Saudi Arabia: Labor Reforms Gather Pace as Government Seeks to Normalize Economy

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By Matthew Kalman

Saudi Arabia is increasing the pace of reforms designed to raise the participation of citizens in the workforce, reduce reliance on foreign workers, and lower domestic unemployment.

As part of this initiative, the government is tightening the requirements for hiring foreign workers. Beginning in January, for example, companies employing more Saudis than foreigners will no longer be exempt from monthly fees for foreign workers. In addition, the minimum professional experience required for foreign engineers to work in the kingdom increased on Aug. 24 to five years from three, and since July 1, foreign workers must pay a levy on each dependent living in the country.

In addition to hiring Saudis to replace foreigners, employers must also train their Saudi workforce to help them gain promotion to higher-grade positions in an effort to arrest unemployment, which topped 31 percent among 15-24 year-olds in 2016, according to World Bank data.

‘A Painful Process'

Observers link the uptick in the kingdom’s Saudization program to leadership changes as the kingdom resets its economy away from dependence on falling oil revenues.

“The regulations are in line with a trend that we’ve seen since 2011,” said Sara Khoja, a partner at Clyde and Co. law firm in Dubai. “They show a determination by the government to make it work and to make employers employ Saudi nationals.”

The foreign worker levy for companies with a majority Saudi workforce will be imposed beginning in January, rising from 300 riyals ($80) to 700 riyals per month by 2020, while companies with a minority of Saudis will pay 400 riyals beginning in January – up from 200 – and 800 by 2020.

Khoja said some firms employing large numbers of low-skilled migrant workers are putting plans on hold because of increased labor costs.

“In infrastructure, some companies are finishing the projects they have on now and are taking a step back as to whether they then bid for new projects or how they bid,” she said by phone on Sept. 18. “Most companies are not exiting the market but they are saying they can’t afford to base people in the market and if they can they’ll resource projects by having the work done outside of the kingdom. It really depends on the sector.”

Some professional firms will retain “a small shop window” in the kingdom and rotate people on short-term visas, she said.

“I have clients every day who are grappling with these issues,” she said. “It’s not just foreign companies. These are 100-percent Saudi-owned businesses grappling with Saudization, having to train people, having to get people with the right attitude and the right skill set.”

“For a lot of private sector employers, it will be a painful process,” Khoja said.

‘Very Expensive'

Hadi Allawi, managing director for the Middle East and North Africa at Berry Appleman & Leiden LLP law firm, said most professional companies are absorbing the dependents’ levy.

“It doesn’t have a significant impact on employees,” Allawi said. “It increases operational costs if the company pays it. Long-term that may not be the case. I think they need to make decisions on policy,” .

Khoja said some dependents of workers at companies at the other end of the scale that cannot afford to absorb the costs have already left the kingdom.

“Most of the foreign workers who have been affected are lower to mid in terms of staff grading. It’s now very expensive for someone who’s on a middle income to have their family there. It’s going to become more and more expensive every year for the next three years,” she said.

“A lot of people have chosen to send their families home over the summer, so there are a lot more apartments to rent, apartments are not being let, or the rents are going down,” Khoja said. “There are a lot more school places. Anecdotally, I’m hearing that it’s already had a big effect.”

‘Unsustainable' System

Omar Al-Ubaydli, program director for International and Geo-Political Studies at the Bahrain Center for Strategic, International and Energy Studies, said Saudi Arabia had no choice other than to reform the labor market “aberration” created by the desire since the 1970s to use oil wealth to develop quickly despite a low population and skills base.

The Saudi economy is now poised for normalization, he said, including the reduction of foreign workers’ visas closer to the level of most developed economies.

“The existing system was unsustainable,” Al-Ubaydli said by phone from Manama on Sept. 18. “Foreign investors in general will be pleased to note that the government is thinking in a systematic and analytically plausible way about how to address some of the domestic economic problems.”

“Investors very much welcome macroeconomic stability, a domestically content workforce, and citizens who feel they are engaged in a productive life,” he said. “The Saudi economy, historically, is very closed to foreigners. Net I think you’ll see a big inflow of capital.”

‘Still Keen to Do Business'

Observers say the Saudis have been careful to flag the reforms months in advance—but the pace appears to be increasing.

Amir Mayo, senior manager, international tax for Deloitte Middle East, said a 30-year-old vision of localizing the Saudi workforce finally had “a solid grounding.” He said the reforms will continue, affecting even those with Platinum or High Green ratings on the Nitaqat gauge, which grades companies on the proportion of Saudis to non-Saudis on their payroll, and are granted privileges like block visas.

“I advise my clients: This is not full stop. This is not the bottom line,” said Mayo. “Your HR policy, your employment policies should be flexible in anticipation of the changes. Some clients have been caught slightly cold. They’ve suddenly woken up to find their Saudization rating gone from High Green or Platinum. That’s happened. I’ve had to deal with a few calls this week on that very issue.”

Despite the challenges, “the appetite is still there to do business in Saudi, to contract with Saudi entities, but we just are very clear in managing their expectations in terms of moving their workforce, in terms of how soon they’ll be able to have boots on the ground,” he said. “Despite many of these changes and the wave of Saudization really taking off in the last five years, some multinationals are still oblivious. When I speak to them and share my inside expertise they are sometimes surprised that the situation is as it is.”

“I haven’t advised anyone where someone has taken on board my comments and says it’s more trouble than it’s worth and look at Kuwait or somewhere else. They are still keen to do business in Saudi,” he said.

To contact the reporter on this story: Matthew Kalman in Jerusalem at matthewkalman@gmail.com

To contact the editor responsible for this story: Rick Vollmar at rvollmar@bna.com

For More Information

For more information on Saudi HR law and regulation, see the Saudi Arabia primer.

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