Image Credit: Ahmed Ramzan/Gulf News archives

Dubai: The decline in oil prices and their impact on economic growth is expected to have a dampening effect on remittances from GCC countries, according to the latest regional economic outlook of the International Monetary Fund (IMF).

The GCC’s economic growth is projected to slow to 3.25 per cent this year, down from the 3.25 per cent registered in 2014. It will further slow to 2.75 per cent next year.

The region’s non-oil growth is projected at just below 4 per cent for both 2015 and 2016, a reduction of 1.75 per cent per cent compared with 2014.

Remittances from the GCC are an important source of income for Egypt, Jordan, Lebanon, Pakistan and Yemen.

The Gulf region is one of the largest sources of migrant remittances in the world. Some 29 million foreign workers sent home more than $100 billion (Dh367.3 billion) in remittances in 2014, about one-third of which was sent to the Mashreq region, Pakistan and Yemen.

These countries are highly dependent on remittances and especially on those from the GCC. For example, Egypt and Jordan receive about 70 per cent of their total remittances from the GCC — equivalent to 5 per cent and 7.5 per cent of their GDPs, respectively.

Following tepid growth during most of the 1990s, remittance flows from the GCC accelerated at the turn of the century, in tandem with a rapid rise in oil prices and non-oil GDP.

Historically, remittances have been much less volatile than oil prices. An analysis of past large oil price declines (in 1986, 1991, 1998, 2001, and 2009) shows that remittance flows to the Mashreq region, Pakistan and Yemen fell only modestly (by 3 per cent on average) following large declines in oil prices and recovered quickly in line with oil prices.

This is mainly because the GCC countries had accumulated large buffers, which allowed them to maintain their fiscal spending, even in periods of temporary declines in oil prices.

Moreover, government spending tends to drive non-oil economic activity in the GCC, particularly construction and services, where demand for migrant workers is high. Based on historical trends, a 1 per cent decline in real non-oil GDP in the GCC is estimated to reduce remittance flows to the Mashreq region, Pakistan and Yemen by 0.5 to 0.75 per cent annually.

Over the near term, the impact is likely to be modest because real non-oil GDP growth is projected to decline only moderately to about 3.8 per cent per year in 2015—16, compared to the 5.9 per cent growth seen in 2012—14.

Over the medium term, the impact will depend on the pace of fiscal adjustment in the GCC in response to the lower oil prices. Faster fiscal adjustment than what is currently envisaged or the introduction of a special tax on remittances, which have been proposed in the GCC, could slow remittance flows further.