Saudi’s Great Labour Challenge – Shifting From An Expat To A Local Workforce

As Saudi Arabia pushes forward with its nationalisation drive, the Kingdom is preparing to witness a monumental shift in its workforce.

There is nothing novel about nationalisation initiatives in the Gulf States, as Qatar and the UAE have also pursued localisation goals with limited success.

However, the speed with which Saudi wants to replace its expat workers has triggered concern among economists and investors.

For decades, oil-rich Saudi has relied on cheap expat labour and now expats comprise more than half of the country’s 11.3 million workforce. However, this influx has steadily distorted the Kingdom’s demographic profile.

With a gaping youth bulge (48 per cent of Saudi’s population is less than 25-years-old) and an unemployment rate of around 12 per cent, Saudi is now attempting to shed its expat workforce to make way for jobs for its own citizens.

Expat Drain Leaves Gaping Labour Gap

Since unrest in neighbouring Arab countries began in 2011, unemployment has been a top priority for the Saudi government.

In a bid to prevent disgruntled youth protests, the government announced a $130 billion social spending plan and additional jobs for Saudi nationals. It has also tightened regulations concerning expat workers, stipulating that the entire workforce be legalised, which has resulted in an exodus of expats from the Kingdom.

Tommy Weir, a Middle East leadership expert, feels that legalisation of the workforce, including expats, was definitely the right thing to do but says that the move will cause potential difficulties.

“There might not be enough Saudis willing to fill the void created by expats, considering that many of the three million affected workers are in labour roles, ones that Saudi citizens have not historically taken to,” he said.

Despite the nationalisation scheme being easy on quotas reserved for manual labour like construction workers, the Kingdom has begun to experience growing pains in its economy.

Raed Aqeili, a member of the National Committee in Saudi Chambers, was quoted in Saudi daily Arab News, as saying that 90,000 construction contracts out of 250,000 had to be cancelled due to a labour shortage that hit the country once legalisation measures were fully implemented.

According to Aqeili, many of these projects belonged to smaller companies that mainly rely on an expat workforce. Many of these companies faced a labour crunch when their workers moved on to the professions stated in their iqamas or residency permits, or were shifted to other sectors.

“The economic implications of legalisation would mean a decrease in short-term production and, if this happens, then there will be a potential rise in costs to consumer,” said Weir.

The private sector, with its over-reliance on cheap labour, has been hit the hardest by the expat labour drain.

“Private companies in industries such as building and construction, wholesale and retail, and manufacturing which were reliant on low-paid foreign labour and operated on low margins will be negatively impacted,” said Janani Sankaran, senior consultant, business & financial services practice, Frost & Sullivan.

“However, these companies might pass on at least a part of the wage inflation to the consumers. A combination of the two might increase the overall inflation,” she said.

Saudi’s labour challenge

A recent IMF report on the Saudi economy surmised that the country might not be able to create all the private sector jobs needed for its rapidly growing population, leading to higher rates of unemployment.

“A large number of young people will enter the labour market in the next decade and beyond, and creating a sufficient number of rewarding jobs for them in the private sector will be a challenge,” the IMF said in its statement.

The fund pressed the Saudi government to address unemployment rates, especially among the youth and women, which are higher than in other countries with similar incomes. It further advised the country to reduce its reliance on public sector jobs, largely funded by oil revenues.

However, Weir said that the local workforce is not yet ready to fill the gap that will be created by the expat exodus.

“It is a major transition to go from buying in labour to do this type of work and then suddenly expecting the local market to take up the challenge. This creates added pressure on the economic model as the local market is not able to work for incomprehensibly low prices that bought in labour work previously,” he said.

Sankaran recommended a change in Saudi’s educational system to smoothen the transition from an expat workforce to a local one.

“There should be a greater collaboration between universities, students and industry. Additionally vocational training should be imparted to strengthen the human capital,” she said.

Weir said that it is in everybody’s interests that Saudi transforms its existing youth bulge into a competitive advantage. This means that the Kingdom must create a considerable amount of jobs across the country, in both private and public sectors.

“Most countries that are examples of having created huge numbers of jobs in short periods of time did such through manufacturing and hard infrastructure,” said Weir.

According to Sankaran, boosting the Kingdom’s SME sector could be another avenue to create employment.

“Traditionally, small and medium enterprises (SMEs) could be the biggest source of employment for young Saudis,” she said.

Although SMEs account for approximately 90 per cent of all businesses in Saudi, their contribution to GDP is only around 33 per cent, and they account for only 25 per cent of total employment.

“In comparison with global peers, the contribution of SMEs to total GDP is low. In the short term, the imposition of SAR2400 levy on private companies could negatively affect SMEs who are already facing capital raising challenges,” Sankaran added.

The IMF, in its employment report, expects Saudi Arabia’s economy to grow four per cent this year and 4.4 per cent in 2014, below government projections, as oil output falls 3.3 per cent this year.

The medium to long term effects of Saudi’s decision to nationalise employment will definitely be positive, analysts say, but how policy makers will deal with the pitfalls along the way remains to be seen.