Saudi Arabia's new plan for enforcing strict employment quotas on companies operating in the kingdom was, as we reported earlier this month, somewhat misinterpreted as a push to purge the kingdom of some of its long-term expatriates.

While that was an over-dramatic reading of the plan, it is still fair to say that the new guidelines for "Saudization" of the workforce - just 10 per cent of the current private sector workforce is Saudi - have some pretty sweeping and ambitious goals for changing the foreigner-led dynamic of Saudi private business.

The plan, as summarised by Banque Saudi Fransi, is to create 1.12m new jobs for Saudi citizens by 2014. And that means that as opposed to the current 10 per cent, a full 92 per cent of all new private sector jobs will go to Saudis if the plan succeeds.

The new Nitaqat (ranges) system assigns quotas for the percentage of a company's workforce that must be Saudi citizens, with the quotas dependent on the size of the company and the industry it is in. Failing to meet the quotas will lead to businesses not being allowed to hire new foreign workers, and eventually being shut down entirely.

For context, the number of foreign workers in Saudi Arabia has risen sharply over the last five years, tracking the growth in oil prices. Foreign workers now make up fewer than one in every three people in the kingdom:

Saudi share of population

Source: Banque Saudi Fransi

While more than 700,000 new jobs were created in 2009, the majority went to foreign workers, with unemployment among Saudis rising to 10.5 per cent. That figure spikes to 27.4 per cent of Saudis under 30, and 39.3 per cent aged 20-24. Saudi's youth unemployment rate is second only to Iraq in the Middle East.

Getting Saudi employers to quit their structural addiction to cheap foreign labour will be long-term positive for the economy, Banque Saudi Fransi said, forcing companies to offer salaries competitive with the public sector (where most Saudis are employers) and encouraging Saudis to gain the education and training needed in the private sector. As it is, even when paying Saudi employees considerably more than their foreign counterparts, private companies are not salary competitive with government:

Saudi salaries in private and public sector

Source: Banque Saudi Fransi

The new quota system could hurt some smaller businesses, particularly those who cannot afford to comply with the regulations by hiring new, more expensive, Saudi staff. It could also lead to bottlenecks in staffing big new projects requiring hundreds of employees, and put a dent in FDI as foreign investors hold back on projects to see how the system is implemented. But, according to Banque Saudi Fransi, "a less open immigration policy and sub-optimal growth may be a necessary precondition of improving the job situation for Saudis."

The system is also a short term fix to a longer term problem of a mismatch between the skill sets needed by Saudi companies and the education and training paths chosen by Saudi youth (in short, companies need technicians, engineers and specialists, young Saudis prefer to study humanities and arts). The government is working to rectify the imbalance, but it will take many years. As the bank said:

The long-term goal should be to create an education system and jobs market that is able to rely on a highly skilled indigenous labour pool. But this will demand drastic shifts in cultural perceptions of work and entitlement.

See also:
Closing the jobs gap - IMF
The Gulf's foreign workers aren't going anywhere - FT Tilt
A marginalised private sector in Saudi Arabia - FT Tilt
How migrant workers in the Gulf spread the oil wealth - FT Tilt