Saudi Arabia’s labour pains

The construction industry, which relies almost solely on cheap foreign labour, is arguably the hardest hit by Saudi Arabia’s seven-month amnesty programme that ended on 3 November and saw the number of foreigners in the kingdom fall from 9 million to 8 million. About SR100bn ($26.66bn) worth of infrastructure projects are estimated to have been disrupted and industrialists are warning of major building delays.

The delays have flowed onto cement sales. November saw the largest year-on-year contraction on record, down 19 percent, causing annual growth to slow to 4.72 percent compared to 4.89 percent in 2012.

The loss of food supply from undocumented foreigners who ran stalls on the roadside or in markets has contributed to a rapid increase in food prices, contributing to an overall increase in inflation to 3.5 percent in 2013 compared to 2.9 percent in 2012, according to the Saudi Ministry of Finance.

Growth in retail, wholesale, hotels and restaurant sales also declined from 6.37 percent in 2012 to 6.16 percent in 2013.

But the chief investment strategist at Saudi Arabia’s Masic, John Sfakianakis, expects the figures to be revised even lower.

“We do see delays on the retail side and the impact is definitely there in terms of lower GDP performance for the third quarter in the service sector,” he says.

The economic impact has been amplified because the kingdom’s three strongest non-oil sectors — construction, transportation and retail — employ a majority of non-Saudi workers.

“Despite this factor they’ll remain the strongest growing sectors over the next few years because of the resources put into these three sectors in terms of financial resources and a favourable operational environment,” the head of research at Jadwa Investments, Fahad Alturki, says.

However, Alturki is surprised that so far there has been little impact on wages. He says government promises to subsidise the cost of hiring Saudis are working.

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“Employing Saudis will add extra cost to companies operating in the kingdom but surprisingly we haven’t seen that impact channel through to prices,” Alturki says. “Maybe it’ll come; maybe it won’t be as significant because of the wage subsidy.”

He argues there was “nothing new” in the reforms: it was simply enforcing rules that already existed but had been ignored by the private sector. About 4 million workers rectified their status during the amnesty, according to the government.

“By enforcing the law, a lot of people are leaving the country because it doesn’t suit their preference,” Alturki says. “But by enforcing the laws and regulations of the labour market, it gives back workers’ their rights [because they are now working legally].”

The Saudi Labour Ministry says at least another 5 million jobs will be needed by 2030 just to meet the needs of young Saudi men entering the workforce. While the official unemployment rate is around 12 percent, economists say only 30-40 percent of working age adults participate in the labour force.

The reforms do appear to already be having some positive impact on the employment of nationals, according to labour minister Adel Fakeih, who said in December that 254,000 Saudis have gained jobs since the quotas began.

Other measures also have been taken to encourage greater participation of nationals in the private sector, including setting quotas, greater training and improved education. Fitch sovereign group director and former Jadwa chief economist Paul Gamble says the number of nationals in the private sector has risen 21 percent in the first seven months of 2013.

However, the workers forced out of the kingdom, and their home countries, are also in many cases suffering from the sudden return of many people who left in the first place because they were desperate for work. In Yemen and Ethiopia, 7,000 people returned each day in the weeks following the end of the amnesty, including tens of thousands on chartered flights sent specifically by their governments to bring them home in scenes reminiscent of an evacuation.

Four lives also were lost in the aftermath of the amnesty — three during violent street protests in the capital Riyadh, and an Ethiopian man was shot dead by police during a round-up of deportees.

While governments across South Asia, including India, Pakistan, Indonesia, the Philippines and Bangladesh, moved to support thousands of their citizens, the most affected countries appear to be Yemen and Ethiopia.

“Every Yemeni official I talked to was terrified about the economic impact of the situation,” Human Rights Watch Middle East researcher Adam Coogle tells Arabian Business shortly after visiting the west coast of Yemen, where majority of the country’s foreign workers forced out of Saudi Arabia had returned to.

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“An Expatriates Ministry official — they actually have an Expatriates Ministry — told me he expects the remittances [they now won’t receive] from Saudi Arabia will cost them $1bn.”

The International Organisation for Migration (IOM) says it will cost $15.6m to help the 200,000 Yemenis that have crossed back over the border since November. And that’s just the initial repatriation costs. Not all the returnees are expected to be able to find work.

Donations have fallen miserably short, making it difficult for the IOM to provide support including transport, both physical and physiological first aid, food and water, temporary accommodation and in some cases even shoes and clothing after Saudi authorities stripped some deportees of their belongings. “The cost per beneficiary is estimated at $130,” an IOM statement in December calling for international donations said.

About 75 percent of the returnees interviewed by the IOM previously sent remittances to their families in Yemen worth up to $200 per month.

“The fact that the families will not receive these remittances any more will have a major impact on them and the economy of their region,” the IOM’s Dr Teresa Zakaria says. “We are looking here at approximately $5m lost in remittances for the months of October and November alone. Most of them are returning to areas with high levels of food insecurity and malnutrition. The massive loss of income will inevitably exacerbate this situation.”

Yemenis, who make up the poorest Arab population, have long crossed the harsh desert to find work in oil-rich Saudi Arabia, often staying in the southern regions, picking up a few dollars a week, which is mostly sent back home.

And with little opportunity in their homeland, about half of those forced back in the recent months say they will keep crossing the border: they have no choice.

“When you ask them what they’re going to do, they say, ‘it’s up to God, God will take care of this’,” Coogle says. “I didn’t get a sense any of them had a real plan for what they’re going to do. I suspect many will go back to Saudi Arabia.”

The economic crisis also has the potential to exacerbate political instability in the country, one of the most dangerous in the Middle East and widely considered a key hub for Al Qaeda operations. Unemployment has been a key driver of unrest and with an additional 200,000 people potentially unable to support their families the situation could quickly escalate.

