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Labor Market in Saudi Arabia: Saudization and Nitaqat Policy Essay

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Updated: Apr 24th, 2020

Introduction

In the past three years, the world labor market has experienced a slow down. This was attributable to the economic crisis in the United States and other factors. However, even in those desperate times the Saudi Arabian labor market has been relatively stable.

Currently, according to official government statistics every eight out of ten Saudis are employed. In some circles, this figure is too little. The opposition to government policies enacted to maintain calm in labor markets argue that this figure ought to be higher. However, the government argues that its policies towards combating unemployment are working well.

In this paper, I will look into both sides and arrive at a conclusion on the workability of two major policies that shook the Kingdom of Saudi Arabia labor market since enactment. This is the Nitaqat Policy and the Saudization concept. Nitaqat policy is a guideline to the private sector companies that hire in the Kingdom of Saudi Arabia.

It has been there since early 1990. However, the ministry of labor introduced new policies regarding Nitaqat in 2011. Saudization, on the other hand, refers to all government policies that the Kingdom is pursuing to make sure that Saudi nationals get a larger share of the private sector employment.

Saudization Concept

This concept has featured highly in the Saudi Arabia policy making since 1990. However, Nitaqat policy is the latest development employed by the Ministry of Labor in furtherance of this concept.

In 2004, a royal decree called the ‘Saudi Labor Law’ came into force. Although it was enacted in 2006, the employers in the country had a big problem complying. It required that Saudi nationals comprise three quarter of an employer’s workforce. However, the ministry could reduce this percentage if qualified people were required. However, they could not be found among the Saudi nationals.

In 1994, the Saudi government introduced a resolution. Dubbed Resolution 50 of the Council of Ministers, it required that any company that have a workforce of twenty or more to increase the number of Saudi nationals in the workforce by more than 5% every year. However, the resolution does not indicate the number of Saudi nationals a company should have during start up (Chance 2).

In 2002, the ministry of labor issued a circular to all employers. The circular informed employers that 1/3 of all employees in a company’s workforce should be Saudi nationals. However, the circular detailed a number of exemptions that would be granted to those that complied. This includes lower tax rates, possibility of listing in the local bourse and favorable treatment (Chance 1). However, this did not last long before the ministry of labor passed another resolution.

It nullified the 30% requirement of labor mix with a possibility for a lower percentage. It was the basis for the Nitaqat program. It is important to note that not all these worked to solve the employment situation in Saudi Arabia. Therefore, at the end of 2011 a royal order was issued which required that the business community of Saudi Arabia meet to discuss the Saudization concept.

The kingdom believed that companies did not and were not willing to comply with previous statutes. Therefore, the ministry of labor was to create a program that would ensure compliance and frequent reporting on its progress and possible improvement. Late in 2011, the ministry of labor announced a modified version the Nitaqat program. It also reiterated that it was pursuing this new Saudization initiative.

The above history reflects the importance of Nitaqat program to the Kingdom of Saudi Arabia. This policy seeks to enhance a concept that started a long time ago. In its chronology, it is evident that the kingdom was in dire need to make sure the Saudization concept remain alive.

This was even more critical during the economic situation that was there for the last three years. However, is it a working concept? Does it limit creativity and growth? Will it make Saudi nationals competitive at an international arena? Does it kill or create jobs? This paper seeks to answer these questions.

Nitaqat Policy in Detail

The Kingdom of Saudi Arabia thought about this policy in the 1990. The policy’s main area of interest is the employment of Saudi nationals in the private sector. Nitaqat refers to categories when directly translated. Under the policy, there are four categories of companies. This includes red, yellow green and premium.

The classification defines the strictness with which major private firms in Saudi Arabia follow the ministry of labor guidelines towards making sure Saudi nationals get priorities in employment. Firms, which fall under the premium and green category, are compliant. Consequently, they receive special treatment from the government. On the other hand, companies that fall in the red and yellow category do not comply with the requirements under the auspices of the Nitaqat policy.

