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Saudi Arabian Oil Crisis, Reforms and Its Impact

By Danish MC

In June 2014, everything was going good for the oil producing countries as oil price was at $118 per barrel, but after that it was a downward spiral for the oil prices as it fell to $48 a barrel in January 2015. There are several reasons for this phenomenon and one of them is the increased production of oil from shale in United States. Production of oil in US had jumped almost 50% from 2012 to 2014 as it leapt from 2 billion barrel to 3 billion barrel per year. Everyone expected Organization of the Petroleum Exporting Countries (OPEC) to save the day as it usually does by cutting production, but it refrained from doing so because it wanted shale oil out from the market, which had a break even price of $60 per barrel. Entry of Iran in the arena after the removal of sanctions against it didn’t help. The market now had an additional 500,000 barrels a day, which in a market that was already oversupplied by over 1 million barrels per day, was enough to cause further disruption in the market.

This lead the Kingdom of Saudi Arabia (KSA) to rethink their model of growth. They realized that they needed to diversify from oil if they wanted to sustain their growth. Saudi Arabia thus proposed in its budget in January 2017 to levy a tax on dependents who are sponsored by foreign nationals and also the foreign nationals themselves. They also hiked the visa fees for foreign nationals from countries with whom Saudi Arabia doesn’t have bilateral agreements. The dependent levy began functioning from July 2017 onwards and will increase on an incremental basis. The levy in the first year is 100 Saudi Arabian Riyal (SAR) on each dependent of a foreign national per month.

Year Levy on dependents from month of July in each year
2017 SAR 100 per month per dependent
2018 SAR 200 per month per dependent
2019 SAR 300 per month per dependent
2020 SAR 400 per month per dependent

Source : Ernst & Young

The levy was introduced as a source of income for the country as well as to reduce the number of expatriates from other countries, so that the young population along with female population of KSA who are entering the labor force are able to find work. The Kingdom is set to increase its female work force from 22% to 30% as a part of its vision 2030. According to LinkedIn Insights, the percentage of Saudi women members completing bachelors degree was more than 63% which is surprising as even a developed country such as United States has only 57% of its women completing bachelors. Saudi Arabia has an unemployment rate of 12.7% and it is not surprising that the government has decided to reduce the number of foreign expatriates.

The condition of the economy has deteriorated after the fall of oil prices. The Government has decided to cut down on projects which are not necessary. This has affected other industries in the country because the government is the largest investor in the country. A lot of companies lost projects and are not able to pay their workers salaries. They are also cutting down on workers to reduce costs and all of this has lead to collective departure of foreign expatriates.

Collective departure of expatriates from other countries has adversely affected the Saudi Arabian economy which is trying to diversify under the leadership of Crown Prince Mohammad Bin Salman. The real estate market has plummeted as the demand has fallen drastically. The rent of residential building has also come down as expatriates are vacating the apartments and houses they rented for their family. Earlier people had difficulty in finding apartments to live but now advertisement of vacant apartments are everywhere. An alternative reason for rents coming down is the increase of electricity and water charges, Now the apartment owners are willing to rent at a lower price if the person is willing to pay the electricity and water expenses from their own pocket. But even that isn’t helping the real estate market. The market is also suffering as there is a growing inactivity due to mass exit of people from the country.

Private schools in which most of the children of Indian expatriates study have increased their tuition fee and have taken away fee concessions which were provided earlier. This was mainly due to the Ajeer programme in which people who work for another person other than their sponsors have to pay SAR 9500 yearly as a levy. Schools have informed their teachers who are in dependent visas that the school will pay half of the levy and they have to pay the other half from their own pockets. It is very challenging for schools as most of the teachers are either wives or daughters of expatriate workers which means they fall under the category of dependent in their visas. Employing people from dependent visas was a method used by many private schools to reduce charges associated with bringing people from other countries to teach which has now become a major problem for these schools.

The move to reduce foreign expatriates was envisioned to give employment to young Saudi Arabians who despite having qualifications, weren’t able to find work in their own country due to competition from foreign nationals and the country is within its rights to implement any such rules. But the inability of our own government in tackling this problem is alarming. India doesn’t have an exact figure of how many Indians are working abroad, especially in countries like KSA, but it is estimated that more than 4.1 million Indians live in KSA. India already has a high unemployment rate amongst its young population and it will be challenging to deal with the hoard of expatriates who will now be returning from the Middle Eastern countries. It is way past the time when we took actions to counter this upcoming catastrophe. Indian expatriates have sent $69 billion to India from foreign countries putting our country on top position amongst countries which receive remittances from its expatriates population in 2017. They have sent similar amounts in the previous years and inward remittances constitute one fifth of our total foreign exchange reserve.

Our government should realize that holding ‘Pravasi Bharatiya Divas’ which has turned into a gala where the wealthy expatriates mostly from US and Europe comes to show off is not enough to help the expatriates. Pravasi Bharatiya Divas is extremely expensive for a regular expatriate as hotels booked by the sponsors, registration cost and other charges costs a lot. So the forum is not accessible for a regular expatriate to express their concerns. Even awards are not accessible to regular expatriates. It is informative that of the 15 NRIs honored with the Pravasi Bharatiya Samman Awards for their ‘outstanding’’ work in 2015, just one can be described as truly ordinary — Ashraf Parakunmummal, a UAE resident who helps families of Indian expatriates who die there to send their bodies to India. The rest of the list comprised of elites amongst NRIs. We need to understand that we can’t expect other countries to employ our people indefinitely. We need to form policies to rehabilitate them if they return from foreign countries after losing their job, and help them as they have done a lot for the growth of our country.

References :

Danish MC, the author, is a second year economics honors student from Jindal School of Government and Public Policy.

Featured Image Source : Flickr

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