Published: Jun 1, 2011 22:55 Updated: Jun 1, 2011 22:55
JEDDAH: Saudi Arabia's plan to limit foreign worker visas in an effort to boost local employment will have negative effects on the economy and could lead to higher inflation, Citi's Middle East Chief Economist Farouk Soussa said Wednesday.
Companies in the Kingdom have until Sept. 7 to achieve a prescribed quota of Saudi employees, under a new program announced by Labor Minister Adel Fakeih on Tuesday.
"There is the possibility that many private sector companies will be shut down as a result of strict implementation ... their possible failure will likely have an impact on economic growth, as the private sector goes through an adjustment period," Soussa said in a research note.
The Kingdom’s new program may also lead to higher inflation as businesses try to attract Saudis to jobs that they tend to refuse by offering them higher wages than they would offer foreign laborers.
"This will raise the cost base of doing business in Saudi Arabia, eroding local corporate competitiveness and raising domestic inflation," Reuters quoted Citi as saying.
John Sfakianakis, chief economist at Banque Saudi Fransi, told Arab News: "Certainly if the measures are fully implemented, the impact on productivity will be felt in those sectors and companies that would be most affected by the new measures. Productivity is very important and Saudi Arabia has to make important headway on this, especially for private and public sector productivity and efficiency gains. This is crucial as Saudi Arabia's growth potential has to rise via productivity gains,"
He said certain sectors could be impacted more than others but it all depends how the law is implemented. For instance, expatriate workers account for 90 percent of employees in the construction sector, and 80 percent in retail. It is unlikely that private sector firms will be able to find Saudi employees willing to take low-paid jobs in these sectors over the medium term.
"Overall, the prospect of further complications in Saudi labor regulations will add to business uncertainty, which may also impact foreign investment. The government has made some positive steps toward foreign investors in recent years, which resulted in a twentyfold increase in FDI (foreign direct investment) from 2004 to 2009. This trend is at risk of reversing," Sfakianakis said.
Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said the main concern here is naturally the extremely heavy reliance of the Saudi private sector on expatriate labor, especially low-cost labor.
One of the consequences of this dependency has been the emergence of highly labor-intensive but ultimately fairly inefficient modes of production. The relatively ample availability of low-cost labor has in turn engendered a high and growing dependency on low-cost labor. It is clear that this pattern is not the only economically viable arrangement available to these companies, but it is equally obvious that the current environment offers few economic incentives for companies to voluntarily change their way of doing things. It is this deadlock that the government’s policy seeks to address and to do so for a very legitimate reason, namely the desire to create more job opportunities for Saudis in the private sector. This, ultimately, is a necessary precondition for ensuring sustainable growth into the post-oil era.
He said the international experience from a number of countries suggests that overcoming entrenched practices in the labor market can only happen by combining the proverbial carrot with the stick. Such a combination has in many cases produced positive results. “Saudi Arabia has in recent years pursued a number of laudable reforms which have engendered growth and thereby new job opportunities. It has also invested very heavily in education. In spite of this, the balance of employment in many sectors has not changed meaningfully. Under the circumstance, new approaches merit consideration," Kotilaine added.
He said it is doubtless the case that some companies will struggle to adjust to the new policies. But just as obviously, many will adjust and thereby boost their competitiveness and efficiency. “I believe that a great deal of good can be accomplished by publicizing the success stories, specifically structures and solutions that have enabled companies in different sectors to increase their numbers of Saudi employees. Just as much as the goal of the government’s policy is to boost sustainable employment opportunities, it needs to reward companies that do this well. With this in mind, it is important to enable as many companies to succeed as possible,” Kotilaine added.
Nitaqat, meaning categories in Arabic, was launched earlier in May and classifies firms by green, yellow and red colors according to how they fulfill "Saudization" rules. It also sets penalties for noncompliance.