Saudi Arabia's plan to limit foreign worker visas in an effort to boost local employment will have negative effects on the economy and could lead to higher inflation, according to Citi's Middle East chief economist.

Companies in the world's top oil exporter have until September 7 to achieve a prescribed quota of Saudi employees, under a new program announced by the labour minister on Tuesday.

Business will be deprived of privileges if they do not comply, the minister said.

'There is the possibility that many private sector companies will be shut down as a result of strict implementation ... their possible failure would be likely to have an impact on economic growth, as the private sector goes through an adjustment period,' Farouk Soussa said in a research note.

In 1994, Saudi Arabia began a 'Saudisation' plan, setting quotas for the number of nationals private firms must hire. Despite that, Saudis account for just 10 percent of the private sector work force.

Companies tend to hire workers from Asia, who, they say, are prepared to work for long hours on low salaries, or well-paid foreign experts.

The new program may also lead to higher inflation as businesses try to attract Saudis to jobs which they tend to refuse, by offering them higher wages than they would offer foreign labourers.

'This will raise the cost base of doing business in Saudi Arabia, eroding local corporate competitiveness and raising domestic inflation,' Citi said.   

Some eight million foreign workers, who remit $27 billion per year, live in the kingdom, with the majority working in the private sector.

Netaqat, meaning categories in Arabic, was launched earlier in May and classifies firms by green, yellow and red colours according to how they fulfil 'Saudisation' rules. It also sets penalties for non-compliance. - Reuters