Saudi job drive may hurt SMEs

An aggressive initiative just launched by Saudi Arabia to force its expatriate-dominated private sector to hire more Saudis could shake investor confidence and force small companies out of the market, a Saudi bank said on Tuesday.

Nitaqat (ranges) programme, which was enforced on June 11, is the most radical job drives by the world’s oil superpower seeking to replace its massive foreign work force with nationals and tackle a festering unemployment problem.

The government’s ambitious goal is to succeed in creating 1.12 million new jobs for Saudi nationals by 2014, or 92 per cent of all new jobs created, as set out in the current development plan, Banque Saudi Fransi (BSF) said.

In a study sent to Emirates 24/7, BSF described Nitaqat, which gave firms three months to comply with the new rules, as a dynamic programme but added that it constituted only part of the solution.

It noted that the previous Saudisation quota system required all sectors to have a blanket nationalization rate of 30 per cent–although only a third was achieved. The new system is more dynamic, applying 205 categories of quotas that vary based on the line of work and size of the company, BSF chief economist John Sfakianakis said in the study, sent to Emirates 24/7.

As part of Nitaqat, companies falling in the ‘red’ category would be barred from renewing the work visas of their expatriate staff entirely, while ‘green’ companies will be entitled to, for the first time, recruit foreign workers freely from the other two categories and transfer their sponsorship visas without their current employer’s consent, according to the study.

“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,” it said.

“Private sector growth rates have lagged in recent years well below the six per cent minimum we believe is necessary to stimulate enough job creation for a population that is nearing 28 million….in the medium- to long-term, however, Nitaqat has the potential to introduce much-needed adjustments to wages and efficiency in the private sector, so long as it is supplemented with high-quality training programmes at Saudi schools and within companies. We expect the programme will succeed at improving Saudi participation in the private sector.”

Sfakianakis said he believes the private sector must evolve into Saudi Arabia’s main engine for job creation in order to relieve the burden from the state, which has frenetically created jobs for citizens to quell unemployment.

He said such a long-standing drive has led to unsustainable growth in its wage bill and taken a grave toll on public sector productivity.

Beyond the kingdom, effective implementation of Nitaqat could lead to a downturn in remittances to countries that come to rely on them heavily for foreign currency, and could prompt them to reconsider employment strategies, he said.

“Remedying the disparity between recruitment of expatriates and nationals in the private sector is one of the biggest challenges facing Saudi Arabia’s labour market…when authorities conducted a census last year, they discovered that the non-Saudi population had grown more quickly than earlier estimated. Since the 1990s, the ratio of expatriates to the total population remained relatively stable, fluctuating at slightly above or below 27 per cent,” he said.

“But in the past five years this shifted noticeably as recruitment of expatriates intensified during an economic boom that tracked a rise in oil prices between 2003 and 2008. Since 2004, the ratio of non-Saudis to the total population rose sharply, reaching 31 per cent of the 27.6 million people living in the country by the end of 2010, according to revised population data. Now, very close to one in every three Saudi residents is a foreigner.”

According to official data, in 2009 alone almost 674,000 new jobs were created in the private sector, and another 42,189 in the public sector.

Yet that year, unemployment among Saudi nationals rose to 10.5 per cent from 9.8 per cent in 2008. The jump in unemployment, which is expected to have been sustained in 2010, resulted from a particularly sharp increase in the incidence of joblessness among youth, the study said.

It showed that in 2009, some 27.4 per cent of Saudis under the age of 30 were without work, including 39.3 per cent of those aged 20-24.

“Due to the announcement this year that unemployment benefits will be paid for the first time, the official unemployment rate could increase this year as more individuals register their employment status.”

The study said it believes that if the private sector responds dynamically to Nitaqat, there could be some much needed and “welcome mergers and acquisitions” that take place in order to enable smaller firms to be better able to cope with higher wages and training costs.

But it noted that small- and medium-sized enterprises have tended to be disfavoured for government contracts and they may also have a harder time enforcing quotas due to their small size and inability to afford the extra costs associated with hiring nationals.

“The policy could, hence, hamper the development of the SME sector if nationalisation requirements provide difficult to implement. Quotas do not address the lack of incentives in private sector work for national jobseekers.

With Nitaqat, the cost of doing business in Saudi Arabia is likely to rise, although demand among Saudis may also rise if more are employed, thus providing greater overall momentum in the economy,” it said.

“Still, forcing the private sector to be more proactive in employing Saudi nationals is only part of the solution. The education system has been unable in the recent past to produce enough qualified graduates who are able to fill crucial jobs in the kingdom. Humanities and arts remain the single-largest majors chosen by Saudi students, accounting for 41 per cent of total university graduates in 2009.

Yet what are needed are specialists in technical, engineering, science, computer science and medical programmes. The Ministry of Higher Education is working toward rectifying this skills gap, but it will take many years before the skills makeup of the population changes to suit the needs of the economy and reduce the need for foreign talent.”

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