Therefore, they face sanctions and unfavorable treatment from the government. The ministry of labor decided to use the policy amid a growing unemployment rate among Saudi nationals. Compliance with the policy is mandatory since late September last year (2011). The policy became stricter when the ministry of labor announced that it would penalize any company that fell in the red category without any explanation for back up (Chance 2).

Categories

Overview

Under the Nitaqat program, any company locally owned or owned by foreigners, employing at least 10 employees must comply (Chance 4). The percentage of Saudi nationals that a company should employ depends on two factors. That is, the activity of the company and the number of employees in the company. The table below outlines the requirements of the program.

Wholesale and retail Trade Red Yellow Green Premium
No. of employees From (%) To (%) From (%) To (%) From (%) To (%) From (%)
10-49 0 4 5 9 10 26 27
50-499 0 4 5 16 17 33 34
500-2999 0 9 10 23 24 34 35
3000+ 0 9 10 24 25 36 37

Retrieved:

The above categorization seeks to eliminate the previous blanket 30% requirement of all companies. This criterion recognizes companies falling in the green and premium category as compliant. However, those in the red and yellow category are non-compliant and the red category is liable to facing penalties (Chance 2).

Benefits of Compliance/ Penalties for Non-Compliance

Premium Category

Companies in this category have surpassed the Saudization requirement. They are the ideal for the kingdom of Saudi Arabia in trying to solve the employment issue. These companies receive a myriad of benefits with the requirement that the rating does not fall below green. The companies can renew work permits for existing employees and can apply for visas for expatriate workers ever two months.

They can also obtain visas for any professionals who wish to join the company and can change the professions of any expatriate workers. The companies can also poach expatriates from the companies listed in the red and yellow categories without requiring a non-objection letter from the current employer. The most important is that in cases where their documentation has expired (e.g. licenses, certificates permits etc), the ministry of labor continues to provide essential services for the form for a period of up to one year (Chance 2).

Green Category

The companies in this category enjoy benefits almost similar to the premium category ones. The companies can renew work permits for existing employees and can apply for visas for expatriate workers ever two months. They can also obtain visas for any professionals who wish to join the company. They can also change the professions of any expatriate workers. The companies can also get expatriates from the companies listed in the red category without requiring a non-objection letter from the previous employer (Chance 3).

Yellow Category

This category has more limitations than benefits. They can renew work permits for employees with a permit valid for at least three months. However, the companies cannot apply for new work visas from the government since it will be rejected. If there is permanent departure of one of its expatriate workers, the company can only get one visa for replacement.

New expatriates may not be recruited and the existing ones are not able to change their professions. Expatriates cannot transfer their sponsorships too. The companies can renew employment permits for employees with a permanent residency of at least six years. Employees have the free will to move to work for a green or premium listed company without objection from the current employer (Chance 3 & 4).

Red Category

This category is evidently non-compliant with Nitaqat policy at almost all levels. It faces many obligations and bottlenecks. It may not apply for new work visas. It cannot change the profession of its expatriate workers and cannot recruit new ones. These companies will not be able to renew work permits for expatriate employees who have an unlimited free will to switch employers without objection from the current employer (Chance 4).

Companies with Multiple Activities

In the categorization above, I looked at companies that engaged in only one activity. However, this is usually not the case since many companies engage in many different or related activities. In this case, the ministry of labor comes up with a Saudization percentage for each of the activities the company undertakes.

Saudization percentages apply differently for the different activities. For example, a company that engages in agricultural activities, retail, and wholesale of the produce. In calculating the Saudization percentage, the ministry will look at the number of employees in each category and come up with a percentage.

If the outcomes fall under different categories as listed above (i.e. green, premium, red and yellow), then the ministry will issue certificates of compliance for each activity. Therefore, a single company may have a green and red rating. In a case where the articles of association permit a company to conduct a myriad of activities, the ministry of labor will look for the main activity it engages in and use it as a measure (Chance 5).

