Remittance flow remains strong

Dubai: When the global financial crisis hit, one of the first things that was initially affected was the flow of remittances.

Remittance flows to developing countries reached $316 billion (Dh1.1 trillion) in 2009, a six per cent decrease from $336 billion in 2008, according to a World Bank report, "Migration and Development Brief", published in April.

As the economy started to pick up, remittance flows to developing countries went up again. A 6.2 per cent increase was expected in 2010 and 7.1 per cent in 2011, the report stated.

"What is unique about this crisis is that for the first time we saw the remittances decline because the slowdown happened in most of the countries from which remittances were sent," Ralph Chami, Chief Regional Studies Division, Middle East and Central Asia Department at the International Monetary Fund in Washington DC told Gulf News.

"So there was a drop in the dollar amount sent to remittance-dependent countries," he said.

Chami explained that there were two main factors that determined the behaviour of remittances: a migrant's own income and the welfare of his/her family. If your income went up, then you sent more money to your family. If your family's income dropped, you sent them more money, he said.

Continued growth

The state of the six Gulf Cooperation Council (GCC) countries has been different compared to other parts of the world. Research has shown that the flow of remittances from workers in the GCC continued to grow in the past couple of years.

"The volume of remittances [from the GCC] is large and it's only increasing and not decreasing because the linkages between the countries are strengthened," Chami said.

"And this links the economies of the countries in Mena [Middle East and North Africa] even more."

According to a recent article published by the Oxford Analytica, the total remittance outflow in the GCC countries was around $30 billion in 2007, which rose to $40 billion in 2008.

Remittances from countries such as Saudi Arabia continued to remain resilient because the governments had "reacted to the crisis by actually spending more," Chami said.

"The governments were prudent, acted on time, maintained their spending and government projects remained in the works and were not scrapped." It's what experts called a counter cyclical fiscal measure, he said.

In turn, this measure has worked well for countries such as Lebanon, Jordan and Syria which continued to see the remittances come in.

In the Gulf, "Saudi Arabia would be the number one for remittance outflow," Chami said. "In terms of remittances, it's the largest remittance-sending economy in the GCC followed by the UAE."

In order to see how large they are relative to the local economy, experts look at it as a percentage of GDP.

"Earnings sent abroad by foreign workers in Saudi Arabia equalled four per cent of Saudi GDP in 2008 while for UAE, Kuwait and Qatar they were estimated to be nine billion, five billion and five billion dollars respectively, with comparable shares in domestic GDPs," the article by Oxford Analytica stated.

Misunderstanding

Jamal Zarrouk, Chief of Research and Studies Division at the Arab Monetary Fund in Abu Dhabi told Gulf News that there is a "misunderstanding" that remittances have a negative impact on the countries from which they are sent.

"The workers provide services and an output and contribute to the economy," he said. "That doesn't really show the service that they are providing against the money that goes out of the country."

Zarrouk said the GCC countries relied on these workers and benefited from their service as they also helped build the economy.

"As per the World Bank data, remittances flows from the GCC countries accounted for 80 to 90 per cent of the total remittances inflows to the Philippines, 84 per cent for Jordan, 63 per cent for Bangladesh, 52 per cent for Pakistan, 52 per cent for Egypt also and 35 per cent for India," Zarrouk said.

In terms of magnitude, Zarrouk explained that remittances had a very important development factor for the recipient countries. They were used to help "education, construction and real estate," he said. "They are shock- absorbent."

For instance, Jordan is a big recipient of remittances in the Middle East. Around 75 per cent of its remittances came from the GCC, Chami said.

According to Chami's latest research, in 2009, remittances to Jordan were 12 per cent of the country's GDP. For Lebanon, they were nine per cent and for Egypt they were four per cent.

Transaction volume

Keeping in mind that remittances flowed through official and non-official channels, in reality the volume of these transactions could sometimes be double what is reported.

According to data provided by UAE Exchange, a money transfer agent, UAE market volume in 2009 to India was around $6.1 billion, to Bangladesh around $1,755 million, to Pakistan around $1,689 million and to the Philippines $645 million.

"Despite the economic slowdown in certain sectors, such as construction and real estate, flow of remittance has remained resilient as increase in employment in other sectors has offset the decline in remittances sent by construction labourers," said Y. Sudhir Kumar Shetty, Chief Operating Officer for the Global Operations of UAE Exchange,

On an individual level, they had a positive impact, Chami said. "

Suddenly you have more money than you earn, your income goes up and poverty is alleviated. People will use this money for medical services, education, increase their consumption of food, etc," he said.

On the macro-economic level, an increase of consumption increases a country's tax revenue. Therefore, the governments benefit from it indirectly, Chami explained.

"It's a boon for the government from that perspective. That's interesting because we didn't know about that before. We knew on an individual level what it did but at the macro level we didn't know how governments are affected by these flows."

However, governments have been trying to attract these remittances to remain and be invested in the countries, Zarrouk said.

For a better life

"Remittances are transfers among family members, so for the most part they go to help out families back home," said Ralph Chami, Chief Regional Studies Division, Middle East and Central Asia Department at the International Monetary Fund in Washington, DC. "They're not profit driven."

Chami said that remittances were not, as many considered them to be, capital flows. "When I send money home it goes directly to my mum's purse," he said. "It's not an investment project."

In the Middle East and North Africa, the money flowed from the GCC to the neighbouring oil-importing countries, he said. "In the past, people didn't use to pay much attention to them because there wasn't a lot of statistics on them." However, in the past decade, migrants from labour surplus countries were sending money back to their home countries especially from the Middle East.

For example, if there was a war or a natural disaster, remittances into the affected countries increased, but capital flows decreased or reversed, he said.

While remittances mean a better life for those who receive them, it doesn't have an effect on economic growth in the long run, Chami said. Remittances created a buffer. "It's like insurance - a social insurance. Remittances behave in a similar manner. They insure remittance-recipients against adverse shocks."

However, he said: "Some argue that these flows allow governments to put off providing public services". By having families that received remittances buy their own insurance, medical attention and education, there w as less pressure on the government to provide these public services.

In this respect, remittances were not the answer to all financial issues. "They may have some effect in decreasing the incentive for governments to offer public goods," he said.

What portion of your monthly income do you send home? Have you started sending more home following the uncertain financial climate?

Gulf News