Saudi clampdown on illegal workers likely to have little long-term effect

The November deadline for migrant workers in Saudi Arabia to fix their papers is fast approaching, and more than a million are thought to have left. The clampdown on illegal employees may have short-term economic effects, but will change little in the longer term. Published in Gulf States News, 3 October 2013

Saudi Arabia’s vast army of expatriate workers has one month left to ensure its paperwork is in order, under an official amnesty that ends on 3 November. Anyone found to be working without the right visa after that date faces the prospect of fines or imprisonment, and the government has said it will to show no leniency.

The policy is the latest effort to help reduce the country’s reliance on foreign labour and get more locals into work, a process known as ‘Saudisation’. But while the latest clampdown is likely to have a short-term economic impact, history suggests it won’t make much difference in the longer term.

The amnesty was announced in April by King Abdullah Bin Abdelaziz, after an outcry at a government crackdown on illegal workers which saw thousands deported; the large numbers involved mean the government later had to delay its deadline from July to November. There are more than 9m expatriates in the country, with around 6m of them in the labour force. By 17 July, the Ministry of Labour said that almost 4m migrant workers had corrected their status, suggesting that the majority were working illegally. More than 1m people have left the country, according to the local English-language Arab News site, and no doubt more will follow them during October.

Reduced GDP?

The big question is what sort of impact this will have on the Saudi economy. An economist at one Saudi bank suggested it could reduce GDP growth in 2013 by 0.5%. Given that GDP in 2012 was $711bn (according to the International Monetary Fund), that 0.5% is equivalent to around $3.6bn.

The biggest impact is likely to be felt in the construction sector where Asian labourers toil for low wages in tough conditions. This is not the sort of work that many Saudis are willing to tolerate. For now, locals make up just 200,000 of the 2,175,000 workers in the contracting sector, according to the Council for Saudi Chambers of Commerce and Industry (CSC). Businesses forced to employ more Saudis, will find them more expensive. “Firms have to take on nationals and the good, talented nationals are in a buyers’ market and that creates artificial wage inflation,” one independent human resources consultant told GSN.

There has been anecdotal evidence that the clampdown is already being felt. Local media have reported falling demand for steel and cement over the summer, which some have suggested is because the presence of fewer foreign construction workers has led to a slowdown in activity. Retailers could also suffer if too many people leave. “Most of these expats have low wages and they tend to spend a large amount of that within the kingdom and the retail sector is the beneficiary of this,” says one Riyadh-based banker. There have been signs of tensions in other areas of the economy, too. In May, the CSC released a study which warned that the agriculture sector could become economically obsolete unless the Saudisation targets for the industry were relaxed.

The government has acknowledged the difficulties facing the agriculture sector but, as yet, there has been no public sign of a softening of approach. It is likely that more discussions covering other sectors are also taking place behind closed doors. “What opposition there is will be done on an informal, personal basis,” said Christian Koch, director of international studies at the Gulf Research Centre. “Key people in the business community will be talking to decision makers in the ruling family. Some concerns are definitely being voiced to the government but they’re being voiced privately in the hope that there will then be a change of approach.”

Some concerns have been voiced within the government, too. In an interview published on 29 September, education minister Prince Faisal Bin Abdullah said the solution was not nationalisation, but investment. “I would say that Saudisation and employment is not the solution,”he was quoted by the Arab News as saying. “The solution lies in creating job opportunities. How can we do that? By developing the economy and expanding areas of work for Saudis to become productive.”

Need for more effective reform

For now, there is more speculation than hard evidence about the impact of the amnesty. Economists expect it to feed through to higher inflation as companies are forced to take on more expensive Saudi workers, but that has yet to happen. The purchasing managers index published by HSBC has shown some signs of higher labour costs in recent months, but it is too early to say if that is a blip or a trend.

The availability of skilled labour was one of the main issues highlighted by companies in the most recent business optimism index published by the local National Commercial Bank and business information firm Dun & Bradstreet: it was cited as a concern by 15% of respondents in the oil and gas sector and 9% of companies in the rest of the economy. But more than 60% of companies said they did not foresee any negative factors for their business.

The bigger picture is that low employment among locals is both an economic and a political issue. Only 55% of locals participate in the labour force and there is a clear preference for government jobs over private sector ones. This is clearly an inefficient model, but the government is too timid to tackle it with any force. The political risks for Riyadh of reducing the incentives to work in the public sector and cutting back on the cradle-to-grave welfare state are simply too great.

The government can afford to maintain a comfortable welfare state because of high oil revenues, but there are signs that the balance between revenues and expenditure is shifting. Local bank Samba said that data from the central bank shows a couple of small drawdowns in the country’s foreign asset position this year. That implies revenues and expenditure are finally balanced and that the government’s breakeven oil price is close to the market price, even though prices have been well above $100 a barrel this year.

The need to reform the system is therefore clear. But the current clampdown on foreign labour will not be enough to achieve that, not least because past performance suggests the government will not maintain its position of zero tolerance for long. “This is not the first time we have seen a policy like this. The same thing has been practised by other Gulf states,” says Koch. “The fact that we’ve seen these programmes repeated numerous times shows that it doesn’t really deal with the issue. Amnesties clean out the labour market but then business owners start complaining about the lack of cheap labour and projects start to slow down so the government eases off. In a couple of years there is going to be a large number of illegal immigrants in the country again.”