“We’ve had a period in Yemen where the economy is really going down the tube and then you’re absorbing tens of thousands of workers from Saudi Arabia and losing the remittances flowing from the country,” Coogle says.

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It’s also been an economic disaster for Ethiopia and the estimated 155,000 workers who suddenly returned, mostly on board emergency flights put in place by the government in November. Ethiopia’s 91 million people are among the poorest in Africa, and despite its economy being the second-fastest growing on the continent, the International Labour Organisation estimates unemployment is near 20 percent. The majority of Ethiopians live on just $2 a day.

The United Nations refugee agency estimates 51,000 Ethiopians risked crossing the treacherous Gulf of Aden in 2013 to seek out work in Saudi Arabia. Many returned empty handed, bruised and psychologically battered from their ordeal just months later when the kingdom cracked down on illegal entrants.

The Ethiopian government had expected just 30,000 to return during the amnesty but that soared by more than five times, creating what the IOM called “an emergency”requiring more than $13m, most of which has not been made available.

The future of the returnees and their ability to find work remains a serious threat to their families as well as the country’s economy. Some are too traumatised to immediately work, while others say they will have to go abroad again because there is no employment in Ethiopia, according to the IOM.

In India, the largest supplier of labour to Saudi Arabia as well as other Gulf countries, authorities have been better able to absorb the sudden influx of returnees. However, the government of Kerala, where the majority of Indians who work in Saudi Arabia originate, has applied for federal funding.

Professor R B Bhagat from the International Institute for Population Sciences in Mumbai says the Saudi crackdown on illegal workers would have “devastating impacts” on the families of Indian returned workers.

Predicting the impact on its own economy, the Filipino government made last-minute appeals for Saudi Arabia to extend the amnesty.

But the kingdom has stood its ground. While there have been some concessions in the New Year — Interior Minister Prince Muhammad Bin Nayef gave his department a further two months to finish processing expatriates’ applications to rectify their status if they had been lodged during the amnesty but not finalised — other announcements indicate it will continue to take measures to reduce foreign labour and open up jobs for Saudis.

There are also still more than 10,000 foreigners being held in a detention centre built specifically to house illegal workers due to be deported near the kingdom’s second-largest city, Jeddah, officials said in early January.

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For many, their future is in limbo because Saudi authorities declared only those deemed to be working illegally prior to the amnesty are eligible for deportation, leaving those who lost or left their employment after April in a difficult legal position.

Despite the recent shedding of foreign workers, they will continue to flock to Saudi Arabia, even if the droves that have historically flowed in slow to a trickle in the short term. Over time, the stories of the past three months will fade and unemployment pressures in source countries will once again push workers into the kingdom, which will continue to receive them due to its own labour pressures.

Saudis are yet to prove they’re willing to move into certain sectors, including construction and domestic work, while an increase in locals, particularly women, in the retail sector will take time to reach the levels required.

The kingdom already has signed new labour contracts with Sri Lanka, India and the Philippines this year.

“There are far more employed expatriates than unemployed nationals, so some roles are likely to continue to be performed almost exclusively by expatriates,” Gamble says.

But if human rights observers get their way, what will change is not the number of foreigners in the country but the visa system that determines their legal status.

Saudi Arabia and Qatar are the only Gulf states that essentially tie a worker to their employer, making it illegal for them to change jobs or leave the country without their employer’s permission. This system is what led so many of Saudi Arabia’s 9 million foreign workforce to move from legal to illegal status.

“If you dig into these stories, we have many workers who entered the country legally… [and] were driven into black market work not because they wanted to but they were in a situation where they weren’t paid, they were subject to unsanitary or unsafe conditions and they really need to get out of it,” Coogle says.

The Labour Ministry has said it will set up tribunals to hear expatriates’ complaints about their sponsors, but it has no plans to change the sponsorship system itself.

Alturki expects migration to resume again this year but the new arrivals won’t replace all of those who left.

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“The labour market was oversupplied over the last few years,” he says. “Saudi has been attractive for foreign labour in the last few years; as a result work permits have been issued above and beyond the need of the kingdom and Saudi economy, so a major part of the 1 million are not coming back but I think we’ll see some work permits being issued. It’ll probably be more…regulated.”

Observers expect the effects on the Saudi economy to be only temporary.

“Although there is short-term pain, over the long run the economy will benefit as more Saudis will enter the labour market,” Sfakianakis says. “There is never enough time for businesses to adapt if you ask these businesses. But there has to be a start and it’s better to have the immediate shock and pain now than prolong the process of adjustment.

“Any adjustment is painful but there is a need for reform and the measures taken are on the right path. And it’s good to adjust during the good days than to wait for painful measures to happen when the economy grows less aggressively.”

How long the repercussions will last is difficult to tell.

The Saudi government already has indicated it is working on even tougher labour law measures, including potentially limiting foreign workers’ stay in the kingdom to eight years, while using a points system to discourage them from staying more than three years or bringing their families.

“Undoubtedly the government is proving more resolute in its Saudisation efforts than in the past, which will have negative longer-term implications for the economy’s performance and productivity,” Economist Intelligence Unit Middle East economist Robert Powell says.

But Alturki is confident the economic impact won’t linger.

“The private sector is very dynamic in Saudi Arabia. We’ll just adapt to the new operational environment and move on,” he says. “I don’t think it’s going to be a major setback.

“Growth for the next year is solid. I don’t think over the [post-amnesty] period we’ve seen a major impact on those [three fastest growing] sectors that will make us rethink our focus in a major way.”

Meanwhile, as many as 1.5 million workers returning to some of the world’s poorest nations, and their dependents, are hoping the Saudi amnesty doesn’t have long-term effects on their survival back home.