Economic Impact of Repatriation of Workers

Transcription

1 Economic Impact of Repatriation of Workers December 203

2 Backdrop In most rich nations, immigrants have been an integral part of the economic structure. Likewise in Saudi Arabia too expatriates account for about one third of the population, or around nine million expats work in both skilled and unskilled professions. The number of expatriates has surged over the past decades, as oil demand began to expand and led to domestic growth. On the other hand, with the soaring youth population, the country s unemployment rate in the 5 to 29 years age bracket has touched as high as 27%, serving as a perfect ingredient for social unrest. There is an increased sense of insecurity among locals as they perceive the expatriate population taking away most of the lucrative jobs in the private sector. As a result, over the last few years, government policy has been shifting from providing easy access to expatriate workers to ensure employment avenues for the locals. While the recent crackdown on illegal migrants is primarily to create employment opportunities for locals, it has repercussions for the Saudi economy. Before we discuss the economic impact of the crackdown, it is relevant to scan the realities of the labor market that led to the government backlash on migrants. High reliance on foreign labor and consequent measures to lower the dependence Historically, the prosperity of Saudi economy has largely depended on cheap foreign labor, both in the regulated and the unregulated segments. Saudi economy could face headwinds in the absence of this cheap labor. Saudi nationals in private jobs accounted for as low as 0% of the total private sector workforce in 20, even as the number of employed in the private sector almost tripled in the last two and a half decades. Meanwhile, it can be noted that although unemployment rates in the Kingdom have been falling, foreign workers have been the major beneficiaries of increased demand for labor in the nation. While the overall employment in the Kingdom has risen 8.5% from 200 to 202, employment among Saudi nationals has risen at a slower pace of 4.6% over the same period. In order to address these issues, the Saudi government introduced the 'Nitaqat' to lower dependence on foreign workers across the nation, and pacify any dissent amongst the changing demographics of the region. The six-month amnesty granted to foreign workers to fix their legal status came to an end on 4th November, following which the Saudi Arabian authorities started inspections to track illegal migrants. Reports indicate that about 2 million 2 illegal workers have so far left the Kingdom voluntarily while about five thousand illegal workers have been arrested, and the number is rising. Businesses in many parts of kingdom came to a halt as even legal workers stayed at home to avoid arrest and hassles. About 60% 3 of shops, and grocery stores in Jazan and other cities and towns in the region remained closed during the week that followed the deadline

3 Private Sector Employment Saudi Locals 0% Expatriate 90% Source: KPMG Distorted Saudi labor market as locals prefer public sector jobs The labor market in Saudi Arabia is characterized by the affinity of a large number of educated youth towards employment in public sector firms. It has been observed that most labor market entrants voluntary remain unemployed, thereby refraining from taking up available jobs in the private sector in the hope of getting public sector employment. This wait unemployment phenomenon has contributed to the high unemployment rates. This has created employment opportunities for large number of expatriates in the private sector. However, this has also led to an increase in illegal workers as domestic employers source cheaper labor to save costs. Expatriates Job Category 00% 75% 86% 8% 68% 50% 25% 4% 0% Menial Jobs Other Jobs Salary <SR,000 Salary <SR2,000 Source: News Reports & Labor Ministry 4 The government hopes that reducing the number of illegal workers and lowering reliance on expat workers will create opportunities for Saudi job-seekers. However, the majority of the kingdom's nine million foreigners are unskilled laborers dealing with jobs usually shunned by Saudis. 4 ZAWYA / 3

