World Economy

Mounting Remittances Pressure (P)GCC

Mounting Remittances Pressure (P)GCC
Mounting Remittances Pressure (P)GCC

In a global economy, remittances represent one of the major international flows of financial resources, even exceeding the flows of foreign direct investment in some cases. Further, in the past two decades, the value of worldwide remittances rose considerably, largely driven by the increase in stock of international migrants and the reduction in the cost of money transfers.

A similar trend was observed in the six (Persian) Gulf Cooperation Council (Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain, and Oman), with the region attracting foreign workers, Arabian Business reported.

(P)GCC expats tend to send an overwhelming share of their incomes to home countries since the region has always been their “temporary home” given the stringent citizenship and property ownership requirements coupled with lower interest rates, compared to other Asian economies. As a result, the (P)GCC has emerged as a top remitting region in the world, with more than 18 million foreign workers sending home over $90 billion in remittances.

According to the World Bank, the value of worldwide remittances reached $583 billion in 2014, with more than 15% generated from the (P)GCC region. The total outflow of remittances in the (P)GCC accounts for around 6% of GDP, significantly higher than just 0.3% of GDP in the US, the largest remittance market in the world.

Saudi Arabia is the largest remittance market in the region (and the second largest market in the world), with a total value of remittances exceeding $37 billion, around 5% of the country’s GDP. UAE emerged as the second largest regional market, with remittance valued at $19 billion, followed by Kuwait ($18 billion) and Qatar ($11 billion).

Further, the share of remittances in GDP varies from a low of 5% for Saudi Arabia, UAE and Qatar to a high of over 10% for Oman and Kuwait, thereby reflecting the importance of remittances in overall regional economics.

 CBs Under Pressure

While the receiving countries tend to benefit from inward remittances in terms of economic growth and increased money supply, the impact on sending economies is rather gloomy, especially in the (P)GCC scenario wherein the outward remittances account for a considerable share of the region’s GDP.

Export of billions of dollars every year distorts the exchange rate market, thereby exerting additional pressure on (P)GCC central banks to keep high foreign reserves in order to maintain the dollar-peg.

Similarly, the growing size of remittances adds downward pressure on the fiscal policy and overall investments in the region as government spending has to be relatively higher to compensate for the remittances and the money generated by regional businesses that is not recycled domestically.