Jobless rate could widen in the GCC - Emirates24|7

Jobless rate could widen in the GCC

A projected contraction in the economies of Gulf crude producers this year is expected to widen their unemployment rates after several years of job growth during the oil boom, a Kuwaiti bank said yesterday.

Presenting a gloomy picture about the labour sector in the six-nation Gulf Co-operation Council (GCC), the government-controlled National Bank of Kuwait (NBK) said the public sector can no longer create jobs as it is already suffering from redundancy, while the private sector’s job capacity could be severely hit by low performance, poor investment and retrenchment by some companies.

Over the last few years, the oil windfall and associated strong economic growth have enabled GCC economies to achieve significant and far-reaching success, an example of which is the notable increase in the number of new job opportunities for both Gulf nationals and expatriates, the bank said.

In broad terms, GCC countries succeeded in reducing their corresponding unemployment rates and increasing the labour participation rate among nationals despite the rapid growth in their labour forces, it added.

Its figures showed the number of employed in the 28-year-old Gulf alliance reached around 14 million by end-2007, of which 18 per cent are nationals.

The number of workers in the public sector stood at 13 per cent of the total employed, and this share is dominated by nationals – at 80 per cent.

For 2008, preliminary estimates show a further improvement in labour market indicators, with the GCC unemployment rate dropping to 3.2 per cent.

DETERIORATION

“The acute deterioration in the regional economic outlook in 2009 relative to past years, however, is expected to partially diminish these achievements and pose serious difficulties for the Gulf labour markets, unless further solid government measures are put in force,” NBK said in the study, titled “Weaker outlook for private sector employment in the GCC in 2009”.

“There are three major problems facing the GCC private sector at present. Firstly, heightened uncertainty is forcing business to scale down expansion and investment plans, and in some cases retrench… secondly, the recent tightening in credit conditions has made financing availability more expensive and limited. Thirdly, and most importantly, the anticipated reduction in private consumption is forcing businesses to cut production and operations.”

IMBALANCES

But it noted that despite efforts over the recent years and the enforcement of nationalisation laws, GCC labour markets still face severe structural imbalances compared to most regions around the globe.

Nationals working in the public sector in the GCC, for example, accounted for almost 58 per cent of total nationals employed in 2007, while the private sector absorbed the remaining 42 per cent, it said. It considered that ratio as high and even higher in individual members, as it was estimated at 90 per cent in Qatar in 2007, 86 per cent in the UAE, 84 per cent in Kuwait and only 50 per cent in Saudi Arabia. “These numbers may suggest that the ability of the public sector to continue absorbing new entrants to the labour force may have reached its upper limit.”

PRIVATE SECTOR

It said the private sector has managed to create a sizeable share of new job opportunities for nationals in recent years as data show that employment in the sector soared at an average annual rate of eight per cent over the period 2003-2007, while average growth in public sector employment was 2.8 per cent.

Accordingly, the share of the private sector in total employment rose by five percentage points over the same period.

“Such a positive development can be attributed to the supportive economic environment for private sector activities, education and investment in human capital in order to equip national labour forces with the kind of skills demanded by the private sector… governments also recognise this reality and many have made education and training a national priority.”

The study found that with the rising number of new entrants to the region’s labour force, reflecting the youthful profile of the population, the greatest responsibility for providing new job opportunities rests with the private sector.

SHORT-TERM DIFFICULTY      

But it noted that while the private sector will be a major driver of growth and employment in the long run, it is likely to face particular difficulties in this regard over the short term due to the prevailing economic environment.  It referred to Kuwait’s decision in November to deal with this situation by raising the mandatory quota for national labour at private institutions in a number of key sectors in the hope of shoring up employment of nationals. “Given the anticipated layoffs by companies suffering a decline in business, such a measure will put a badly timed burden on institutions, even those that have so far remained healthy,” it said.

BUDGET REACTION

NBK said it believed a surge in state budgets announced by some GCC members for 2009 was somewhat a reaction to such a situation.

“With employment topping the list of economic policy objectives, governments usually adopt counter-cyclical policies to support growth. This is currently most evident in the expansionary fiscal policies adopted around the globe and in many GCC countries in response to the devastating impact of the current crisis,” it said. The rationale behind those policies is very simple. Economic growth is achieved by expansion in domestic demand (consumption and investment of private and government sectors) and in foreign demand (net exports of goods and services).

ECONOMY

Turning to economic performance, the study said the anticipated contraction in GCC economies in 2009 by nearly 20 per cent in nominal terms and the sharp slowdown in real terms will come from almost all components of GDP.

Foreign demand will shrink with the fall in both prices and production of oil, while private consumption will be hit by reduced consumer wealth and investment income in light of the severe drop in regional stock markets and to a lesser extent in the real estate markets, it said. “This situation can only get worse if households’ wage incomes contract. Private investment is also expected to suffer in light of the challenges mentioned above. The contribution of the public sector to overall economic growth will depend upon decisions made by GCC governments about their respective budgets,” it said.

“Government consumption and investment are the only tools powerful enough to steer the economy in the desired direction and to lessen the anticipated contraction in the Gulf economies. Bailout plans focused on the financial sectors across the GCC and the easing of monetary policy may counteract some of the negative forces putting a damper on private expenditures. As such they can also help maintain jobs in the private sector, especially at banks which tend to be the largest employer of nationals in many GCC countries.”

FISCAL POLICY

The study believed most GCC governments are aware of the important role of fiscal policy in recessionary environments. It said with this in mind, a significant boost to government expenditures was announced in the 2009 budgets by Saudi Arabia, the UAE and Oman. While the Qatari Government has announced its intention to boost spending,  it has yet to release any budget figures.

 

Key indicators

- Growth in employment across the GCC has been notable over the past five years, with the private sector playing an increasingly important role in job creation, especially for nationals who make up a small fraction of the labour force. However, the current economic and financial crisis puts recent gains at risk.

- Monetary easing and bailout plans focused on financial sectors will not be sufficient to support employment, as heightened uncertainty and tighter credit conditions may still pose difficulties for some firms.

- Private domestic demand has provided a solid foundation for growth alongside oil exports this past five years. Expansionary fiscal policy can offset some of the expected drop in private spending. More importantly, it can support the employment capacity of the private sector through its positive multiplier effect on domestic demand.

 

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