4 Demographics of Expat Population Skilled Labor 4% Low-Skilled Labor 86% Source: News Reports 5 Aversion to take up labor intensive jobs Even if an employer is willing to pay the prescribed minimum wages, Saudi natives refrain from taking up jobs considered to be less prestigious. Most of the transport companies are willing to hire Saudis as drivers, however many of them are reluctant to work given the stressful and the low end nature of the job. The transport sector, comprising about 2 million 6 commercial vehicles, is the mainstay of the Saudi economy, and any disruption in the sector would have significant repercussions. There is fear that Saudis would be reluctant to take up and seriously pursue certain types of jobs which are considered menial. Moreover, employers believe expat workers are easier to control and more disciplined than local workers. Foreign workers are willing to perform lower end jobs at a lower pay With the local population mostly uninterested in lower end jobs, there is a growing fear that most employers would not be able to substitute expats with natives, and would fail to comply with the prescribed norms. With foreign resources willing to perform lower end jobs at a lower pay, there is an underlying fear that their absence could prompt firms that survive this challenging environment to pass on the excess labor costs onto the customers. Wage Profile, KSA Economic Activity Saudi Average Monthly Wage Wage Rate Non-Saudi Average Monthly Wage Wage Rate Wage Rate Agriculture, Hunting, Forester & Fishing 4,630,244 Construction 3,26,45 Electricity, Gas & Water 9,85 3,487 Banking, Finance, Insurance 6,963 2,880 Manufacturing 6,09,929 Mining & Quarrying 5,080 7,944 Other Activities, Private sector, non Social Services 23,587 8,353 Social Services Activities in the Private sector 5,075 2,33 Postal, Transport & Communication 8,47 2,58 Trade, Hotel, Catering 3,605,420 Average Of Total 8,589 4,325 Source: Gov. Social Security Inst. (GOSSI), WB own estimates based on micro-data. All estimates are in SA- Monthly, ZAWYA /

5 Impact of the localization measures on the economy Keeping in mind the growing unrest seen among the youth due to lack of job opportunities, the Saudi government envisaged the need to implement localization laws in order to promote employment for locals in the private sector. 'Nitaqat' and minimum wage programs were the key regulations formulated by the Kingdom in June 20, in order to promote localization of jobs, the deadline for implementation for which was November 203. Although it is too premature to assess the economic impact of the crackdown on illegal immigrants, we have highlighted the possible implications in the near term. Kingdom remains susceptible to inflationary pressures The minimum wage laws and absence of unskilled foreign labor force could have a negative influence on the labor market. The economic consequences of the reforms could be negative in the short term, owing to rising inflationary pressures. The Hay Group in its annual Saudi Arabia Compensation and Benefits report revealed that salaries in KSA rose at a faster pace in the last twelve months, largely due to Nitaqat and minimum wage laws. Many Saudi employers had gained from the illegal status of expats by paying them lower wages, and therefore a dearth of workers will result in increase in employment wages and could reduce labor productivity in the private sector. This will be more evident in the areas of construction and related activities. Besides, the changing dynamics in the labor market could also stoke food inflation in the coming months. The poultry sector still suffers from a huge shortage in labor despite relaxing laws calling for measures to hire nationals 7. Moreover, costs for fruits and vegetables could also escalate due to labor shortages. Economic impact on labor intensive sectors The adverse impact on the labor intensive sectors could hurt the economic prospects in the near term. Reports cite 40% 8 of small civil engineering firms were forced to halt work as expat workers failed to process documents on time. Additionally, large number of bakeries, supermarkets, gas stations and restaurants faced similar situation. Cost of mechanics, plumbers and electricians, that is predominantly undertaken by migrant workers have surged. About 84.5% 9 of the work force in the Saudi private sector is employed in the construction, manufacturing, agricultural, hunting and retail industries. We expect that firms in the construction sector will be particularly impacted as many projects in the construction sector have been halted after the Nitaqat program was introduced. In the midst of prevailing uncertainty over the legal status of foreign workers, many companies have refrained from participating in bids for new work. This has added to the woes of smaller firms. Meanwhile, reports indicate that nearly 36% 0 of projects in the construction sector in Saudi Arabia have been hit by the labour crisis following the decision to introduce the new labour laws. In the aftermath of these laws, contractors indicate that labor costs are up by as much as 30%. The trend is likely to continue until more legal workers are available in the market. A recent survey by Zawya indicates growth in the construction sector could slow largely due to delays in project implementation brought about by these laws. The Kingdom s education sector remains heavily reliant on expat teachers. Private schools in the main cities of Riyadh and Jeddah have been unable to teach students, as expatriate

