Why you should care
Mohammed bin Salman’s domestic legacy may hinge on whether a radical jobs reform project works.
Fahad al-Shahrani answers his phone with a glint in his eye, like a gambler who knows the cards are stacked in his favor. The 27-year-old is excited about how the dynamics of the Saudi labor market are shifting as Crown Prince Mohammed bin Salman oversees what is widely viewed as the kingdom’s most aggressive drive to secure private sector employment for young nationals.
Before, Shahrani says, he would send his CV to 30 companies and receive no responses. But in recent weeks he has found himself in demand. “My phone is ringing all the time,” he says. As if on cue, it buzzes to life — a perfume shop where Shahrani applied for a job has called to say he is being considered for the post.
The scene plays out in a watch store where the young Saudi started working just a month earlier. Nidhal Shaaban, the shop’s Syrian manager, observes quietly that his newest employee is already on the hunt for a better-paying job. Watch stores are among 12 retail sectors — ranging from opticians to car parts outlets — added to the so-called Saudization program in November that means Saudi nationals must comprise at least 70 percent of their employees. The store manager knows government policy is, at least for now, working in favor of Shahrani and his peers.
If I lose my job I will have to leave the country.
Nidhal Shaaban, Syrian shopkeeper in Saudi Arabia
Yet Shahrani’s optimism belies the massive hurdles that face Riyadh’s efforts to overhaul a labor system that has for decades been dependent on millions of imported workers from across the region and Asia, who are typically willing to do more work for lower pay. Of all MBS’ pledges to modernize and diversify the oil-dependent economy, it is the most daunting and critical challenge, experts say. Get it right and Saudi Arabia will ease its addiction to foreign workers, who occupy about 90 percent of all private sector jobs, and address rampant youth unemployment in a country where more than half the population is under 25. Fail, and joblessness will soar and risk becoming a source of social instability in the world’s leading oil exporter.
“Job creation is at the crux of Prince Mohammed’s [reforms] and the long-term prosperity and stability of the country,” says John Sfakianakis, chief economist at the Riyadh-based Gulf Research Center. “At the end of the day it’s your ability to produce employment and income that people test you on.”
The prospects do not look good. Even as more Saudis have found jobs in the private sector, unemployment among the local population has been on a steep upward trajectory in the three years since the crown prince launched his ambitious Vision 2030 reform plan. From 11.5 percent in the first three months of 2016, it climbed to 12.9 percent in July last year, the highest level on record. Youth joblessness is close to 40 percent and far higher for young women.
The measures Riyadh has introduced to accelerate labor reform have increased the costs for businesses already grappling with lackluster growth since the 2014 oil price drop tripped up the economy. In addition to forcing Saudization on a widening number of sectors, the government has increased the levies that firms must pay for each foreign worker from 200 riyals ($52) a month to 300 riyals ($78) at companies that employ more Saudis than expatriates, and to 400 riyals ($104) a month for those that employ fewer nationals. Riyadh also introduced a monthly 100 riyal ($26) fee that expatriates have to pay for their dependents in 2017, and doubled it last year. The goal is to begin to close the gap between the cost of employing Saudis and foreigners, with the former typically paid 1.5 times to three times more than overseas workers.
The most visible result of the reforms is Saudi nationals standing behind shop counters and burger bars in the ubiquitous malls dotted across the country’s cities or repairing mobile phones, selling car parts or hardware. But many small and medium-size companies have been forced to close, according to analysts and Saudi media reports, due to the added labor costs and lackluster growth.
“[If] you are trying to improve employment — which is happening — but at the same time you are imposing another [cost], this creates pressure on business,” says one Saudi executive. He and others insist the government is doing the right thing after years of inaction and complacency while the petrodollars flowed in. Previous attempts at Saudization in the 1990s and 2000s were toothless, with companies doing the bare minimum to tick their quota boxes and complaining about the work ethic of nationals. Generous state benefits, which can amount to as much as two-thirds of the minimum public-sector wage, provided little incentive for Saudis to search for work.
Today, officials patrol shops to ensure compliance with quotas. Those in violation face a 20,000 riyal ($5,200) fine.
