During 2014, GCC countries experienced an outflow of over $100 billion (Dh367 billion) in the form of remittances from expatriates who work in the region. That is an estimated 6.2% of GDP, a significant cost compared to say US (0.7% of GDP) or UK (0.8% of GDP). The figure was roughly $50 billion in 2010 implying steady and strong growth in remittances.
There are several factors contributing to this remittance pattern, some of which are explained below.
Home Bias: Gulf expatriates mostly come from India, Egypt, Philippines, Bangladesh, Pakistan, Indonesia, Sri Lanka, and Yemen. These countries have a large diaspora population living and earning overseas. Most of them engage in low paid jobs and leave their families behind in order to save more and support them. Closed Market: GCC countries have restrictions on what foreigners can own and invest and this, crowds-out investment opportunities for expatriates. While some markets like Dubai and Bahrain have opened up for foreigners, most of them are still out of bounds.
Absence of Tax: GCC countries charge no income tax on salaries paid to expatriates, which is a huge draw for them to look for opportunities here. However, the model which other countries — such as the United States or the United Kingdom — follow, where the local population is taxed as well as provided with social security actually increases the “engagement quotient” and motivates them to invest in local markets. Also, the tax reduces the savings pot and hence the money available to remit. Hence, the absence of tax on income acts as a huge attraction towards remittance in the GCC.
Strict Labour Laws: In the GCC, expatriates can work for a significant period of time but cannot claim citizenship. Unlike the US or the UK, where the possibility of obtaining citizenship is high, the lack of such an option encourages people who work in the GCC to concentrate their investments back home.
Despite the above reasons, the fact remains that remittances pose a huge lost opportunity for the GCC countries. While GCC countries enjoy high liquidity, thanks to oil, this state of oil dependency is neither assured nor desirable. I can think of the following options to stem the growth and outflow of remittances:
Create jobs/Reduce Unemployment: The GCC is highly dependent on the expatriate labour force primarily due to the size of the economy (requiring large scale labour) and the skills shortage among nationals. Employing nationals in the public sector primarily happens as a wealth distribution process rather than actual job need. Hence, there is genuine need to create jobs and enable the nationals who are “job ready” to take up those positions. This will reduce local unemployment and shift the balance away from expatriates over time which may then reduce the remittance flow impact.
Incentivise Domestic Investments: GCC countries can incentivise local investments for expatriates by launching specialised products which cater to their needs and taste. Open up markets: GCC countries can look to opening up their markets to foreigners; especially expatriates. Real estate is a great example of an untapped opportunity set and investment by expatriates should be differentiated from foreign investment as the former provides a more stable source of investment given the length of time this demographic group tends to spend in the region.
Improving Hard and Soft Infrastructure: Countries in the GCC region should strive to improve their infrastructure including airports, roads and railways in order to draw new expatriate groups who interpret sophisticated infrastructures as signs of a healthy economy, which provides fit-for-purpose services to the public. In addition, the provision of excellent health care and education should be a priority so that expatriates are motivated to bring their families and live with them locally. This will certainly increase spending and consumption in the local economies within the GCC and thereby reduce remittance.
In conclusion, remittances offer low-hanging fruit to GCC governments to implement strategies that can stem and reverse the flow. Technically the US ranks as the number one country in terms of net outflow of remittance ($124 billion), when measured from a GDP impact point of view, it is negligible. Hence, the next in line is Saudi Arabia which is the country with the largest outflow on account of remittance at $44 billion (6% of GDP), while India is the top recipient of net inflows at $62 billion (3% of GDP). It is in the long-term interest of GCC countries to retain at least some of the remittances through proper incentives and investment opportunities.
The writer is a founding Member of CFA Society Bahrain and CFA Society Kuwait