6 teachers have stayed away in fear of being deported. A news report in late November 203, confirmed that the Ministry of Education granted licenses to about 60% 2 of expat female teachers working on dependent visa. Government remains wary of the complete overhaul of the labor market Foreign labor is essential for the economy and it remains to be seen whether the current crackdown will be effectively implemented, given the far reaching implications of the foreign labor force on the Saudi economy. In the 950s, labor strikes in the oil fields made the government responsive towards the risks of an organized local labor force concentrated in one key sector. The government then adopted a policy to import labor, to avoid further unrests by workers. An expat worker, on a short-term work permit, who could be easily deported looked like an ideal proposition. The government faces a threat, wherein the absence of imported workforce in critical sectors could once again make key sectors vulnerable to developments in the domestic labor market. Despite the recent government crackdown, there remain a large number of unaccounted illegal workers in the Kingdom. The Philippine government has so far repatriated only around 4,587 illegal workers in Saudi Arabia, which is only 49% of the 9,000 Filipinos who originally sought repatriation 3. Moreover recent reports cite that as the pace of raids lost steam, illegal immigrants were seen back on the streets of Madinah. 4 Need for vocational training to replace the foreign labor force While the government has been heavily investing in educating the youth, the investments, however, have been undermined by the low quality of education standards and weak linkages between curriculum and the labor market. Further, reforms to the education system complemented with vocational training could prove to be helpful in aligning the skills of graduates to the need of the labor market. There is an urgent need to improve the quality of education and ensure recognized and measurable learning outcomes of the young students especially in literacy, numeracy and essential life skills. Moreover, the education systems should be responsive to the needs and concerns of school and college students to prepare them for not only pursuing post-secondary education but also make them ready with skills that are largely relevant to the needs of employers. Quality of education being imparted and its correlation to the requirement of the region s labor market remains an area that nations in the Arab region need to focus on in order to tackle the issue of unemployment among the youth in the region. How repatriation of illegal immigrants could help Some economists view this as a perfect chance for Saudis to build a self-reliant society. Moreover, this move is expected to help wipe out the grey employment market, in addition to creating investment opportunities for Saudis. This would also put a stop to migrant workers from working for anyone other than their official sponsor, and curb the evils of the visa traders in the labor market. Apart from this, there remains a high possibility of a drop in outward remittances from the country. According to estimates, remittances of foreign workers ranged between 00 and 20 billion SAR (between $26.6 billion and $32 billion) per annum 5. Even if this number drops by one fourth, the money will remain within the country and can be put to more productive uses. Moreover, there is a growing belief that women in Saudi Arabia would take jobs once held by expatriates, especially in education, thereby contributing positively to the nation s consumer spending

7 The relatively high cost of Saudi manpower, has resulted in private sector reliance on cheap manual foreign labor, generally deployed for labour-intensive tasks. This contributes to private sector s overall profitability despite increasing attempts to raise expatriate costs (residency or Iqama, visa renewals, etc.). However, expensive labor could prompt companies to use technology to substitute labor intensive jobs, thereby increasing productivity. Further, the domestic population could be a large beneficiary as home prices and rentals could see a significant drop due to lack of demand from migrant citizens. Thus housing could be more affordable to the Saudi nationals. Way Ahead All said and done, Saudi Arabia needs foreign workers for some more time to foster growth. In this backdrop, it would be prudent for the Saudi government to work with their respective governments/ embassies to regulate their employment and turn them into a legal labor force, without disrupting the working of economic sectors. Flexible labor policies will contribute to the creation of a vibrant labor market. A system where employers have the liberty to hire and fire both expatriates and Saudi nationals, can lead to an overall increase in labor productivity and have a positive influence on the growth of the private sector. Moreover, private sector employers should have sufficient flexibility to hire the most qualified labor, both national and expatriates at wages that are market determined to maintain competiveness. It is necessary for wages in all sectors of the economy to reflect market conditions and reduce disparities in incentives between private and public sectors. Along with reforms in the labor market wage structure, the reduced disparities would encourage nationals to alter their educational objectives and priorities and motivate them to participate in private sector employment. This would meaningfully solve the issues in the labor market to a large extent. 7

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