Deadlines

The Saudization concept under the Nitaqat policy started in 2011. Deadlines were set for the non-compliant companies to comply. The yellow companies had until November of 2011 to comply. Meanwhile, the red ones had up to February this year (2012) to comply. Hence, the policy is in full effect now. Pundits say that there is going to be a very interesting situation playing out in the kingdom of Saudi Arabia.

They say that this may present a human resource crisis for the country. The applicability of the whole policy may be too complicated for the government (through ministry of labor) to handle. On the other hand, some say it is the perfect solution to a constant problem of unemployment. Others argue that the concept of Saudization was a dream but the Nitaqat policy has brought the dream to light (Chance 4).

Having looked at the policy in detail, I will embark on the different views regarding it. I will analyze the human resource in the country from this perspective. I will also look at the impact it has on employers and employees. Since it majorly focuses on the private sector, it is also important to look at the effect it will have in new and existing private sector companies objectively (Arab News).

Advantages of Nitaqat Policy

Prioritizing Locals

The policy main idea is to give locals an edge against foreigners in employment positions. It seeks to empower the employment of locals. In the recent years, there has been an influx of foreigners from developing and developed countries. This has polarized the employment of locals.

This is because they have reduced the rate of payment in the jobs that require little or no training and they have increased the requirements for entry into the jobs that require training and education. In the end, locals are at a disadvantage, which limits their employability. This means that the economy of Saudi Arabia grows but the very people who should be enjoying the fruits do not enjoy them.

This is the thinking of the ministry of labor and those experts in favor of the policy. It also stresses the point that it is simply furthering the Saudization concept. This concept, the government and cultural campaigners argue, is the sole glue that binds locals together. Hence, it should not be ignored.

Reduction of Influx of Foreigners

In the previous years, there have been so many foreigners going into Saudi Arabia. They were going there mainly in search of jobs and better lives. These foreigners spell doom for the economic and political stability according to the kingdom. Hence, the influx needs to be reduced. The best way to do that is to empower locals and to prevent any other roll out of work permits.

The government has therefore prevented work permits for companies with yellow and red criteria. According to government statistics, these two categories comprise of 30-40% of all the companies in Saudi Arabia. Hence, in the long term, the goal of meeting a 100% employment rate in the country is possible. This is especially so considering that 80% of the population is currently employed. The ministry’s thinking is that it will solve two problems using one solution. By restricting more work permits and visas it will reduce the number of foreigners in the country and increase employment in the country.

Economic Growth

A higher employment rate of locals will boost economic growth. This is because it will increase the purchasing power of the locals. Since they do not send money anywhere because their families are with them, they will use it there. Services account for 71% of the economic activities that Saudis engage.

With an assuredness of job security under the Nitaqat policy, the Saudis will be happier to use their money. This is going to increase the economic activity leading to a budding economy. Increased economic activity will mean more consumption of goods and services. Hence, there is likely to be firms that will come up to meet this demand. This will create more jobs.

A continued trend of this nature will mean better living standards for the people of Saudi Arabia. Increased purchasing power and vibrant economic activity may mean better payment for a unit of work done and improved relations. Saudization may eventually be a real concept. This is where all Saudis will be employed live better lives. Contrast to what we are seeing in other Middle East countries such as Syria, Libya and Egypt, this also translates to a better political scene (Arab News).

Disadvantages

Wiping Out Private Firms

Critics argue that the policy is old fashioned and misplaced. By classifying companies in premium, green, yellow and red, the government is creating a bad situation. 30%-40% of firms in Saudi Arabia fall in the precarious category of red and yellow (Chance 2). This spells doom for their operations.

This is because of the costs associated with training of new employees. Since their employees’ visas and work permits will not be renewed, they will have to hire new ones in the short term. The hiring process may cripple their budgets and lead to eventual failure. However, even before this happens, the employees will move to look for better deals with the green and premium ratings. This is because in these companies they will have the opportunity to renew visas and work permits.

Another option that the private firms have is to assess their jobs based on the criteria offered by the ministry. After assessment, the firms will decide which jobs are important or core to their operations and retain them. Therefore, there will be a wave of downsizing and rightsizing creating massive joblessness in the short term. This joblessness may not be good for the private firms as they try to come up solutions to the current policy.

