Saudi Arabia: Country Profile

Background information

History

Saudi Arabia is the birthplace of Islam and home to Islam’s two holiest shrines in Mecca and Medina. The king’s official title is the Custodian of the Two Holy Mosques. The modern Saudi state was founded in 1932 by Abd Al-Aziz bin Abd al-Rahman Al Saud (Ibn Saud) after a 30-year campaign to unify most of the Arabian Peninsula. One of his male descendants rules the country today, as required by the country’s 1992 Basic Law. Following Iraq’s invasion of Kuwait in 1990, Saudi Arabia accepted the Kuwaiti royal family and 400,000 refugees while allowing Western and Arab troops to deploy on its soil for the liberation of Kuwait the following year. The continuing presence of foreign troops on Saudi soil after the liberation of Kuwait became a source of tension between the royal family and the public until all operational US troops left the country in 2003. Major terrorist attacks in May and November 2003 spurred a strong ongoing campaign against domestic terrorism and extremism.

From 2005 to 2015, King Abdallah incrementally modernized the Kingdom. Driven by personal ideology and political pragmatism, he introduced a series of social and economic initiatives, including expanding employment and social opportunities for women, attracting foreign investment, increasing the role of the private sector in the economy, and discouraging businesses from hiring foreign workers. Saudi Arabia saw protests during the 2011 Arab Spring among Shia Muslims in the Eastern Province, who protested primarily against the detention of political prisoners, endemic discrimination, and Bahraini and Saudi Government actions in Bahrain. Riyadh took a cautious but firm approach by arresting some protesters but releasing most of them quickly and by using its state-sponsored clerics to counter political and Islamist activism. In addition, protests were met by a strong police presence, with some arrests, but not the level of bloodshed seen in protests elsewhere in the region.

The government held it’s first-ever elections in 2005 and 2011, when Saudis went to the polls to elect municipal councillors. In December 2015, women were allowed to vote and stand as candidates for the first time in municipal council elections, with 21 women winning seats. King Salman bin Abd al-Aziz Al Saud ascended to the throne in 2015 and placed the first next-generation prince, Muhammad Bin Naif bin Abd al-Aziz Al Saud, in the line of succession as Crown Prince. He designated his son, Muhammad Bin Salman bin Abd al-Aziz Al Saud, as the Deputy Crown Prince. In March 2015, Saudi Arabia led a coalition of 10 countries in a military campaign to restore the government of Yemen, which had been ousted by Huthi forces allied with former president Ali Abdullah al-Salih. The war in Yemen has led to civilian casualties and shortages of basic supplies, which has drawn considerable international criticism. In December 2015, Deputy Crown Prince Muhammad Bin Salman announced Saudi Arabia would lead a 34-nation Islamic Coalition to fight terrorism. In January 2016, Saudi Arabia executed 47 people on charges of terrorism, including Shia Muslim cleric Nimr al-Nimr. Iranian protesters overran Saudi diplomatic facilities in Iran to protest al-NIMR’s execution and the Saudi government responded by cutting off diplomatic ties with Iran.

Economy

Saudi Arabia has an oil-based economy with strong government controls over major economic activities. It possesses about 16% of the world’s proven petroleum reserves, ranks as the largest exporter of petroleum, and plays a leading role in OPEC. The petroleum sector accounts for roughly 87% of budget revenues, 42% of GDP, and 90% of export earnings.

Saudi Arabia is encouraging the growth of the private sector in order to diversify its economy and to employ more Saudi nationals. Over 6 million foreign workers play an important role in the Saudi economy, particularly in the oil and service sectors; at the same time, however, Riyadh is struggling to reduce unemployment among its own nationals. Saudi officials are particularly focused on employing its large youth population, which generally lacks the education and technical skills the private sector needs.

In 2015, the Kingdom incurred a budget deficit estimated at 13% of GDP, and it faces a deficit of $87 billion in 2016, which will be financed by bond sales and drawing down reserves. Although the Kingdom can finance high deficits for several years by drawing down its considerable foreign assets or by borrowing, it has announced plans to cut capital spending in 2016. Some of these plans to cut deficits include introducing a value-added tax and reducing subsidies on electricity, water, and petroleum products. In January 2016, Crown Prince and Deputy Prime Minister Muhammad Bin Salman announced that Saudi Arabia intends to list shares of its state-owned petroleum company, Aramco – another move to increase revenue and outside investment. The government has also looked at privatisation and diversification of the economy more closely in the wake of a diminished oil market. Historically, Saudi Arabia has focused diversification efforts on power generation, telecommunications, natural gas exploration, and petrochemical sectors. More recently, the government has approached investors about expanding the role of the private sector in the healthcare, education and tourism industries. While Saudi Arabia has emphasised their goals of diversification for some time, current low oil prices may force the government to make more drastic changes ahead of their long-run timeline.

