Gazi Shbaikat

May 27, 2015

Benefits Addressed labor shortages. Kept wage levels low -lower Inflation – less

pressures on real exchange rate. Prevented Dutch Disease.

drawbacks: Crowded out nationals Skill-building of nationals lagged Locked economy in low productivity pattern

2

Growth benefits foreigners

-10%

0%

10%

20%

30%

40%

50%

60%

70%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Sectoral Contribution to Growth and Employment

(Percentage contribution)

Contribution to national empl.Contribution to expatriate empl.Sector contribution to growth

Source: CDSI; IMF staff calculation

its main drivers contribute little to nationals job creation

3

0

1000

2000

3000

4000

5000

6000

7000

0

1000

2000

3000

4000

5000

6000

7000

2000 2014 2000 2014 2000 2014

Job Creation: Share of Nationals versus Expatriates

(Thousands of individuals)

Nationals

Expatriates

Total Workforce Public Sector Private Sector

Source: Man power surveys, CDS.Source: Man power Survey, CDSI

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

19

99

20

00

20

01

20

02

20

06

20

08

20

09

20

11

20

12

20

13

20

14

Unemployment of nationals

(Percent of labor force)

Youth unemployment rate

Total unemployment rate

Source: CDSI; IMF staff calculations

Young work-age population is growing fast and benefiting least from growth

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

19-15 24-20 29-25 34-30 39-35 44-40 49-45 54-50 59-55 64-60 65+

Job creation for nationals by age group(Annual average percent growth, 2000-14 )

Age Group

Source: CDSI; IMF staff calculation

Leading to high and rising youth unemployment

4

Sources: Behar, A. and J. Mok (2013), "Does Public-Sector Employment Fully

Crowd Out Private-Sector Employment?" IMF Working Paper WP/13/146.

Note: Each point marks a country. Data are for 2011 or latest year available.

50

55

60

65

70

75

80

85

90

95

100

50

55

60

65

70

75

80

85

90

95

100

0 5 10 15 20 25 30 35 40

Private and Public-Sector Employment Rate

(Percent of labor force)

Public sector

Priv

ate

sect

or

- Heavy fiscal burden - Public employment crowding-out effect

5

Education and training

Quota system -Nitaqat

De facto minimum wage

Other active labor policies: Hafiz, Hardship Incentive Program,

Unemployment insurance system

Higher fees on expatriates

6

Immediate impact will result from quota and other active LP

Education and skill building is a gradual process, impact in the long run

Channels of impact of replacement of expat with nationals

less remittance outflows+ higher wages+ larger propensities to consume from generated incomes

= possible higher inflation and appreciation of real exchange rate

Better composition of skills with more investment in training =Higher productivity and potential growth

7

First impact from Nitaqat: mixed results

Higher employment of national but lower overall employment growth: other research reached similar finding (Peck 2014), Alshanbri etl(2015). .. And unemployment remained high

8

Saudi and Expatriate Employment in the Private Sector (Growth)

Source: Man power Survey, CDSI

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Average Wage and Wage Gap

Nationals (RHS, SAR)

Expatriates (RHS, SAR)

Wage Gap (Expats & Nationals, %)

Source: GOSI

New minimum wage doubled wage of more than 50 percent of nationals in the private Sector

9

The government will face a trade-off between higher unemployment or higher wage bill

Reforms leading to replacement of expatriates by nationals could address this trade-off

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

2014 2015 2016 2017 2018 2019 2020

Labor Force and Employment Projections

(Thousands of individuals)

Unemployed

Nationals employment in governement

Nationals in private sector

Source: CDSI; IMF staff calculations

0

2

4

6

8

10

12

14

16

18

20

0

2

4

6

8

10

12

14

16

18

20

Baseline Controlling unemployment

Unemployment rate

Wage bill

Unemployment and Wage Bill in 2020

(Wage bill as percent of GDP; Unemployment rate as percent of labor force)

Trade-off

Reform leading to higher

private empl.

Source: IMF staff calculations

10

Employment of nationals in the private sector

Source: Man power Survey, CDSI; GOSI

Higher wage to attract nationals.

Operational cost of firms could increase by 3 percent for every 10 percentage points increase in share of nationals in the private sector

11

Impulse Response of Inflation

GDPGR: Nonoil GDP growthDNEER: Change in NEEREXPATGR: Growth in expat employmentFood Prices

Staff calculations

12

For 10 percentage points replacement:

- Achieved over 2015-2020, lower growth of expatriates by 2 percent annually

.- If the ratio of expatriates were to be lowered at a faster rate, the inflationary impact would initially be greater.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Inflation 2015-2024

percent

Baseline Lower expat share by 10 pps

Source: IMF staff calculation

13

Growth accounting exercise: growth

driven mainly by factor input, role of TFP small

(Percent)

1990-99 2000-2014

Growth 2.9 6.8

TFP -0.4 1.0

Capital 2.0 3.0

Labor 1.3 2.8

Growth 2.9 6.8

TFP -1.2 0.3

Capital 3.4 5.0

Labor 0.7 1.5

Source: IMF staff calculations.

Average Contribution to Non Oil Sector Growth

Cost Share of Capital (α) = 0.4

Cost Share of Capital (α) = 0.68

Smaller role of TFP from estimation of α (0.64) from data for SAU.

14

50

60

70

80

90

100

110

120

130

70

90

110

130

150

170

190

210

230

250

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Labor Productivity in Saudi Arabia, 1980-2014

(SAR thousands)

Total GDP

Nonoil sector (RHS)

Sources: Authorities; IMF staff calculation.

15

Education attainment has contributed little or negatively to growth and productivity but improved since 2000.

Table 2. Average Contribution to Labor Productivity

1990-99 2000-2014

Productivity Growth 0.9 2.1

TFP -1.4 0.1

Capital labor ratio 1.1 1.0

Human capital 1.2 1.0

Cost Share of Capital (α) = 0.64

1990-99 2000-2014

Productivity Growth 0.9 2.1

TFP -1.6 -0.2

Capital labor ratio 1.8 1.7

Human capital 0.7 0.6

Source: IMF staff calculations.

Cost Share of Capital (α) = 0.4

ΔLn (yt)=ΔLn(At)+α ∆ln(kt)+(1-α)ΔLn(Ht)

16

quality improvement in education and skills of nationals in order to improve productivity in line with the expected rise in wage levels

0.00

2.00

4.00

6.00

8.00

10.00

1980 1985 1990 1995 2000 2005 2010 2011 2012 2013

Average years of schooling

17

Under the peg, fiscal policy is main instrument

– strengthen fiscal framework and delink expenditure from oil revenue in a medium term framework

- Reduce rigidities – lower wage and subsidy bills

Over the longer term, more exchange rate flexibility would cushion the economy and allow more independent interest rate policy in controlling inflation

18

Gradualism in replacement of expatriates by nationals

More technical and vocational training

Control of public employment size and compensation

Move towards more flexible macroeconomic policy regimes

19