Impact of expat levy on Saudi economy
The decision of the Saudi Ministry of Labor to double the annual SR100 fee to SR200 for foreign worker permits and impose an additional levy of SR2,400 on private companies that employ foreigners in excess of Saudis does not augur well for the economy. This move — as part of the Saudization program — will stifle entrepreneurship and slow down growth.
The new policy, which has far reaching implications on the Saudi economy, is designed to extract additional fees from businesses in order to discourage them from hiring foreigners and coax them into hiring nationals. Such prescriptions tend to focus on the macro level, producing quantity instead of quality.
However, to improve the domestic employment climate, it is imperative that policies are pragmatic and conducive at the micro level as well. This is especially important when considering that entrepreneurship is now the primary vehicle for job creation for a very young Saudi population (about 75 percent under 30 years). Small and medium enterprises (SMEs) create most of the jobs in a robust and diversified economy.
Therefore, it is important to assess the impact on entrepreneurship and involve entrepreneurs when formulating labor and trade policies.
Let us consider the premise of the Labor Ministry’s decision to double foreigner work permit fees for all businesses operating in the Kingdom and an additional SR2,400 for businesses that do not meet the minimum Saudization levels totaling their fee expenses from SR100 to a whopping SR2,600 per foreigner.
While to some it may seem incrementally insignificant, consider paying double as much for a brand new Toyota or city house, or in some case 26 times as much. Aggregated and unadjusted for opportunity cost, these astounding 200 percent and outrageous 2,600 percent jumps will undoubtedly impact businesses of all scales. After all, dollars and cents matter in business.
First, a general rule of thumb to encourage entrepreneurship and startups is to knock down as many entry-to-market barriers as possible. This means facilitating the ability to incorporate simple business entities with a single Saudi riyal, for example. Another is reducing government procedures and fees for various commerce-related services. A healthy entrepreneurial environment is one where a successful entrepreneur can say, “I started with nothing.” An organic manifestation of business growth can only be achieved by liberalizing market regulations as to create an equal opportunity for the entire cross-section of society. Such measures not only make it easier for domestic businesses to sustain, flourish and grow, but they also create very attractive incentives for Foreign Direct Investments (FDI) to flow in such commercial environment.
Second, the decision to impose such fees indicates that the ministry assumes that all businesses are healthy and thriving. However, seasoned business people, especially entrepreneurs who rolled up their sleeves and built a business from scratch, can attest to invalidity of this assumption. Businesses go through cycles of ups and downs depending on an interplay of many variables. Some businesses struggle with their cash flows or are in need of additional financing and must run a very lean operation until they reach their turning point. In a business environment where angel investments and business loans are scarce, it is all the more crucial to help SMEs allocate their resources most wisely.
Third, there is an argument that Saudi offers one of the lowest tax rates in the world (2.5 percent) and therefore has leeway to impose fee increases on businesses. In response, it is critical to differentiate between an upfront expense like fees and an after P&L tax. In other words, first the business has to make money and only after it does, it can pay taxes. This is why companies that do not generate money are typically relieved from tax for the respective year.
Fourth, some of our regulatory agencies are dominated by easily quantified economic measures creating a linear “more-is-better” mind-set. In the case of this policy, the ministry is encouraging the creation of the wrong kinds of jobs instead of creating the right ones.
Using such systemic shortcuts simply circumvent development challenges rather than address them by creating direct paths that generate solid economic growth.
Forcing businesses to pay addition fees in order to remove foreigners from their jobs will mainly create low-skill, low-wage employment that does not fulfill the needs and desires of a young and exceedingly educated workforce. This large segment of the population seeks promising, professional jobs as well as business opportunities. Moreover, the section of the youth that lacks formal education also represents many industrious individuals and aspiring entrepreneurs. They may wish to head in a different direction from the unskilled-workers’ sectors to which the ministry seems to direct them. It is noteworthy to remember that many founders of the leading business families and corporations were brilliant business-savvy persons who lacked formal education yet created formidable business empires. The ability to carry on this tradition is very important.
To encourage entrepreneurship and appropriate a labor mix that is high-skill driven, the Labor Ministry in coordination with the Ministry of Higher Education, must create an active platform that engages private sector players of all scales to identify ongoing market dynamics and needs.
Taking into account that some departments of the Ministry of Commerce are disputing the validity of this decision, all labor and trade policies must undergo a thorough multi-front examination of their impact on creating and sustaining a conducive entrepreneurial environment. This requires a framework by which all relevant ministries and government agencies are aligned in their adherence to a set of guiding entrepreneurship principles that match Saudi’s development needs and priorities. Time is of the essence, let’s get our policies right.