The outlook for SMEs in Saudi Arabia

The introduction of the expat levy to push up the costs of doing business…

On my recent trip to the Kingdom of Saudi Arabia I took the opportunity to get some first hand feedback on how the economy is fairing in 1Q 2017. The graph below taken from the monthly Saudi Arabian Monetary Agency (SAMA) statistics shows how the volumes of Import Letters of Credit have declined from  SAR 53,000 Million in Q1, 2015 to SAR 33,000 Million in 4 Q 2016. Sales of construction equipment are down by 70-80% year on year leaving vendors with huge inventories and associated stock holding costs. Dealers have to look to other markets in nearby North Africa for example to lighten their stocks and in some cases will take a hair cut simply to get it off their books. Cancellation and delay in government contracts  have impacted small contractors who face long payment delays and often have little choice but to return equipment taken on lease to the Finance companies which is causing a glut in second hand equipment.

So the outlook for SMEs in 2017 is very uncertain and they face headwinds on a number of fronts:

  • • The fall in oil prices and significant cut backs in Government spending has produced a  decline in economic activity which is impacting the whole economy
  • • There is increased pressure to find jobs for the local population, Saudisation,  which has the effect of increasing labour costs for local businesses.
  • • Reduction in government subsidies leading to an increase in input costs for electricity and fuel
  • • Implementation of VAT which is proposed for 1 Q 2018, will impact SMEs through increased IT costs etc
  • • Reduced consumption due to the removal of allowances from public sector employees resulting in salary cuts.

These effects are seen in the real economy  with automotive sales down 50% in 2016 and 10-15% already in 1 Q 2017.

Later this year will see the introduction of the new “expat levy”, which will further increase the costs of doing business for all firms.  From July onwards expats with their dependents are expected to pay an unprecedented monthly fee. The Ievy is expected to increase until it reaches SR400 per month per dependent by 2020 as shown in the table below:

Coming years Dependents of expat Number of foreign employees ≤ Saudis Number of foreign employees ≥ Saudis
2018 SR200 SR300 SR400
2019 SR300 SR500 SR600
2020 SR400 SR600 SR700

Companies currently pay a levy of SR200 per month only for expat employees that exceed the number of Saudi employees. In previous years Saudi Arabia’s Council of Ministers has announced that it will provide a partial exemption to small and medium enterprises on the annual fees charged for employing expats. As from July 2017, no exemption is available for firms from the expat levy. This takes a toll on SMEs especially with the rising expenses and the ongoing dependency on expat expertise to run their businesses. The effects will be felt by low to middle income expatriates and many  are considering leaving and others will send their families home to minimize their own housing and living costs.

Thus SMEs face a challenging year ahead in 2017.