The reforms are already having a dramatic impact on many of the 10 million overseas workers in the 33-million-strong kingdom. Coupled with the woes of a battered construction sector and weak growth, the reforms have fueled an exodus of expatriates. More than 314,000 left between the second and third quarters of last year, bringing the number who have departed since the beginning of 2017 to more than 1.4 million.
For years, the kingdom has provided an outlet for job seekers in the Arab world’s non-oil exporters and Asian countries that provide the bulk of the country’s construction and domestic help jobs. No one is expecting Saudis to take on roles in these sectors and foreigners will continue to constitute a major segment of the labor force.
But the more Saudis are employed in the service sectors, the more they will be replacing Arabs from neighboring countries, threatening to weaken a vital economic link between the region’s oil exporter and poorer neighbors such as Egypt and Jordan. Remittance outflows from Saudi Arabia fell from a peak of $38.8 billion in 2015 to $36 billion in 2017, according to World Bank data.
“All foreigners are worried. If I lose my job I will have to leave the country and as I’m a Syrian I can’t go home because of the war,” says Shaaban, who fled his homeland in 2011 and says he has had to dismiss some Yemeni workers to make way for Saudis since the changes were introduced. “I know more than 50 people who left in the past year after being replaced by Saudis. They had to leave,” he says. “Companies don’t want to hire any more foreigners.”
For Riyadh, the dilemma is how to push ahead with reforms without inflicting more damage on a private sector that is being leaned on to hire Saudis. The economy has struggled since oil prices plunged in 2014 and it slipped into recession in 2017. Gross domestic product bounced back to expand by 2.3 percent last year, but the International Monetary Fund forecasts it will slow again to 1.8 percent in 2019.
The situation has been exacerbated by government moves that have hurt fragile investor sentiment. MBS’ extraordinary crackdown on corruption in November 2017, during which more than 300 princes, businessmen and former government officials were rounded up, sent shock waves through the kingdom. The global outrage triggered by the October killing of journalist Jamal Khashoggi further dented international interest at a time when the kingdom is desperate for foreign backing for the prince’s megaprojects.
In January, Riyadh launched a $450 billion, 10-year plan that focuses on mining, industry, logistics and energy, with the hope of creating 1.6 million jobs by 2030. But that — like so many of MBS’ plans — will depend on the kingdom attracting massive levels of investment.
Some businesses say that in the wake of the Khashoggi murder, the leadership is paying more attention to local concerns. King Salman bin Abdul-Aziz Al Saud Salman approved in February a $3.1 billion plan to ease the burden of expat levies on businesses in a bid to stimulate growth. And the government will exempt some companies from paying the 2018 fees or reimburse those that have already paid on the condition they make progress on hiring Saudis. Officials acknowledge that some of the reform targets were too ambitious.
At the same time the government has quietly recalibrated its goal of reducing Saudi unemployment from 9 percent by 2020 to 10.5 percent by 2022, analysts say. But MBS is unlikely to ease up on his Saudization drive.
“He’s just going to keep pushing this as his main priority. Every time someone suggests, ‘Your Royal Highness, should we slow down and ease the process,’ he says, ‘No, this is a priority and we have no more time to slow down,’” says Fawaz al-Alamy, a former deputy minister of commerce and World Trade Organization chief technical negotiator. “Some believe the answer is to improve the skills of Saudis and narrow the chasm between foreigners’ and locals’ wages, until the Saudis are grabbed by employers for their merits.”
But the kingdom is in a race against time. A 2015 report by McKinsey, the consultancy that advises the government, estimated that up to 4.5 million working-age Saudis would enter the labor market by 2030, almost doubling the size of the domestic labor force to 10 million. Absorbing the influx would require the creation of almost three times as many Saudi jobs as were created during the 2003–13 oil boom, the report said.
Job creation is already failing to keep pace with about 400,000 young Saudis entering the job market each year, 230,000 of them university graduates. Sfakianakis calculates that just to meet the 10.5 percent unemployment target by 2022, the economy will need to absorb about 30,000 jobs in the private sector every month, compared with the 4,000 to 6,000 a month generated so far. The relaxation of some of the social restrictions on women in the highly conservative state, such as lifting the ban on driving, means more of them are also looking for work.
“Pressuring the private sector to hire regardless, although positive, is going to have its limitations. You need real and productive growth,” Sfakianakis says.
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