New rules limiting the stay of expatriate workers in Saudi Arabia could have sweeping effects on economic growth and productivity in the kingdom, economists say.
Adel Faqih, the Saudi labour minister, said on Tuesday a limit of six years would be placed on residency for expatriates whose companies did not comply with quotas for hiring locals. The restriction is part of a package of reforms called Nitaqat, which aims to address rampant unemployment among young Saudis.
But strict enforcement of quotas could have devastating effects on private businesses in Saudi Arabia. Mr Faqih estimated that a large number of companies would be forced out of business as a result of the limits, which are due to come into effect this year after a five-month grace period.
Farouk Soussa, the chief economist at Citi in the Middle East, said yesterday the companies most at risk would probably be small businesses, and "their possible failure would be likely to have an impact on economic growth as the private sector goes through an adjustment period".
Laws that raised the cost of hiring foreigners and made it difficult for companies to retrench locals could hurt productivity, Mr Soussa said. Another cost could come in the form of training for locals to fill jobs left vacant by expatriates. And companies would have to pay Saudis more than expatriate workers under the new system, which would raise the cost of doing business in the country.
But despite those obstacles, he called the reforms "encouraging" overall, saying they were needed to correct the country's over-reliance on foreign workers and an alarming rate of unemployment among locals.
According to Citi research, just 40 per cent of Saudis of working age are in the workforce. Meanwhile, 43 per cent of Saudis between 20 and 24 are unemployed, and expatriates comprise 90 per cent of the overall workforce.
"While the emphasis in the past has been on creating new jobs through diversification efforts, we believe it is a constructive step forward to re-emphasise at the same time the backfilling of jobs currently held by expats," Mr Soussa said in a note.
Saudi Arabia will need jobs for 3 million people by the end of the decade and for 14 million by 2050, Citi estimates.
The debate over "Saudisation" underscores a pervasive challenge in the Gulf, where many countries are struggling to create private-sector jobs for a growing number of young people about to enter the workforce. All six GCC states have some form of policy to encourage private-sector hiring of locals, from Emiratisation in the UAE to Qatarisation in Qatar and Omanisation in Oman.
The question for Saudi Arabia, the Gulf's largest country, with a population of about 25 million, was not whether imbalances in the labour force needed to be corrected but how authorities would bring the economy into better harmony, said John Sfakianakis, the chief economist at Banque Saudi Fransi. Introducing abrupt limits on expatriate hiring was "not the way to go about it", he said, suggesting a more gradual phasing-out of foreign workers.
"If they do implement this … it will have certain impacts on productivity and efficiency," he said. "If Saudis don't become more productive, and the private sector does not become more productive, you don't have the wealth effect."
In the end, Mr Soussa said, enforcing quotas was "necessary, despite the potential costs". High unemployment in the country "underscores the imperative of not only creating new jobs but backfilling as many of the 6 million private-sector jobs that are currently held by expatriate labour as possible."
This week, the IMF reduced its forecast for economic growth in Saudi Arabia this year to 6.5 per cent from 7.5 per cent, citing a recent decline in oil prices.