shut down.
In the short term, the scheme could also put off foreign investors from investing in the country as they wait to see how the system will work.
However economists also observe that the new rules are at least acknowledging the scale and urgency of the country's jobs deficit.
"The good thing about the rules is that they recognise the limited progress made to date in creating jobs for Saudis in the private sector," says Jarmo Kotilaine, chief economist at Saudi Arabia's National Commercial Bank (NCB). "With 80 to 90 per cent of the private sector labour force still composed of expatriates, the past efforts to foster economic growth and education have clearly had scant impact."
Indeed, some 6.21 million of a total 6.89 million private sector workers in 2009 were foreigners, up almost 30 per cent from 2006, according to Banque Saudi Fransi.
Part of the problem is the kingdom's education system which remains heavily focused on religious learning and produces graduates devoid of the sorts of skills needed to compete for private sector jobs. Private companies have preferred to hire cheaper imported labour, while nationals have focused on obtaining 'cushy' public sector jobs. However, unlike in Kuwait and the United Arab Emirates, state jobs are not guaranteed in Saudi.
NCB's Kotilaine argues that additional steps are required to overcome entrenched attitudes and employment patterns.
"Many private sector companies have a history of relying heavily on low-cost expatriate labour, which has caused them to operate with lower levels of efficiency than would be desirable. At the same time, many Saudis have been priced out of these markets while attitudes among employers and employees have reduced labour mobility. The experiences of other countries, including ones in the region, suggest that the proverbial carrot has to be combined with a stick to change such a stalemate," he says.
Riyadh has been proffering both in recent months. The country is spending an estimated $130 billion, or nearly 30 per cent of its annual economic output, in government handouts. In an effort to ease tensions caused by unrest in the region, King Abdullah unveiled in February and March measures including a new $533 monthly unemployment benefit - for which some two million people have reportedly already registered - higher public sector salaries, the creation of 60,000 security positions and construction of 500,000 new homes.
However, unemployment benefits, which are estimated to cost around $2.9 billion a year, may encourage low-wage Saudi workers to give up their jobs if there is not much difference between their salaries and benefit packages, analysts have warned. The creation of scores of new public sector jobs (last month King Abdullah ordered 66,000 new public sector jobs for graduate teachers and health diploma holders) could also compromise the success of the Nitaqat scheme.
On the upside, the programme may force private companies to invest in training schemes to better match nationals with the needs of the jobs market, and lead to an increase wages. Banque Saudi Fransi also observes that the system could benefit talented expatriates, by encouraging companies to compete in order to retain them. Mergers and acquisitions could also take place, as companies try to cope with higher wage and training costs, the bank says.
But such dramatic changes to the labour market are unlikely to come without resistance. NCB's Kotilaine says that the system should be flexible enough not to cause severe economic disruptions.
"The main challenge created by the current situation is precisely its deeply entrenched nature and the attitudes and dependencies it has produced. Addressing these too quickly or rigidly will engender not only resistance but also disruptions and uncertainty at a time when the private sector is still emerging from the downturn," he argues. "In that sense, flexibility in implementation and the use of economic incentives and penalties are important if the ultimate goals are to be met with minimal disruptions."
© The Gulf 2011