Human Resource Problem

The policy has immensely empowered the Saudis. It has also given unlimited or almost unlimited powers, to the premium and green rated companies. These companies may play manipulative tactics to increase their power further. They will ensure that they meet the threshold for assessment at all times. This way they will take the best of expatriate workers from the red and yellow companies who do not get visa qualification.

This may happen strategically where those companies ensure that they hire at the least cost. This is at the time when this expatriate worker who desperately needs a visa and work permits renewal takes any kind of deal to remain afloat in the job market. Hence, there will be a combination of power (from the green and premium rated companies) and desperation (from expatriates). These two will combine to kill red and yellow rated companies and compound an already existing precarious human resource problem.

In addition, a situation may play out where find themselves in different categories at different times. This will spell doom for the companies, as they not have permanent employees. Employees will be switching companies at their convenience since the government protects them adequately. Employees will not have permanent contracts any more. This is because an employer will not want to commit to a permanent employee when he or she is not sure of the economic situation. On top of that, there is no guarantee of maintain the status of premium or green which means an employee may move.

The cost of hiring and retaining an employee will skyrocket. This is in light of the fact that most employees who are qualified enough to do tasks that Saudis are not qualified for will need to work in contracts. Thus, it is going to be hard to convince expatriates to work on permanent basis. The combination of temporary employment and contractual terms may spell doom for employers. They will find it hard to keep up with the budgets and decide to outsource.

Outsourcing and Relocation

Recently, there has been debate that outsourcing kills jobs of the country from which it emanates. This is likely to happen in Saudi Arabia. Most firms may decide to outsource noncore parts of their operations to countries outside Saudi Arabia. This may complicate the situation even further.

This will be the best move to cut costs in light of this policy. Some of the departments that may be outsourced include security, human resource among others. The kingdom of Saudi Arabia may not have anticipated this but it may be the undoing of the policy.

Other companies may decide to relocate their headquarters and major operations from Saudi Arabia to their neighboring countries only maintaining braches in Saudi Arabia. Although this may not be possible with manufacturing firms in the short run, in the end it might a possible restructuring though. It is also going to be easily possible for service firms such as airline booking agencies.

Locking out qualified personnel

The enactment of this policy locks out major asset. This is the benefit of acquisition of qualified personnel. This is because as a person goes into Saudi Arabia they will not be assured of a lasting placing. Hence, a person seeking to settle in the job market will not even consider this country. Among the locals, according to a CIA fact book, there is a high illiteracy level.

Hence, the policy is good because it guarantees that illiterate will get a job as security men, hotel service, and servers. What about the professional positions that locals cannot fill? Although this disclaimer appears in the Nitaqat policy, it is explicitly clear how the assessment will be done to determine to what extent this is true. It only gives a general guideline. Therefore, the government may be lagging behind economic growth from this point of view (Central Intelligence Agency).

Assessment of Labor Market

At its best, the labor market is Saudi Arabia is a mess currently. There is a lot of uncertainty in the air. Companies falling in the red and yellow categories do not know what to do. There is also a situation where foreigners feel mistreated. This is a similar situation to what happened in South Africa a few months ago.

They feel like they are been treated as outsiders. People who are hanging onto long-term contracts are confused. Employers who entered into long term contracts with employees are feeling the heat of a policy that may make them pay for cancellation contracts.

The private sector has many small and medium sized enterprises. These enterprises may not have a legal department that is adequate. This means that they not have seen all these coming. Hence, they are faced by a situation where this has come too fast. The government is accused of having not had enough awareness campaign to enlighten the job market of the situation. It is also evident that this policy does not touch on women specifically. In the past, women have been mistreated in their job places in Saudi Arabia.

The implementation of the Nitaqat policy needs more impetus than the government is giving it now. The awareness is still limited and the scope is too narrow. For example, the website that details the plan is still written in Arabic. This locks out those who do not speak Arabic but have invested in Saudi Arabia.

