The impact of COVID-19 on GCC labour markets

By: Boris Ivanov, Founder of GPB Global Resources B.V

The COVID-19 pandemic has led to rising debt levels, spiking budget deficits and slumping oil prices resulting in a slowdown of economic growth and a radical surge in unemployment levels. 

The IMF projected the MENA economy to contract by 3.3 per cent in 2020, the biggest slump in four decades in its World Economic Outlook report in April. It said the combined shocks of the virus and low oil prices will shave off $323 billion, or 12 per cent, of the Arab world's economy -- $259 billion of that from the energy-dependent Gulf states alone.

The current employment situation in several countries within the Gulf Cooperation Council (GCC), including Saudi Arabia, the United Arab Emirates, Kuwait, Oman, Bahrain and Qatar have been shaped by oil-based growth to support rapid economic development since the discovery of vast oil reserves in the 1930s, and their subsequent extraction and exportation. While this enabled GCC countries to generate significant wealth to modernise infrastructure, lift living standards and provide a generous social contract to their citizens, the growing level of national unemployment remains one the region’s key domestic policy challenges. COVID-19 has merely exacerbated these pressures.

With oil and gas firms already registering a 19 per cent drop in demand for additional employees in the Middle East, we explore some of the tactics and policy shifts designed to support the labour market and aid its recovery.

A challenging landscape

The labour market predicament in GCC countries is characterised by several features; high youth unemployment, low female participation amongst GCC nationals and critically, the fact that foreign labour constitutes most of the workforce.

This imbalance is the result of GCC countries being largely dependent on expatriates to underpin their booming oil economies for several decades. When oil prices fell in the 1980s, GCC leaders realised the crucial need to shift from oil dependent economies to diversified economies. However, this caused yet greater dependence on expatriates, as most GCC nationals preferred to work in the public sector due to its superior employment conditions, causing expatriate employment to rise and eventually account for three-quarters of the total workforce.

Policy shifts

To combat this, in recent years, GCC governments have formulated labour market reform strategies to create sufficient employment opportunities for nationals in the private sector, limit dependence on expatriate labour and increase workforce participation. For example, in 2019, Oman blocked foreigners from working in more than 80 job categories. In the same year, Saudi Arabia reserved employment to nationals in several retail and hospitality sectors. GCC governments also enacted taxes and fees to turn foreigners into new sources of revenue, including the establishment of road rolls, excise taxes on alcohol and tobacco and visa renewal fees.

Immediate effects of the pandemic

Since the outbreak of COVID-19, tens of thousands of migrant workers have left or applied for repatriation from GCC countries. Additionally, with scant prospects of re-employment in the current climate, large numbers of highly skilled expatriates have started to return to their home countries. It is estimated that a mass exodus of foreign workers could result in the population declining throughout the Middle East, by around 4 per cent in Saudi Arabia and Oman.

Some GCC countries are using this as an opportunity to readdress their national to foreign worker balance. The UAE for example, enacted new regulations concerning redundant workforces to enable working permit transfer possibilities and gave companies the right to reduce salaries and force employees to take paid and unpaid leave. Saudi Arabia announced they will support national workers but give no support for the foreign workforce. Kuwaiti media has reported around 50 per cent of the country’s foreign workers have had their employment terminated amid calls to reduce the number of expatriates and the Government has announced that it will no longer employ expatriates in the oil sector.

Whilst it is true there is need for these countries to address their national to foreign worker balance, a mass exodus of expatriates will mean a loss of skilled workers, technical expertise and experience.

Approaches for recovery

Firms must do all they can to appear attractive to prospective employees, to bring expatriate workers back to GCC countries and to tempt nationals over to the private sector. Firms should be very aware that their attractiveness will largely depend on how people are treated now, in terms of when they exit, try to renew contracts, or how and when they receive their end-of-service payment.

To ensure they can source workers with the right skills and experience, firms may need to work closely with GCC governments to allow flexibility in a country’s rigid immigration standards, even if only for the short term.

This will need to be supplemented with attractive and secure employment packages, which may mean that policies such as increased taxes on the back of expatriates will need to be revisited or compensated by firms in other ways.

The labour markets in GCC states will experience major changes from the twin Covid-19 and oil crises. Firms will now need to work hard to offset job losses and attract highly skilled workers to ensure they are in the best possible position to withstand this latest downturn.

Policies designed to facilitate economic diversification, shift workforces away from government jobs and into fast-growing new industries outside of oil and a major overhaul of the educational system will all help to build an adaptable workforce and resilient economy.

The pandemic has brought mounting uncertainty on the real impact to millions of people employed in the oil industry. Government responses therefore need to account for the urgency of the situation while embracing short- and long-term perspectives to support economic recovery, restore balance, learn from failures, seize opportunities, and emerge stronger.