In a global economy, remittances represent one the of the major international flows of financial resources, even exceeding the flows of foreign direct investment (FDI) 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 GCC, with the region attracting foreign workers. 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 GCC has emerged as a top remitting region in the world, with more than 18 million foreign workers sending home over $90 billion (Dh330.3 billion) in remittances.
According to the world bank, the value of worldwide remittances reached $583 billion in 2014, with more than 15 per cent generated from the GCC region. The total outflow of remittances in the GCC accounts for around 6 per cent of GDP, significantly higher than just 0.3 per cent 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 per cent 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 per cent for Saudi Arabia, UAE and Qatar to a high of over 10 per cent for Oman and Kuwait, thereby reflecting the importance of remittances in overall regional economics.
GCC central banks
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 GCC scenario wherein the outward remittances account for a considerable share of the region’s GDP. Export of billions of dollar every year distorts the exchange rate market, thereby exerting additional pressure on 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.
Although the impact of remittances is not new for the GCC, it has become more apparent in the last couple of years as the region is reeling through a challenging period amid lower oil prices and burgeoning budget deficits. Consequently, remittance outflows have become part of government debate and reform agenda, with several regional governments tendering with the idea of introducing taxes on remittances. While the impact of such legislative reforms is hard to quantify at this stage, theoretically it can partially offset budget deficits and discourage remittance outflows. On the other hand, the introduction of such tax can have significant ramifications on labour supply, resulting in loss of competitiveness in the international market. Further, it may also influence the relocation decision of foreign workers, especially at a time when regional governments have ambitious infrastructure development plans in the pipeline.
Remittance taxes
According to industry estimates, around 60 per cent of the GCC remittance market is controlled by the traditional exchange houses, while the remaining 40 per cent is managed by banks and unofficial channels. Most regional banks have dedicated remittance divisions and have also formed partnerships with mobile operators and other leading international banks to remain competitive in this segment. However, introduction of remittance taxes will impact both the traditional exchange houses and banks due to the increased burden on customers. Moreover, this is likely to encourage unofficial channels of mobilising money, which had become non-existence or less significant since the advancements in payment channels. Such unofficial money transfers not only raise serious security and policy concerns for GCC countries but can also derail efforts by local governments to constructively examine remittance effects in the medium to long term.
The GCC has taken a proactive approach in implementing reforms ranging from removal of gasoline subsidies to imposing indirect taxes to balance their budgets in the medium to long term. However, the remittance tax policy may face structural challenges due to its possible ramifications on labour markets, security and diplomatic relations in the long term. Moreover, the region might also risk its competitiveness in the international markets and challenges the status of being a tax free region, something that has attracted millions of foreign skilled workers in the past. Therefore, GCC governments will need to consider the timing, manner and magnitude of such policy, not only to avoid or minimise distorting the local labour market, but also to maintain market competitiveness and attractiveness of the region.
--Shailesh Dash, Founder and CEO, Al Masah Capital
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