It is also evident that the government needs a lot of training and investment in its people. This will effectively relieve the government of the burden of having to create jobs for youth in the country. In the past, the government used to create jobs for the youth through major projects but that is set to shift (Central Intelligence Agency).

The other thing that is likely to play out is the payment of wages. The kingdom anticipates better wage payment for the Saudis. This is set to increase. The government will also relieve itself of recurrent expenditure on wage bill payment and focus on expenditure on other infrastructure projects. The labor market is Saudi Arabia is going to be more stable. In the past policymakers have had to contend with a situation where so many jobs created went to foreigners.

For example in 2009, close to 700,000 jobs were created in the private sector alone and an additional 40,000 in the public sector (Arab News). In the same year, the unemployment rate rose from 9.8% to 10.5% among Saudi nationals. Hence, the government is concerned about this. The youth unemployment is highest in Saudi Arabia in the region. It stands at close to 30% for people below the age of 30 (Central Intelligence Agency).

In the Saudization plan under Nitaqat policy, it estimated that a growth of just over 5% would be realized in eliminating youth unemployment in Saudi Arabia. The goal is to yield over one million jobs in three years after the enactment of the plan. From that figure, 90% of the jobs should go to Saudi nationals. In the last few years, the private sector has had a trend to hire more of its workers from south East Asia than from Saudis.

This is because the foreigners are more skilled and demand lower wages. Therefore, the government has an uphill task to ensure that it puts in place training and educational programs that will boost this state of affairs. In 2010, the government issued more than two million visas to expatriates (Arab News). These expatriates infiltrated the Saudi job market and secured jobs created at the expense of the locals. The kingdom of Saudi Arabia seeks to avert this situation.

People working in small companies will have little relief, as the percentage share is beneficial to them. According to the above table, they will only be required to have 10% of locals. Therefore, this policy is focused on the multinationals that settle in the country and kill jobs by looking at costs rather than growth of the country.

These big companies are the focus of the government because they obtain some of the highflying contracts both from government and from major private sector endeavors. Hence, if it is in creating jobs, they should feature highly (Central Intelligence Agency).

Problem of Implementation

There is a high risk of how well to implement this program. It is too detailed and may be very hard to implement it widely. It is also likely to face major resistance as companies find other ways to cut costs. The country has so many companies and small businesses and follow up may be the hardest thing to do.

However, employees are likely to be the major driving force. This is as they seek to position themselves better in the workplace or want a person they favor to come in. in the short term the costs may be too high for this program. However, there is high likelihood that it is going to be beneficial.

The private sector needs to grow at a rate of 5% to sustain the Saudi population. In the long term, the government wants to endear private sector jobs to the citizens by creating an atmosphere like the one in public sector. Statistics show that Saudis prefer government jobs to private sector jobs. In 2009 for example, 92% of the workforce were in government jobs. This shift needs a lot of trust and reassuring and this is what the government should focus on (Central Intelligence Agency).

Conclusion

Saudization concept has been there for a long time. However, its full force came in 2011 with the royal decree that enacted the Nitaqat policy. The government wants to use this policy to enforce hiring and retaining of Saudi nationals. The policy requires that companies comply with a formula that defines its employees.

The majority must be locals. The policy may face a few hurdles such as lack of training, semi skilled local workforce, government creation of favorable jobs and possible relocation and company outsourcing. However, the government is determined to overturn the unemployment situation, which threatens the stability of politics and the economy. There are discussions that point towards possible amendments to the strict policy to, among others, enable its implementation.

However, many Saudis have hailed these government efforts. Many countries with a workforce in Saudi Arabia are crying foul over apparent mistreatment of its citizens. They also say that remittances from the workforce in the Asian country will reduce drastically. This will harm their already ailing economies. Human resource pundits concede this is a situation that needs special handling, as it may be hard to handle when it finally plays out in full.

Works Cited

Arab News. ‘Nitaqat’ May Wipe Out 40% Of Private Firms, 2011.

. The World Fact Book, 2012.

Chance, Clifford. Saudization Update, 2011.

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