Employment crackdown in Saudi Arabia poses long-term risk

Riyadh’s drive to expel illegal workers in a bid to create more jobs for locals will ease pressure on public coffers, but it is predicted to drive up costs for companies in the longer term. Published in MEED, 8 October 2013

At one point in the Saudi film Wadjda, the 10-year old title character joins forces with her friend Abdullah to confront her mother’s unreliable foreign driver, Iqbal. They threaten to get Abdullah’s powerful relatives to ensure Iqbal is thrown out of the country unless he returns to work.

For Wadjda’s mother the problem is that, like other women around the country, she cannot get to her job without a driver. The scene reflects the reality of life for many people in Saudi Arabia, a country that has become addicted to cheap labour from overseas. Foreigners may make up a larger proportion of the population in other Gulf countries such as Qatar or the UAE, but the size of the kingdom means it is facing the biggest issue in terms of raw numbers.

Illegal workers in Saudi Arabia

There are about 9.4 million foreigners in the kingdom, out of a total population of just over 29 million. Not all are in the country to work; some 6 million are in the labour force, with Yemen, the Indian subcontinent and the Far East providing the greatest number of workers. Many, perhaps even most, of them are thought to be working illegally – either because they have violated the terms of their original visa by switching to a different employer, because they have overstayed their visa or because they never had a visa in the first place.

The government, keen to find more jobs for locals, wants an unspecified number of these foreign labourers to leave and has been pushing the issue to the top of the agenda. Over the course of this year, the Labour Ministry has been warning employers and expatriates that the residency and labour status of all foreign workers must be corrected or they will face a mixture of fines, imprisonment or expulsion.

An amnesty was announced, with an initial deadline of 6 April to get paperwork in order. That was extended to 3 July, before being postponed again to 3 November, the start of the new Islamic year. The date is not expected to be extended a third time and media reports over recent weeks have quoted a passports department spokesman as saying that spot checks will be carried out on the streets to identify undocumented workers once the amnesty ends.

Not everyone thinks the crackdown is a good idea. “Imposing visa restrictions on expatriate workers is not a positive thing and enforcing it more rigorously is worse,” says one observer of the Saudi economy. “It has created a lot of uncertainty, particularly for contracting firms who are struggling to get labourers. I can understand why they’re doing it in a political sense, but economically, any restrictions on labour mobility are not to be welcomed.”

Notwithstanding the delays and the criticism, the policy has already had a large impact. By the first week of June, seven weeks after the amnesty began, some 451,000 workers had corrected their status. By mid-July, that figure had shot up to 3,922,926. According to a Labour Ministry statement on 16 July quoting the deputy minister for inspection, Abdullah Abu Thunain, some 1,183,022 foreigners had transferred their sponsorship to a different employer, 1,122,125 had changed their profession, and a total of 1,617,779 work permits had been issued or renewed.

More than 220,000 people who had overstayed their visas are reported by local media to have left the kingdom. The countries thought to have the largest number of undocumented workers are mostly in south and southeast Asia, including India, Pakistan, Bangladesh, Nepal, the Philippines, Indonesia and Sri Lanka. However, there are thought to be many from Egypt and Yemen too.

Those countries’ embassies in Riyadh have been urging their nationals to take advantage of the amnesty to correct their status or leave. The Indonesian embassy reports that the number of its nationals who had overstayed their visas and have now signed up to the amnesty had reached almost 88,000 by early September, while at least 815 had been repatriated. Other governments have also been helping their nationals return home. The Philippines government has helped pay for more than 3,000 of its citizens to return home during the amnesty.

Saudi Arabia’s labour reform

The policy on expatriate workers fits in with other initiatives the Saudi authorities have been pursuing for several years to reform the labour market. The overarching strategy of getting more locals into jobs is known as Saudisation. Aligned to that are other programmes such as the Nitaqat system, which uses a combination of benefits and restrictions to get private sector employers to take on more locals.

“The policy is a step in the right direction in terms of fixing the labour market,” says Fahad al-Turki, head of research at the local Jadwa Investment. “It is part of a package to reform the labour market, which includes Saudisation and other elements such as Nitaqat and Hafez [unemployment assistance]. You cannot reform something before you know the facts and the data currently available on the market is distorted by violations of the foreign worker permit system. After this step, there will be a clearer picture of the sectors that need reform, or which sectors you can push to recruit more nationals. So it will give us a better view of the dynamics of the labour market.”

If it is successful, there should be some significant long-term benefits for the Saudi economy. The main advantage will be more locals in gainful employment in the private sector who will, consequently, be less of a drain on public resources. Fewer young people with too much time on their hands will also reduce the chances of political disquiet.

Saudisation risks

But there are risks as well. Some sectors already do well in terms of hiring locals. Many of the large local banks say 70-80 per cent of their staff are locals, for instance. “Training and development of Saudi nationals is at the top of the agenda,” says a senior executive at one lender. “Almost all junior, entry-level positions are filled by locals. We will only go outside the country for very targeted senior positions where the skills are not present.”

Other sectors, however, are in a different position, notably the construction industry, which is likely to find it tough to persuade locals to take on the sort of low-paid labouring jobs many expatriates have been doing.

“We’ve seen nationals increasingly take on jobs they were not willing to before, especially in the retail sector,” says Al-Turki. “I think this push will give more room for them to take on these jobs. But there is one sector that will find it very difficult to comply: the construction industry. It’s one of the largest employers of low-skilled, low-paid expatriate workers.”

For companies that do manage to recruit more nationals, they could find their new employees demand higher wages than they were used to paying their expatriate staff. That will push up costs for employers, although some government assistance may be available. In any case, the shift could feed into higher inflation. The most recent purchasing managers index data from the UK’s HSBC shows average staff costs in the non-oil private sector rose in August, although the overall increase was modest as the vast majority of companies reported no change in average salaries. However, economists expect it to have a bigger impact in the longer term.

Rising costs

“Getting more nationals into the workforce is to be encouraged,” says James Reeve, deputy chief economist at the local Samba Financial Group. “However, denying Saudi firms cheaper labour from abroad will likely push their costs up, given that it will be difficult to find nationals to do the same jobs at the same wages. This is particularly true in the construction sector, where locals are unlikely to seek labouring jobs. I would have thought that, all things being equal, it would have some upward effect on inflation, although that doesn’t seem to have materialised as yet.”

It may be that the real impact of the changes will not become clear until the amnesty is over. Once it ends, the government has promised a stringent programme of inspections. Individuals and employers who are found to be violating the law will be liable for penalties of up to SR100,000 ($26,600), or two years in prison.

The threats of such punishments should be enough to encourage most workers and employers to ensure their paperwork is in order. If not, some employers may find that for a while at least they, like Wadjda’s mother, have been left high and dry.