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.