An implicit social contract, guaranteeing public sector jobs for a large proportion of nationals (over 90% in some cases) has been a challenge for decades, particularly in the Gulf states. It has also posed issues in other countries. A recent IMF paper noted that public spending on salaries in the region, which is high relative to peers, does not correlate with good services (in part because performance is not incentivised) and attractive public sector jobs distort the private sector labour market.
High rates of population growth amongst Gulf nationals also mean that the existing system of public employment is steadily becoming less and less fiscally viable for all but the very wealthiest states. It costs nearly a fifth of GDP in some states, double the OECD average. Some states also have underfunded public sector pensions obligations. This has driven efforts to direct new entrants to the workforce towards the private sector, most notably through the “nitaqat” system in Saudi Arabia which has advanced Saudization through a range of incentives for employers. The oil price crash in 2014-16 further encouraged some to begin to consider more radical reforms.
Nationals, share of workforce in public sector (2016)
Source: National statistical agencies, IMF
The National Transformation Strategy, released in June 2016, envisaged cutting back public sector employment by 20% and creating 450,000 new private sector jobs for Saudis by 2020. In October 2016, a range of benefits and bonuses were cancelled.
However, the bonuses and benefits were reinstated in April 2017 and in June 2017 it was announced that employees would be paid back what they missed during the suspension. The reversal in policy was also part of a broader shift away from austerity. The IMF had been recommending a counter-cyclical fiscal policy to support growth (a 1.2% decline in the retail sector GDP in 2016 was likely due in part to the salary cuts) and the government agreed to delay its deadline for balancing the budget from 2019 to 2023. However, public employment reforms have not been fully shelved. In announcing the 2018 budget, the Minister of Finance said the goal now was to cut spending through a hiring freeze and ending automatic annual increases. A team from the World Bank is also contributing to a review of salaries across the whole public sector. This should be supported by a new central payroll system which, when up and running, will enable the Ministry of Finance to get more detailed information on wages, allowances and overtime payments.
The Kuwaiti government also initiated a civil service wage review, in early 2016, and is nearing completion. The IMF estimated that implementation of the reforms will increase spending by about $1bn in the first year, as grades and benefits are unified, but thereafter it could make savings by holding annual increases below inflation, with potential savings equal to 2.3% of GDP by 2022. However, these optimistic forecasts could be held back by Kuwait’s culture of industrial action, which is more common than in other Gulf countries. In 2016, oil workers went on a successful strike over concerns that the salary review would end their guaranteed bonuses and annual increments. Meanwhile, the Civil Service Commission is advancing aggressive strategies to reduce expatriate numbers in the public sector. One initiative is requiring that most administrative roles be filled by Kuwaitis (currently they only fill about 24% of the 109,000 admin roles), which may be facilitated by the completion of a new e-government system, will enable more expat admin roles to be cut and replaced with fewer and more substantive roles for Kuwaitis.
The UAE’s National Agenda 2021 laid out specific KPIs for national employment including boosting the share of the national workforce that is in the private sector to 50% (from just 7%). Although it is differentiated from other states by its clear targets, public sector employment (or employment in government-controlled companies) is still so much more preferable than the private sector that there is little motivation for nationals to move sectors. This is a challenge for companies coming under increasing Emiratisation pressure, for example with new requirements that firms over certain sizes hire Emiratis for roles such as health and safety and data entry.
UAE National Agenda: Emirati employment goals
Sources: National Agenda
A decade ago, the 2008 global financial crisis had also spurred efforts to rethink public sector employment. However, social pressures in the wake of the Arab Spring halted those efforts, supported by a revival of oil prices in 2011-14. There is a real danger that the recent efforts at reform could also be put on hold as oil once again trades around $80. This would be a missed opportunity and, aside from the fiscal costs, it would undermine efforts to grow the private sector, boost productivity and achieve higher levels of national participation.
Middle East Senior Partner, PwC Middle East
Tel: +971 4 304 3100
Middle East Strategy and Markets Leader, PwC Middle East
Tel: +971 4 304 3100
Middle East Chief Economist, PwC Middle East
Tel: +971 4 304 3100