New employment rules to shake up Saudi private sector
Nitaqat has the potential to introduce much-needed adjustments to wages and efficiency in the private sector
Young Saudis queue to apply for work at a company in Riyadh
There is a striking paradox in Saudi Arabia’s labor market. Expatriates working in the Kingdom send home more remittances than those living in any country in the world apart from the US. Yet youth unemployment among Saudi citizens is higher than every country in the Middle East and North Africa (MENA) except Iraq.
Confronting a dilemma of youth joblessness that persists despite reasonable rates of economic growth, Saudi Arabia is unveiling a major overhaul of the long-ineffective plan to nationalize a private sector workforce dominated by foreigners to the tune of nine out of every 10 employees.
The private sector has been creating jobs, but they do not go to Saudis.
This month, the government will inform companies which of four categories — ‘excellent’, ‘green’, ‘yellow’ or ‘red’ — they fall under based on whether they employ enough Saudi nationals to comply with established quotas. Following a grace period, the new Saudization scheme, known as Nitaqat (or ranges in Arabic), would level severe penalties on violators and offer incentives and rewards to those firms meeting quotas.
The government’s ambitious goal: to succeed in creating 1.12 million new jobs for Saudi nationals by 2014, or 92 percent of all new jobs created, as set out in the current development plan.
The previous Saudization quota system required all sectors to have a blanket nationalization rate of 30 percent – although only a third of that was achieved.
The new system is more dynamic, applying 205 categories of quotas that vary based on the line of work and size of the company. In many cases, companies achieving more than 30 percent nationalization would be classified as “excellent”.
The state will impose a six-year cap on residency visas for expatriate workers, if their employers fail to meet quotas.
Companies falling in the ‘red’ category would be barred from renewing the work visas of their expatriate staff entirely, while ‘green’ companies will be entitled to, for the first time, recruit foreign workers freely from the other two categories and transfer their sponsorship visas without their current employer’s consent.
The initial shock of Nitaqat, if enforced with vigor, could lead numerous smaller businesses to shut down, shake already feeble foreign investor confidence in the economy, and further stall the private sector’s recovery.
Private sector growth rates have lagged in recent years well below the six percent minimum we believe is necessary to stimulate enough job creation for a population that is nearing 28 million.
In the medium- to long-term, however, Nitaqat has the potential to introduce much-needed adjustments to wages and efficiency in the private sector, so long as it is supplemented with high-quality training programs at Saudi schools and within companies.
We expect the program will succeed at improving Saudi participation in the private sector.
The private sector must evolve into Saudi Arabia’s main engine for job creation in order to relieve the burden from the state, which has frenetically created jobs for citizens to quell unemployment.
This has led to unsustainable growth in its wage bill and taken a grave toll on public sector productivity.
Beyond the Kingdom, effective implementation of Nitaqat could lead to a downturn in remittances to countries that come to rely on them heavily for foreign currency, and could prompt them to reconsider employment strategies.