Four Insights To Reduce GCC Remittances
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During 2014, GCC countries experienced an outflow of over $100 billion in the form of remittances from expatriates that work in the region. The amount is an estimated 6.2% of GDP, a significant cost compared to the United States (0.7% of GDP) or the United Kingdom (0.8% of GDP). The figure was roughly $50 billion in 2010, implying steady and strong growth in remittances.
There are several factors that contribute to this remittance pattern, as described below:
Home Bias: The majority of Gulf expatriates originate from India, Egypt, Philippines, Bangladesh, Pakistan, Indonesia, Sri Lanka, and Yemen. These countries have a large diaspora population living and earning income off-shore, most often in low paid jobs that require them to leave their families behind in order to save money and support them.
Closed Market: GCC countries have restrictions on what foreigners can own and invest in, which crowds out investment opportunities for expatriates. While some markets such as Dubai 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 factor that attracts expatriates to opportunities here. However, the model that other countries follow (like the US or the UK), 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. The required tax also reduces the savings pot, and thus the money available to remit. Therefore, the absence of tax on income acts as a huge attraction towards remittance in the GCC.
Strict Labor Laws: In the GCC, expatriates are able to legally work for a significant period of time, but cannot claim citizenship. As opposed to the US and UK where the possibility of obtaining citizenship is high, the lack of securing citizenship for expatriates in the GCC encourages them to concentrate their investments back home.
Remittances represent a huge lost opportunity for the GCC countries. While GCC countries enjoy high liquidity, attributable to oil revenues, this state of oil dependency is neither assured nor desirable.
I believe the following are ways in which the GCC can curb the growth and outflow of remittances:
Create Jobs/Reduce Unemployment: The GCC is highly dependent on an expatriate labor force, primarily due to the economy size (requiring large scale labor) and a skill shortage among nationals. The expatriate population comprises 49% of the total population in the GCC; additionally, nationals are highly concentrated in the public sector, often as a result of a wealth distribution process rather than actual job needs. Therefore, there is genuine need to create jobs and enable the nationals to secure and retain those positions. This will reduce local unemployment and shift the balance away from expats in the long term, which may then reduce the remittance flow impact.
Incentivize Domestic Investments: GCC countries can incentivize local investments for expats by launching specialized products that cater to their needs and preferences. This will allow the region to tap into the 25 million expats that reside in the region and maximize investment potential.
Open the Markets: GCC countries can start opening up their markets to foreigners, especially expats. Real estate is a great example of an untapped opportunity. Investment by expatriates should be differentiated from foreign investment, as the former provides a more stable source of investment given the length of time they spend in the region. The toughest obstacle would be reaching out to low-wage workers, who constitute the bulk of remittance. An employer engagement strategy (similar to 401k) can be implemented to tap into this segment.
Improving Hard and Soft Infrastructure: The GCC should strive to improve their infrastructure, including airports, roads, and railways to consistently provide state-of-art lifestyle avenues. This can attract new expat groups that view infrastructure sophistication as important criteria. Areas like healthcare and education should be elevated to best in class, so that expats are motivated to bring and live with their families.
In conclusion, remittances offer a low hanging fruit to GCC governments to implement strategies that can stem and reverse the flow. It is in the long-term interest of GCC countries to reduce at least some of them through proper incentives and investment opportunities.