GDP (purchasing power parity):
$1.683 trillion (2015 est.)
$1.628 trillion (2014 est.)
$1.571 trillion (2013 est.)
Note: data is in 2015 US dollars
Country comparison to the world: 15
GDP (official exchange rate):
$653.2 billion (2015 est.)
GDP – real growth rate:
3.4% (2015 est.)
3.6% (2014 est.)
2.7% (2013 est.)
Country comparison to the world: 87
GDP – per capita (PPP):
$53,600 (2015 est.)
$52,900 (2014 est.)
$52,400 (2013 est.)
Note: data is in 2015 US dollars
Country comparison to the world: 22

Information courtesy of The CIA World Fact Book.

Employment Issues

Saudi Arabia is currently undergoing a policy of “Saudization.” This Saudization is a national policy aimed at encouraging the employment of Saudi nationals in the private sector, which has historically be largely dominated by expatriate workers. Due to these new policies it has become very difficult to sponsor new work permits for employees coming in from outside the country to work in Saudi Arabia for the first time.

However the Saudi economy is still mainly powered by expatriates, who must have a work and residency permit (Iqama) to work in Saudi Arabia.

Due to the new regulations regarding Saudization, for every 7 work permits a company sponsors, it is now legally required to have at least 3 Saudi Arabian citizens on the payroll. Bear in mind that as there has to be three Saudi employees on the payroll for every 7 other workers on the payroll, the Saudization policy contributes significantly to the cost of doing business in Saudi Arabia.

Compensation for expatriate employees in Saudi Arabia often comprises of base salary plus allowances for housing, transportation, etc. For foreign employers, it may be easiest to negotiate a total compensation package inclusive of these allowances, rather to negotiate all of the various components separately.

Issues to consider when negotiating terms of an employment contract and offer letter with an employee in Saudi Arabia are outlined below:

Public Holidays

Saudi Arabia celebrates two major religious festivals during the Islamic year: Eid Al Fitr and Eid al Adha.
The amount of public holidays granted each year is variable and announced by the government.
• Eid Al-Fitr, which lasts for 3 days, is customarily celebrated for 10 days at the end of the month of Ramadan.
• Eid Al-Adha lasts for 4 days and is also recognized as a 10 day holiday usually extending from the 5th to the 15th day of the month of Thul-Hijja.
• Saudis also observe Unification of the Kingdom Day which always falls on September 23rd.

Bonus payments

It is very common, although not mandatory, for all Muslim employees to receive a 13th month’s salary to mark the Eid Al Fitr public holiday.

Working Hours

Saudis generally work a 40-48 hour week. During Ramadan, the work day is reduced to six hours. Although this reduction in working hours is supposed to apply to all employees some companies only apply this change to Muslim workers.

The weekend is Friday and Saturday in Saudi.

Vacation

The statutory minimum vacation leave is 21 days. From the 6th year of employment onwards, the statutory minimum is increased to 30 days. It is usual, however, for most employers to provide 30 days of vacation from year 1, with senior management typically receiving 40 or more vacation days.

Employers typically pay for air plane tickets for expatriate employees to go home to visit family on their annual leave.

Muslim employees are generally entitled to Hajj (pilgrimage) leave after 2 years of continuous employment. The leave may be up to 10 days and can only be taken once in 5 years with the same employer.

Sick Leave

Employees are generally allowed up to four months of sick leave, if they provide a medical certificate. Sick leave is paid as follows:
• First 30 days: 100%
• 31 to 90 days: 75%
• 91 days to 120 days: unpaid

Maternity/Paternity Leave

Female employees are generally entitled to 10 weeks of paid maternity leave, up to four weeks may be taken before the birth and at least six of the weeks must be taken after. The mother can take an additional one month of unpaid leave.

Fathers are eligible for three days of paid paternity leave.

Termination/Severance

Probation periods of up to 90 days are commonplace but if both the employer and the employee agree the period can be extended an additional 90 days. Probationary periods are, however, not a statutory requirement.
Employees with unlimited contracts are entitled to receive 60 days’ notice. Employees with other contracts are entitled to 30 days’ notice. If appropriate notice is not given, the parties can agree to compensation in place of proper notice. During any notice period, employees may use 8 hours of work time per week to find alternate employment.

When an employment contract ends, an employee is entitled to an “end-of-service award” which is equal to one-half of one month’s wages for each of the first 5 years of employment and a full month’s wages for each year of employment thereafter, pro-rated for any partial year’s service.

