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Replacing Expats
05 June 2011
Creating jobs is central to the new Saudi economic strategy. After unleashing a $130-billion investment programme, the Kingdom has now unveiled its accompanying job creation plan with a renewed push for Saudiization. Can it solve Saudi Arabia's unemployment problems, or hurt the economy and drive talent foreign labor away from the country?
Saudiization has been given a new lease of life. Worried about domestic unrest and the political fallout of unemployed Saudis, the Kingdom has recently made a concerted push to embark on an unusually aggressive drive to encourage companies to recruit Saudis and "compete with one another in employing Saudis in order to qualify for the various incentives offered by Labour ministry," according to the minister Adel Fakieh.
The speed and earnestness with which the Kingdom has moved on "Nitaqat" has taken analysts by surprise.
The Nitaqat reforms package includes limiting expats to six years of residency and build on the existing rules for recruiting nationals in the workforce, especially the private sector. It also means that companies that do not adhere to the new policies may be penalised.
But the bank argues that the Kingdom is faced with a severe demographic and labour imbalance which is compelling the authorities to make the move, despite the potential risks.
"The computer system at the labor offices across the Kingdom would reject any transactions with these firms with regard to renewing their employees' work permit or issuing new labor visas. This would be a serious setback for these firms that might eventually force them to exit the employment market," the minister told the media.
Citibank believes this is an idea whose time has come.
"Serious imbalances have been building in the country over decades and that we believe require urgent attention: only 40% of Saudis of working age are in employment, 43% of 20-24-year-olds are officially unemployed, 51% of Saudis are below the age of 21, expat workers make up 90% of the private sector work force. While the emphasis in the past has been on creating new jobs for Saudis through diversification efforts, we believe it is a constructive step forward to re-emphasize at the same time the back-filling of jobs currently held by expats.
However, this knee-jerk reaction to rapid Saudiization will have a severe impact on the workforce and the wider economy, especially due to the great mismatch.
First, there is the possibility that many private sector companies will be shut down as a result of strict implementation of the Nitaqat policy. SMEs and smaller companies will be especially vulnerable.
Second, the rapid change in employment demographics could lead to loss of productivity, especially as companies will let go off trained expat staff. In addition, the inability to fire local labor force could be a major drag on the bottomline.
Third, the training of Saudi labor force will result in a loss of productivity, although much of the training is expected to be borne by the state.
Fourth, Citibank believes that the private sector will have to pay higher wages to attract Saudis, as they let off their cheaper expat staff. "This will raise the cost base of doing business in Saudi Arabia, eroding local corporate competitiveness and raising domestic inflation."
But Saudi Arabia has to swallow the bitter pill.
Saudi Banque Fransi notes that Saudi Arabia's labor market needs to shift from one relying on cheap labor to one exhibiting high wage equilibrium to encourage Saudi participation and ease unemployment.
"This would in turn improve real incomes of citizens and reduce the burden on the state purse. The government moved a step in this direction by raising the minimum wage this year for civil service employees to SR3,000 per month from SR2,185. However, private sector employers must be compelled to do the same for the proper incentives to be in place to improve real wages in the sector that employs more than 80% of the workforce."
If Not Now, When?
While extremely painful, this is as good a time as any to implement tectonic shifts in the economy. Saudi authorities have embarked on a major investment spree to the tune of $130-billion, which will no doubt lead to job creation for the Saudi local population, which has complained of lack of opportunities.
National Bank of Kuwait (NBK) estimates Saudi GDP growth of 6.9% this year, making it the second fastest growing economy after Qatar.
Non-oil GDP growth in 2011 is also revised up, from 4.0% to 6.0%, says NBK. Key to this are the huge supplementary government spending measures - which include new jobs, pay increases and money for housing programs and the health sector.
If Saudi Arabia is to make this transition from an expat-heavy workforce to a local-dominated workforce, it is imperative that the authorities support the smaller businesses through this transition.
"The strong near-term economic outlook provides an opportunity to address longer-term priorities," the IMF notes. "As emphasized in recent Royal Decrees, high among these are providing jobs and housing for the growing population. Key steps will be to continue progress in diversifying the economy, building on the positive business environment, and continuing to improve access to finance for SMEs as well as for housing.
The new policy initiatives entail spending commitments over the next several years which will reduce fiscal surpluses and it will be important that the additional spending be undertaken in a way that complements private sector activity. Ensuring the efficiency of public spending will be key to realizing an appropriate return from the increased government investments, the IMF notes.
Citibank expects close to an additional three million Saudi youth to enter the workforce by the end of this decade and 14 million by 2050.
"We believe there are steps that the government can take to limit the fallout on the economy, such as to relax hire and fire rules for Saudis, skew contract tenders to companies with higher Saudiization ratios, and keep up efforts on vocational training and education, among others."
Since the Labor Minister announced the move, the private sector has been rightfully worried of the consequences on their businesses. According to some estimates close to 120,000 Saudi men and women will return to the kingdom after completing their higher studies abroad sponsored by the King's Scholarship Program.
While bringing their international training to, they will no doubt demand higher salaries and that would raise the cost of doing business in the country.
The SMEs are especially vulnerable and according to some estimates a huge number of smaller businesses may get wiped out as they fall foul of the Labor Minister's policies.
Even the major companies have seen the impact of new labor-oriented reforms. Many listed companies saw their bottom lines impacted in the first quarter, as they paid a bonus of two-month's salary to their employees, to replicate the award to public sector workers contained in the Royal decrees.
Saudi Telecom, for example, saw net profits fall 11% in the first quarter due to bonus payouts. In all, Jadwa investment has identified 27 companies that paid out bonuses, which has hurt their profits.
Critics of the plan also argue that the Saudi higher education system and training centers are not equipped to train Saudis to be recruited in sectors as complicated as banking, insurance, telecom, real estate and hundreds of other less attractive sectors that still require expertise such as sales and marketing.
Implementing the plan so aggressively in such as short-span of time will leave the country without an efficient workforce, at least in the short-term, before the Saudi population can take over the reins in the long run.
Also Read: The Great Saudi Population Compendium
Conclusion
Saudiization is not a new concept but the new push towards inducting the Saudi labor force is seen by its critics as a desperate act by authorities to nip any dissension in the bud. Of course, finding employment for the local workforce is the first priority for any government, but a knee-jerk reaction may see an exodus of talent from the economy as it move to other parts of the region, especially the UAE and Qatar.
Saudi Arabia needs to find a balance between employing foreign talent - which it desperately needs - to ensuring skilled Saudis find the job they deserve. But in their eagerness, the Saudi authorities may be skipping a few steps to get to the end result of Saudiization.
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