Why unemployment targets are still a concern in Saudi Arabia

August 9, 2018
Jobless rate for Saudi citizens has increased to 12.9%, its highest level in more than a decade

Saudi officials are scrambling to reverse rising unemployment that could test the patience of the youthful supporters Crown Prince Mohammed bin Salman needs for his plan to rid the kingdom of its reliance on oil.

One proposal discussed by officials involved the creation of as many as 500,000 government jobs, even though Prince Mohammed’s blueprint for the post-oil era was based on cutting the public payroll, according to three people familiar with the matter.

That idea isn’t likely to be pursued, one of the people said, but the fact that it was even proposed is a sign of growing pressure on the issue.

For the quarter-million or so young Saudis who each year enter the job market, Prince Mohammed’s employment targets matter most.

More eye-catching elements to his so-called Vision 2030 modernisation project abound - the promised sale of a stake in oil giant Saudi Aramco; plans for a futuristic city pulsing with artificial intelligence; women finally getting the right to drive. But in Riyadh and Jeddah and places in between, it’s primarily about work.

“Creating sufficient jobs to reduce the unemployment level is one of the most challenging parts” of the transformation plan, “and ultimately the litmus test for if the program has succeeded,” said Monica Malik, chief economist for Abu Dhabi Commercial Bank and a longtime Saudi watcher.

The latest data will be a disappointment for the crown prince, who’s King Salman’s son and the power behind the throne.

The jobless rate for Saudi citizens has increased to 12.9 percent, its highest level in more than a decade, from 11.6 percent at the time he announced the economic overhaul in 2016. The plan’s targets of 9 percent unemployment by 2020 and 7 percent by 2030 appear far off.

While the government will continue to hire Saudis “based upon real need,” it remains committed to creating a more efficient public sector, according to a Saudi official who spoke on the customary condition of anonymity. A plan to employ half a million nationals “has no factual basis and was never on the table as such. The question was how to increase suitable job opportunities” for Saudis in general, the official said in response to questions from Bloomberg.

Prince Mohammed has vowed to overhaul the economy of the world’s biggest oil exporter in little over a decade, a feat other commodity producers struggled to achieve. What makes the task more daunting is that almost half of Saudis are younger than 25, and creating jobs for them is crucial to avoid unrest in a region roiled by turmoil since the 2011 Arab Spring.

New measures including extra fees for expat workers and restricting hiring in some sectors to Saudi citizens have helped push hundreds of thousands of foreigners out of the kingdom, most of them formerly employed in construction, trade and manufacturing. Yet unemployment among Saudi men increased to 7.6 percent in the first quarter from 7.2 percent in the same period last year, according to data from General Authority for Statistics.

A mismatch of skills and wage expectations between citizen and foreign labour forces is partly to blame, according to an analysis by Ziad Daoud, chief Middle East economist for Bloomberg Economics in Dubai. More than half of foreign workers are low-skilled, and Saudis are paid 1.5 to 3 times more than expatriates with the same education levels.

Daoud said the kingdom will need to add as many as 700,000 jobs by 2020 to reach the 9 percent unemployment target, a figure that dwarfs the number created over the past few years. Even a more modest projection released in January for 10.6 percent unemployment in 2020 would require creating 600,000 jobs.

That’s about 15 times more than the number generated between the beginning of 2016 and the end of the first quarter this year, according to an estimate by Tamer El Zayat, head of macroeconomics for Saudi Arabia’s National Commercial Bank.

The government official said authorities regularly review Vision 2030 targets to take into account changes and priorities.

Companies have struggled to adjust to recent government efforts to shore up the nation’s finances, including subsidy cuts and a value-added tax. Hiring has been restrained as the economy labored. Last year, as the kingdom cut oil output, gross domestic product contracted 0.9 percent.

While it grew 1.2 percent in the first quarter this year, even optimistic forecasts over the next couple of years “will be nowhere near enough to meet the unemployment target,” said Daoud. “It would take a huge fiscal expansion, which the government can ill-afford, to achieve such strong growth rates and add 700,000 jobs.”

A massive government hiring spree could ease the pressure in the short term. But in many ways it would undermine the prince’s long-term goals.

“A decision to ramp up public-sector employment would go completely against the target outlined in the National Transformation Plan, which called for a 20 percent reduction in the number of civil servants,” said Jason Tuvey, a senior emerging markets economist for Capital Economics in London. “Moreover, it will simply exacerbate a problem that has been around for decades now.”

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