Interpreting Middle East Economic News and Analyzing Market Trends

Saudi Arabia’s decision to tax expat labor will prove to be a bad decision down the road

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Photo: Construction Week Online

  Saudi Arabia’s decision last year to impose a levy of SR 2,400 ($640) per year, per expat worker, will prove to be a very poor decision in the years to come.  The main justification for this levy is to discourage Saudi companies from bringing in low skilled labor and help reduce the rising unemployment problem in the country.

 

Labor Minister Adel Fakeih has said there is no plan to withdraw the SR 2,400 levy imposed on private companies that employ foreigners in excess of Saudis.

In an exclusive interview with Arab News, he said the Nitaqat program was successful in employing more than 400,000 Saudis in the private sector. “It represents five times the annual average of Saudization of jobs before implementing this program,” he pointed out.

Fakeih said the main objective of the SR 2,400 levy was to bridge the gap between the cost of employing expatriates and Saudis, raising the cost of foreign labor. “This is not a ministry decision, it’s a Cabinet decision,” he added.

He said the levy collected from private firms would not be added to the state treasury. It would rather be redistributed among the firms that implement Saudization.

“This means that these fees will be collected only from the firms that insist on employing low-cost foreign labor which competes with our boys and girls,” the minister said.

According to the latest figures issued by the Department of Statistics, there are about 588,000 unemployed Saudis. But the Hafiz program showed that their number is much larger than this figure.

Read the full story from Arab News.

 

There is still no explanation on how they see the program working.  It sounds good for all the unemployed and under-employed Saudis, but have they really given it much thought?  Here’s another story from Arab News that sheds a little more light on this levy:

  

Plans to impose a tax of SR 2,400 a year for each expatriate worker in the Kingdom is still not being favored by economic analysts and the business community.

Asked about the potential benefits of such a move, businessmen termed the move as unfair and said it was doubtful whether the proposed tax would speed up the ongoing Saudization program.

Saudi business owners have said that the decision has “zero advantages” and would not contribute to benefit the local economy.

The decision came as a step toward restricting the rate of hiring of expatriate workers in Saudi labor market.

Labor Minister Adel Fakeih recently put the official unemployment rate at round 10.05 percent in Saudi Arabia.

“There are half a million unemployed Saudis in the country where around 8 million expatriates live here — 6 million of them in the private sector — with their annual remittances exceeding SR 100 billion,” he said.

Saleh Hefni, CEO at Halwani Bros Company, said he expected the new proposal to contribute to increased inflation rather than Saudization.  “Additionally, such a decision will increase the cost of hiring expatriate workers and force their sponsors to additionally incur a large sum. The tax proposal, I think, will not stop the private sector’s dependence on expatriate workers, rather they will try to cover the cost of expatriate workers by increasing the prices of the products they produce and sell in the market,” he added.

Abdullah Saad Al-Ahmari, head of real estate valuation committee at Jeddah Chamber of Commerce and Industry (JCCI) and economic researcher, was forthright in saying that the new move had a lot of disadvantages.

“This decision has ‘zero advantages’ from the point of view of the economy. The rate of Saudization will not increase, rather the small and medium enterprises (SMEs) will shut down. Such decisions will lead Saudi business owners to wind up their projects and become unemployed,” he said.

“Saudi SMEs need more support and financial loans from the government to grow more and expand more job opportunities for Saudis. Such decisions will lead local companies to lose huge amounts of money,” he said.

Al-Ahmari wondered whether this decision will help Saudis with finding job opportunities. “We must encourage the next generation of young Saudis to be qualified, educated and trained enough to do skilled jobs,” he said.

“We should push our citizens to work in high positions rather than pushing them to work in low positions that carry a monthly salary ranging from SR 1,500 to SR 3,000,” he added.

Reem Asa’d, an economic writer, said that various aspects of the tax proposal need to be clarified.

“We need to know more details about this decision, especially when the rate of expatriate workers varies from one sector to another. For example, the rate of expatriates in construction, transportation, and restaurant sectors is higher than any other sectors. Therefore, such decisions will impact some sectors,” she said.

She added: “In addition, we are still not in a position to replace expatriate workers in sectors like transportation, construction and hospitality. Saudis still refuse to work in ‘low-class fields’ due to several reasons. If the Ministry of Labor wants Saudis to replace expatriates, they have to set minimum wages and limit working hours. Otherwise, no Saudi will agree to work in these sectors.”

Raed Al-Tayyar, a member of contracting committee at JCCI, stated that the tax proposal will be nothing short of a crisis for companies in the construction sector.

He said: “The rate of Saudization in construction sector is estimated between 5-10 percent. This means that expatriate workers account for 90 percent. We wouldn’t be able to pay huge amounts in the form of taxes for our expatriate employees. For example, a company may have a wage bill of SR 2.5 million for 1,000 workers. Thus the construction sector is of the view that it should be excluded from the purview of such decisions. We are waiting for the Ministry of Labor to announce a final decision in this regard. In construction sector we have no choice but to employ expatriates because Saudis tend to refuse to work in this sector.”

According to Al-Tayyar, construction companies will try to cover its losses by increasing prices, with commercial buildings and residential units already maintaining a rising cost graph.

“I feel, some traders will increase the prices dramatically to benefit from this decision,” he said.

Read the full story from Arab News.

There will be nothing good to come out of this new tax.  Companies will have no choice but to pay the levy since Saudis will not want low-paying jobs.  These companies will then pass on the higher costs to the consumers leading to higher inflation.  Once this takes hold, Saudi Arabia will start looking more like France where the unemployed can make more money staying at home collecting unemployment than working.  If this is the case, expect unemployment to rise thanks to this new ’employment-fighting’ initiative.