Taxes

It is mandatory for employers to pay Saudi social insurance tax (GOSI) on behalf of their employees. The contributions are based on the basic salary, including housing allowances and certain commissions. This usually amounts to around 10% of the employer’s cost.

Employers must pay contributions for occupational hazards insurance at a rate of 2% for both Saudi and non-Saudi employees.

Health Insurance

Medical and hospital care is provided for free through the national system for Saudi citizens only and additional health insurance should be provided to expatriate employees as a benefit. Most executives request supplementary health and life insurance.

Typical Additional Benefits

Some common benefits would include such items as supplementary health insurance, travel tickets home for vacation, education expenses, retirement plans, mobile phones, housing allowances, and transportation costs.

Bottom Line on Benefits

Generally, we recommend budgeting around 23% -27% to cover benefits on top of the gross salary.

Employment Contracts

Be aware that any Saudi national who completes three consecutive fixed term contracts or works continuously for four years for a company will automatically have the right to have their fixed-term contract converted to an unlimited contract.

You are advised to put a strong, written employment contract in place in Saudi Arabia which spells out all the terms of the employee’s compensation, benefits, and termination requirements. An offer letter and employment contract in Saudi Arabia should always state the salary and any compensation amounts in riyal rather than a foreign currency.

Saudi Trade Tariffs

An overview of the trade tariff regime which applies when trading with the Saudi Arabia can be found on the website of the Kingdom of Saudi Arabia Ministry of Finance. There is a great deal of very useful information on this site but we strongly recommend that you take advice on how this information applies in your specific circumstances.

Business Culture in Saudi – top tips

Tip 1
Religion is all pervasive in Saudi Arabia and all aspects of life in Saudi are governed by an absolute belief in the teachings of Islam and an adherence to its tenets. No business deal will ever be discussed without reference to the Almighty and His Prophet Mohammed.

Tip 2
You should try to show to such devoutly held religious beliefs and accommodations made to allow people to observe religious rituals of prayer and fasting.

Tip 3
As all things emanate from the will of Allah, a degree of fatalism and acceptance are inherent in the Saudi character. Things will or will not happen according to the will of God and not because of the actions of man; ‘The meeting will take place tomorrow at nine o’clock – God willing.’

Tip 4
Business structures are usually family-based and all (non-expatriate) senior positions will be filled by family members. Nepotism is the natural order of things and not something that needs to be explained to visitors.

Tip 5
Family controlled businesses tend to lead to the growth of strong hierarchies and you often find that the oldest male relatives are at the head of the organisation.

Tip 6
Age is worthy of respect and visitors should display respect to older people.

Tip 7
Try to find out the organisation map of any company you wish to do business with. Power may not reside with a functional head if that head is not a family member or has poor relationships at the top.

Tip 8
Managers tend towards an authoritative style and lead through direct and precise instructions leaving subordinates little room to show initiative.

Tip 9
Meetings can involve sitting in rooms with multiple unknown people who are meeting your contact at the same time that you are meeting them. In effect, several meetings can take place at the same time.

Tip 10
Initial meetings can be very time-consuming and appear to deliver very little in terms of tangible returns. These meetings are viewed as relationship-building opportunities and it is dangerous to try to rush too quickly towards discussing detailed business issues.

Tip 11
Time is seen as being very flexible and meetings may start very late (if at all) and last for many hours. It is difficult to schedule a series of meetings on the same day.

Tip 12
Teams work well if birth or kinship associates everybody in the team. Teams of strangers rarely gel effectively.

Tip 13
It is important to offer lavish compliments to your host and that you are prepared to receive them in return. Arabic is a language of hyperbole.

Tip 14
Saudis do not like to say ‘no’ or to deliver negative news. It can be very difficult to fully understand exactly how interested people really are in your propositions. Patience and perseverance are essential.

Tip 15
Loud and seemingly aggressive discourse usually denotes engagement and interest – not anger or hostility. Do not be frightened or worried if the noise levels in meetings start to grow.

Tip 16
Levels of eye contact are very strong (same gender) and strong eye contact denotes sincerity and trustworthiness.

Tip 17
Avoid touching anybody with your left hand or pointing feet at people as both of these are seen as inappropriate behaviour.

Tip 18
Do not comment on the political situation in the Middle East or make any adverse comments about the influence of Islam.

Tip 19
Women play little or no active role in business life and it can be very difficult for women to even get a visa to enter the country on business.

Tip 20
Dress conservatively and smartly as you will be judged partly on your appearance.

For a more comprehensive guide to business culture in Saudi please visit here.

The information above is intended as background information only and professional advice should always be taken in advance of making any decisions.