A Saudi money exchanger counts Saudi riyals in Riyadh August 4, 2008. (photo by REUTERS/Fahad Shadeed )

Underground Economy Costs Jobs, Security in Saudi Arabia

Author: Al-Hayat (Pan Arab) Posted June 12, 2012

According to experts, the programs that were recently launched by the Saudi Ministry of Labor, including the Nitaqat program, will not be sufficient in eliminating the Kingdom’s underground economy. They said that the Nitaqat program will likely reduce the incoming and the irregular labor forces. The program also aims to better the situation for small and medium-sized enterprises, where underground economic activity is rampant.

SummaryPrint The wealthy kingdom of Saudi Arabia earns billions of dollars per year in gas sales, but it actually loses a lot of domestic revenue due to its rampant underground economy. Several factors contribute to this phenomenon, but the only one who can stop it are the Saudis themselves, writes Saad al-Asmary.
Author Saad al-Asmary Posted June 12, 2012
Translator(s)Sahar Ghoussoub

Two economists told Al-Hayat that Saudi citizens are the key to eradicating the underground economy. They said that the World Bank recently published a study which showed that the Kingdom of Saudi Arabia (KSA) ranked 24th out of 151 countries fighting underground economies.

According to expert Saad Buainian, “The underground economy must be addressed by security authorities, the Ministries of Labor and Commerce, the Saudi Arabian Monetary Agency, the banking sector, the community and the business and finance sectors if we wish to reduce it to 10% or less of output. Eliminating it completely, however, would be a very hard task at this time.

“An underground economy can be defined as all of the activities which generate income that is not accounted for in the gross domestic product (GDP). Such economic activities are concealed in order to evade legal obligations, and sometimes these activities are illegal in some systems.

There are many reasons behind the emergence of an underground economy. The most important factor is administrative and financial corruption, not to mention administrative and bureaucratic complexities, an unfair tax system that does not balance individual and public interest, low wages, rampant unemployment and poor security monitoring. Importantly, the efficiency of anti-corruption forces has declined considerably, banking has poor and scarce supervision and management is spoiled and lazy. All of these factors encourage illegal monopolies and discourage people from permissible and legal activities. Finally, we should mention the broad use of cash transactions rather than electronic banking,” said Buainian.

He added that “the underground economy represents between 20 and 25% of GDP around the world, and it might reach 30% in some countries. In the KSA, a minimum level of the international rate can be applied to judge the size of the country’s illicit economy — meaning around 400 billion Saudi Arabian riyals ($103.6 billion). Estimates of the underground economy in certain countries may not be accurate, but this gives us a rough indication.”

Buainain stressed the importance of official data in accurately determining how big the underground economy is, as well as creating a database for economic crimes, which can help draw an the overall picture of the country’s economic situation. He also warned against the devastating effects of the underground economy, insisting that it is not limited to the economic sector, but that it can also undermine society as well as social, political and economic security.

Underground economies affect state revenues due to the loss of an important part of tax revenue, not to mention the spread of corruption as a result of bribery, concealment of illegal activities and trafficking of contraband. The banking sector is also affected because of money laundering, as well as the distortion of official data and information and widespread unemployment. He also mentioned that resource distribution is directly impacted, and that monetary policy — as well as justice — is adversely affected by inaccurate data caused by underground economic activities.

Former Shura Council member and President of Economic Studies Abdul Aziz Daghestani believes that the programs initiated by the ministry of labor may help regulate the labor market and remittances in the Kingdom, but that they cannot eliminate the underground economy completely. That is, of course, unless Saudi citizens start to understand their role as part of the legitimate labor force. Daghestani stressed that "this type of economy is rampant through the labor that citizens conceal from the government. This has negatively affected the domestic economy. It is an inefficiency in the labor market that has caused Saudis to lose many jobs.”

According to Daghestani, statistics show that legal remittances are estimated at 100 billion riyals ($27 billion). Because these remittances can be sent through illicit channels, however, their volume is probably larger.

Read More: http://www.al-monitor.com/pulse/business/2012/06/saudi-arabia-underground-economy.html

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