Saudi plan could put companies out of business, economists warn

Tough quotas for employing Saudi nationals could force companies out of business, economists warn.

An expatriate crosses a main street in the Saudi capital Riyadh. AFP

The introduction of tough quotas for employing Saudi nationals in the kingdom could force companies out of business, economists have warned.

Under rules aimed at providing 1.12 million new jobs for Saudi nationals by 2014, firms failing to employ a sufficient number of locals face punishment.

"Forcing companies to hire Saudis is not the right approach by itself," said John Sfakianakis, the chief economist of Banque Saudi Fransi. "The right approach is to create incentives. The incentive now is on low skills and low wages, and this has to change to high skills with higher wages in an exonomy with open immigration."

Nevertheless, the scheme should succeed at increasing the number of Saudis working within private industry, he said.

For decades, the economies of Saudi Arabia and other GCC states have been built on importing cheap foreign labour to fill blue-collar jobs and other work not matching the skills of locals.

As a result, many nationals have been excluded from the huge growth within regional labour markets in recent years.

Now, huge unemployment and a backdrop of social unrest fanning out across the Middle East have prompted policymakers in the kingdom to adopt a new approach.

Under a plan to tackle the problem of youth unemployment, the kingdom last week took the first steps towards launching an initiative aimed at encouraging private-sector employers to move away from a reliance on expatriate labour and instead hire more Saudis.

The Nitaqat programme aims to change hiring practices in private companies through a system of rewards and punishments, depending on how firms meet quotas.

If fully enforced, the initial shock of the scheme could lead numerous small businesses to shut down, according to a Banque Saudi Fransi report released yesterday.

Growth rates in the private sector have historically been below the 6 per cent minimum considered necessary to generate enough jobs, it said.

The scheme comes at a time when many small companies are still struggling to secure the finance needed to expand their businesses as risk-averse banks remain selective about lending.

In the medium to long term, however, the scheme had the potential to lead to much-needed increases in wages and greater efficiency among companies, Mr Sfakianakis said.

This month, the government is instructing companies which of four categories they fall into based on the number of Saudis they employ. Following a period of grace, penalties will be handed out to companies in the lower red and yellow categories considered not to be hiring enough Saudis.

They will face residence visa caps and restrictions on their access to foreign labour. In contrast, firms in the top two categories - excellent and green - are entitled to privileges, including expedited procedures for obtaining visas for foreign workers, and the right to hire expatriates working for other companies without first getting their employers' approval.

Other schemes in the region to raise the participation of nationals in the private sector have achieved mixed results. The kingdom's previous efforts required all sectors to have a blanket participation of 30 per cent. But only about a third of that level was achieved.

"If this [Nitaqat] is implemented vigorously, the impact on the private sector could be substantial," said Raza Agha, an economist covering the region for the Royal Bank of Scotland. "It takes time for companies to find local talent, and many firms would probably like to retain expatriates to train new Saudi recruits."

Any reduction in the workforce of expatriates could also lead to a downturn in remittances, Mr Sfakianakis said. Saudi Arabia is the world's second-biggest source of remittances, with income from foreigners in the kingdom providing a vital boost to economies in the Middle East and Asia.

The government aims to create 1.12 million new jobs for Saudis by 2014, or 92 per cent of all posts filled.

Among Saudis aged 15 to 25, unemployment is 39 per cent, according to government statistics. Overall, unemployment is 6.9 per cent for men and 28.4 per cent for women, and 76 per cent of unemployed females are university graduates.