Saudi Arabia's labour reform targets will prove an uphill task

At the heart of Saudi Arabia’s economic transformation plan are ambitious labour market targets, which analysts expect will be impossible to achieve within the government’s timetable. The government last week put some specific targets to its National Transformation Plan (NTP), the blueprint to move the Saudi economy away from its dependence on oil revenue and […]

At the heart of Saudi Arabia’s economic transformation plan are ambitious labour market targets, which analysts expect will be impossible to achieve within the government’s timetable.

The government last week put some specific targets to its National Transformation Plan (NTP), the blueprint to move the Saudi economy away from its dependence on oil revenue and public sector employment, which included a large increase in private-sector jobs and a simultaneous decrease in the government’s public sector wage bill.

Over the next four years, the plan calls for the creation of 450,000 additional private sector jobs for Saudi nationals, while at the same time cutting the Saudi-public sector wage bill from 45 per cent of GDP to 40 per cent.

The implication is that private sector jobs will grow at a higher rate than they have hitherto and that Saudis will want to – or be able to – fill them in higher numbers, all at a time when the country’s economic growth is slowing.

Indeed, the biggest immediate problem for the Saudi government is that the country’s still heavily oil-dependent economy will have to deal with a prolonged deceleration after the oil price crash.

The non-oil private sector had been creating jobs at the rate of about 45,000 a year, estimates Giyas Gökkent, a senior economist at the Middle East and Africa department at the Institute of International Finance. But the squeeze on the government is having an inevitable knock-on effect on the non-oil sector.

Jadwa, a Saudi investment company, expects government spending to fall to about 48 per cent of non-oil GDP this year, compared to about 65 per cent over the last five years. For this year, that means investment spending would be 19 per cent lower than last year, at 222 billion Saudi riyals (Dh217.4bn).

Moody’s, the debt rating agency, last week forecast that Saudi spending cuts will mean GDP growth slows to 1.2 per cent this year from 3.4 per cent last year, and will grow at only 2 per cent over the next five years, compared with an average of 5 per cent in the five years to last year.

“Against this background of significant fiscal consolidation, non-oil job growth could fall to just 1 per cent this year,” said Mr Gökkent. “This is why authorities are taking steps to increase the ‘Saudisation’ rate in the retail sector, where only a fifth of the workforce of 1.5 million are nationals.”

The retail sector has relatively low barriers to entry in terms of qualifications but even still there are entrenched barriers to overcome in terms of the Saudi social contract.

“It is no surprise that most Saudi graduates continue to gravitate towards public-sector employment, where wages, benefits and working conditions are generally better than in the private sector,” said James Reeve, the deputy chief economist at Samba Financial Group. “The average public-sector employee is paid about 70 per cent more than the private-sector average.

“This ‘wage gap’ is one of the highest in the world and goes a long way to explaining why so few Saudis are employed in the private sector.”

While the government’s ambitions have been widely lauded, they are considered widely to be unachievable within the time frame. “The government needs to find a way of making employment in the private sector more attractive and this was acknowledged in the NTP, but the authorities provided few concrete details on how to achieve it,” said Jason Tuvey, a Middle East economist at Capital Economics.

Difficult as it will be to change the labour market incentive structure, an even more fundamental shift is required in education and training.

“The education system needs to be overhauled – we saw the government finally give a nod to this in the NTP – although I’m concerned that this will prove to be difficult given the likely opposition from the religious establishment,” said Mr Tuvey.

The gap between the government’s wish list for jobs in areas such as health care and information technology and the reality in terms of education and training is wide.

“Boosting educational standards is critical to achieving the productivity gains that are the basis for any sustainable economic expansion, but despite heavy investment in education infrastructure over the past decade, teacher training is often poor with too much emphasis on theory over practice,” said Mr Reeve.

“Curricula tend to emphasise memorisation rather than critical thinking and only 10 per cent of high school students go on to technical or vocational education, while 30 per cent of new university entrants choose a humanities degree,” he added.

Part of the solution could be government subsidies to the private sector to train and educate Saudi employees, he said.

There is a steep hill to climb, even in the hydrocarbons sector. As pointed out by McKinsey, the consultancy company thought to be the main adviser to Mohammed bin Salman, the deputy crown prince, who is driving the plan, the country is on track to add petrochemicals capacity over the coming decade that will surpass Germany’s, but only to produce one-fifth as many chemical engineers in the same period.

It is not just a skills gap but also the imbalances on wages and conditions between private sector foreign workers and public sector Saudi nationals that is an obstacle to shifting Saudis to the private sector.

To address this, “the authorities are now trying to create jobs for Saudis in the private sector by displacing foreign workers”, said Mr Gökkent.

There are many details still to be made clear but the Saudi policy seems to be aimed at making foreign labour more expensive.

“Increasing the cost of hiring foreign labour would make Saudi graduates a more attractive proposition for firms,” said Mr Reeve. “This might be achieved through an income tax levied on expatriate workers, though a more subtle approach might be to make it easier for expat workers to change jobs, as restricting their movements now means they can be paid relatively low wages.”

Other measures introduced by the government were aimed at increasing foreign investment, but the balance between encouraging foreigners to come, work and start businesses in the country and displacing them does not seem to have been struck yet.

The NTP is widely seen as a serious step towards reform, more so than previous attempts that have gone by the wayside once oil revenues rebounded. But, as Mr Tuvey said, even if these massive educational and wage structure reforms were to begin straight away, it would take at least a generation to see the results.

amcauley@thenational.ae

Read the full text of the National Transformation Plan here.

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Source: Business

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