The Kingdom of Saudi Arabia has embarked on major initiative aimed at addressing the structural challenge of overdependence on the expatriate workforce, according to a latest report released by Standard Chartered Bank in its series Middle East Focus.
“On the economic front, oil output has risen steadily on conflicts in the Middle East and is now close to 9.5 million barrels a day (mbd); this will be a key driver in pushing up real GDP growth to our 2011 forecast of 6.6%. Despite increased spending this year, reserves still seem to be building up, and US Treasuries remain the asset of choice for Saudi,” the report added.
The report, jointly produced by Shady Shaher and Victor Lohle, made public on Tuesday titled ‘Saudi Arabia–tackling the unemployment challenge’ said that official numbers show that Saudi Arabia’s unemployment rate stood at 10.5% at end-2010, with female unemployment at 26.6% and high school graduate unemployment at 40%.
“Private-sector employment is dominated by expatriates, who make up 30% of the population but account for 90% of private-sector jobs, of 6.89 million private-sector jobs as of 2009, 6.21 million were held by non-Saudis.
The government announced a new job nationalisation programme, the ‘Nitaqat’ or ‘limits’ programme, that will classify more than 300,000 local companies in accordance with their nationalisation efforts. The programme’s main objective is to correct imbalances in the labour market and increase Saudi participation in the private sector. It seeks to create 1.12mn jobs for Saudi nationals by 2014.
The Ministry of Labour will assign one of four classifications, from ‘excellent’ and ‘green’ to those complying, to ‘red’ and ‘yellow’ to those failing. Previously, a blanket 30% quota for hiring Saudi nationals was given to all business; under the Nitaqat programme companies will be graded under one of 205 categories of quotas based on the company’s type of activity and size. The system uses a carrot-and-stick approach, allowing companies rated excellent or green, with 30% or more Saudis employed, to freely hire expatriates from those rated yellow or red, without the consent of the lower-rated employers.
“We believe the system is an improvement on previous nationalisation programmes. First, the fact that the law differentiates between different categories of business should make targets more achievable if they are based on the available skillset of Saudi nationals. Second, it will force companies to invest more in training the nationals they employ to make them more productive, given the heavy price of non-compliance (a six-year cap on residency visas for expatriate workers). Third, while the law does not offer expats total mobility, the fact that they can seek employment at better-rated firms without their current employer’s consent is a first step towards creating a more flexible labour market,” the report said.
However, the report added, the new system faces challenges. “While GCC countries have taken significant measures to address education and job creation, incentives remain a key obstacle. The public sector is still a more attractive place to work. For example, this year Saudi Arabia made a temporary 15% wage hike permanent and awarded two-month bonuses to public-sector employees. This further widens the gap between the private and public sectors, with private-sector companies finding it difficult to match the incentives of government jobs, where some professions pay four times as much as the same ones in the private sector. These measures deter foreign investment in Saudi Arabia, with firms weighing the incremental costs of hiring Saudis against expats” it said.
This system may place a burden on smaller businesses that lack the necessary resources to train Saudis. Finally, the system does not address the low participation of women in the workforce, which leads to high dependency ratios on working Saudi men. The problem is not only related to demand for Saudi labour, but also to supply. Encouraging demand through quotas without addressing supply constraints (education, skills, incentives and the pay gap with public sector) might not achieve the desired outcome.