Remittances: What does the future hold?

Expats have flocked to the Arabian Gulf over the past few decades, helping fuel the boom in everything from oil and construction to the start-up scene in tech-savvy Dubai, says Ben Flanagan.

But as the Gulf states tighten the purse strings following the crash in oil prices, the economic implications of having an expat-heavy society have come under the spotlight like never before.

Four of the six Gulf states have majority foreign populations. In Qatar more than 90% of residents are expats – the highest proportion of any country – while overseas workers make up the majority of the populations in the UAE, Kuwait and Bahrain. Even in the more populous Saudi Arabia, 48.3% are immigrants, according to World Bank data.

And when a country has lots of expatriate workers, it stands to reason that more cash will be sent abroad. And so it goes in the Gulf states, most of which are also among the top remittance-sending countries. Saudi Arabia ranks second globally, after only the United States, with residents there sending a whopping $36.9 billion overseas in 2014.

With such massive outflows of cash, and given the decline in oil prices, there is little wonder that some Gulf states are studying ways to limit the impact on the economy. In Saudi Arabia, a tax on remittances has been proposed by the Shura Council, a government advisory body, although not yet enacted. And the UAE has studied the possibility of something similar, it was reported late last year.

George Naufal, a senior research associate at the Public Policy Research Institute (PPRI) at Texas A&M University, has studied the characteristics of expat-heavy economies closely. He is the co-author of “Expats and the Labor Force: The Story of the Gulf Cooperation Council Countries”, which was published by Palgrave Macmillan in 2012.

Here Mr Naufal explained how the economies of the region work – and what changes in the new era of low oil prices.

For the Gulf economies, what historically have been the pros and cons of having high proportions of expat workers?

Foreign workers brought experience that was lacking among the young local population. They also brought knowledge that helped the GCC countries adopt the latest technologies to catch up with other countries in terms of services and infrastructure in a relatively short time. In other terms, foreign workers allowed the Gulf to step on the world stage in a relatively short time. In terms of negatives, the large foreign workers’ presence put pressure on local culture and traditions – there is always a debate among the local population about how to preserve local traditions, etc. It also put pressure on the local labour force in terms of competition – young locals now have to compete with experienced foreign workers. Foreign expatriates send large amounts of money abroad making the Gulf the top sender of remittances in the world. GCC governments have always wondered about ways to keep those sums of money in the local economies – although I have a paper that suggests remittance outflows are not always bad for the local economies in the Gulf – as a way to re-invest the money back inside.

Are the expat-heavy economies of the Gulf sustainable? Do the high remittances mean that it is economically draining and cannot last forever?

The Gulf economies have enjoyed large presence of foreign workers for several decades and with high oil prices it certainly looked like this equilibrium is sustainable. That said, the region has built infrastructure in every country to accommodate larger population than their current local levels which suggests their willingness to have a large presence of foreign workers. However, large populations also place significant pressures on the infrastructure and the environment (water, emissions, buildings, roads, electricity, etc.) which the region has not seen before because historically it was a low-population region due to the harsh weather. At the same time, the local economies are working towards getting the local labour more involved and more experienced to take over some if not most of the jobs through government-sponsored programs (nationalisation) that train and place local labour in jobs. High remittances from the region do drain from sums of money that are badly needed, specifically now, which is why there are serious considerations to impose taxes on remittance outflows.

What policy issues are likely to arise over the next few years as a result of the high expat worker force in the Arabian Gulf?

I am not sure any specific new policies due to the high expat worker force will rise but there will be policies that will take into account budget deficit and perhaps long term low oil revenues. These policies will not necessarily only affect foreign workers. Some will take effect in the near future, such as the VAT tax, linking local gasoline prices to market prices, which already took effect, removing most social welfare giveaways, mainly for locals, and taxing remittance outflows, which is still in discussion but will only affect foreign workers.

Is it likely, from an economic point of view, that the UAE, Kuwait and Qatar will always be expat-majority countries?

Certainly this is going to be the case for the foreseeable future. The GCC countries do not have the capacity to replace all foreign workers and it is going to take decades to first grow as local population and train the local labour force to replace jobs currently held by foreign workers.

Immigration Countries, 2013 – as percentage of overall population

Qatar – 90.8%

United Arab Emirates – 88.5%

American Samoa – 75.7%

Sint Maarten (Dutch part) – 73.8%

Kuwait – 72.1%

Monaco – 64.7%

Virgin Islands – 60.4%

Andorra – 59.4%

Macao SAR, China – 58.7%

Cayman lslands – 57.7%

Jordan – 55.6%

Bahrain – 54.0%

Isle of Man – 51.7%

Channel Islands – 50.9%

Brunei Darussalam – 50.1%

Guam – 48.9%

Saudi Arabia – 48.3%

Northern Mariana Islands – 44.8%

Singapore – 43.0%

Luxembourg – 42.2%

 

SOURCE: The World Bank ‘Migration and Remittances Factbook 2016’

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