Slowdown in flow of remittances
Low oil prices, a stagnant labor market, the nationalization of the workforce, de-risking behaviors by banks, the planned introduction of value-added tax (VAT) in 2018 and the ongoing conflict in the region are all expected to impact the flow of wage earners’ remittances to and from the Gulf and the Middle East, a report by the World Bank said.
“Remittances into the Middle East and North Africa (MENA) are expected to increase by 1.5 percent in 2016, but remittances from GCC countries are expected to decline and, beyond 2016, remittances are expected to pick up only gradually,” the World Bank said in the report.
The bank’s latest statistics show that the flow of remittances to the MENA region is expected to reach $52 billion in 2016, marginally growing from $51.2 billion in 2015. This is expected to reach $53.7 billion in 2017 and $55.4 billion in 2018.
Saudi Arabia was the largest source of remittances in the GCC with $38.78 billion flowing out of the country in 2015, while the UAE experienced an outflow of $19.28 billion in 2014; data for 2015 is yet to be released by the country.
The global remittance flow is expected to reach $585.1 billion in 2016, up from $580.6 billion in 2015. The World Bank estimates this figure to grow to $606.4 billion in 2017 and $628.8 billion in 2018.
Remittances to low- and middle-income countries are expected to increase 0.8 percent to $442 billion. This is expected to grow to $457.3 billion in 2017 and $473.4 billion in 2018.
Although India and China continue to be the world’s top two recipient countries for remittances, their intake has declined. India and China are expected to receive $65.5 billion and $65.2 billion in remittances, respectively, which is way below the peak of the $70 billion mark.
Weak global growth
Amid a backdrop of weak global growth, remittances to developing countries are expected to increase only slightly in 2016, says the World Bank’s latest paper on Migration and Development.
“The modest recovery this year is largely driven by increases in remittances sent to Latin America and the Caribbean. In contrast, other regions are seeing a decline in the earnings sent home by migrants. This follows a decline in the level of remittances recorded in 2015. Low oil prices continued to be a factor in reduced remittance flows from Russia and the Gulf Cooperation Council (GCC) countries. In addition, structural factors have also played a role in dampening remittances growth,” the report said.
“Anti-money-laundering efforts have prompted banks to close down accounts of money transfer operators, diverting activity to informal channels. Policies favoring employment of nationals over migrant workers have discouraged demand for migrant workers in the GCC countries. Also, exchange controls in countries from Nigeria to Venezuela have disrupted the flow of remittances,” it added.
Remittances and migration are closely linked. Remittance flow grows almost proportionately with migration. There are roughly 250 million international migrants and almost three times as many internal migrants. Out of these, there are 21.3 million refugees (including 5.2 million Palestinian refugees). An increase in the number of refugees, on the other hand, affects remittances due to the violent circumstances they are fleeing from.
The current violent situation in Syria and Iraq is partly dampening the natural flow of remittances to and from these two countries, while the scenarios in Libya and Yemen are also not helping the situation.
Weak economic growth in remittance-source countries and cyclical low oil prices have dampened the growth of remittance flows from Russia and the GCC countries.
Dilip Ratha, manager for migration and remittances at the World Bank, told TRENDS that the worldwide growth of remittance flows has moderated, from the double-digit growth of a decade ago to a ‘New Normal’ of low, single-digit growth. Remittances to the region are expected to increase by 1.5 percent in 2016 due to a low-base effect, given the 5.7 percent decline in 2015.
“The moderation in growth of remittances from the GCC countries has been a major contributor to this new normal. Cyclical factors, such as low oil prices and low growth, are, of course, important factors behind these trends. But structural factors that will affect remittance flows for years to come have also emerged, including the labor market ‘nationalization’ policies and fiscal consolidation that might impact public sector salaries,” Ratha said.
He added: “De-risking behavior by major international banks that restrict the correspondent bank accounts of money transfer companies are also impacting flows worldwide as well as flows within the MENA region.
“In addition, some countries, such as Egypt, the regions’ largest remittance recipient, are experiencing exchange rate volatility and the emergence of a black-market premium, [such as that] on the exchange rate of the Egyptian pound. Exchange controls, such as surrender requirements and limits on outward remittances can drive flows underground, which would translate into a lowering of flows through official channels.”
Volatility in the region
The escalating violent conflict in Syria and Iraq will also weigh on the flow of remittances within the region, as the humanitarian and refugee crisis reaches new heights.
“With oil prices not rebounding significantly and a GCC-wide VAT planned for 2018, remittance outflows from the region would remain subdued for some time to come. Remittance inflows into the region from GCC would therefore be modest,” Ratha pointed out. “Growth in the Euro area, from where Maghreb countries (Morocco, Algeria, Tunisia, and Libya) receive most of their remittances, is also expected to remain modest. Consequently, going forward, overall remittance inflows would be subdued.”
Remittances to South Asia – the world’s second-largest remittance-recipient destination – are expected to decline by 2.3 per cent in 2016, following a 1.6 per cent decline in 2015. Remittances from the GCC countries continued to decline due to lower oil prices and labor market ‘nationalization’ policies in Saudi Arabia.
In 2016, remittance flows are expected to decline by five per cent in India and 3.5 per cent in Bangladesh, whereas they are expected to grow by 5.1 per cent in Pakistan and 1.6 per cent in Sri Lanka.
“Remittances continue to be an important component of the global economy, surpassing international aid. However, this ‘New Normal’ of weak growth in remittances could present challenges for millions of families that rely heavily on these flows. This, in turn, can seriously impact the economies of many countries around the world, bringing on a new set of challenges to -economic growth,” said Augusto Lopez-Claros, director of the World Bank’s Global Indicators Group.
GCC countries collectively are the largest source of remittances in the world. It is a growing and well-regulated market. Exchange houses handle the majority of the volumes.
“The economic volatility in the region is majorly attributed to the slump in oil prices, political unrest in certain countries and the strengthening of US dollar against major global currencies,” Y Sudhir Kumar Shetty, the president of UAE Exchange, told TRENDS.
The governments in the GCC are well-prepared to face the challenges ahead, he added, saying: “They [the GCC governments] have diversified their investments, reducing their dependency on oil. They have also streamlined their public spends, strengthening exchequers. Initiatives like FIFA World Cup in Qatar, Expo 2020 in Dubai and various other major infrastructure projects are once again attracting expatriates, mostly from the MENA region and South Asian countries, which could strengthen remittances.”
“So, the coming years will definitely see a high influx of blue-collar workers first, followed by a rising need for skilled professionals from across countries,” Shetty continued. “This will surely trigger remittance flow out of the GCC. The flow might be slow but steady, given the political situation in the region. As mentioned earlier, we shall remain cautious yet optimistic about the future.”
The flow of informal remittances, which was a major issue in the GCC remittance business, had been contained well, with exchange houses offering greater benefits.
The UAE’s Wage Protection Scheme (WPS), which formalized the disbursement of salaries to low-paid workers, also helped contain the flow of Hawala or money transfers through informal channels.
However, the World Bank’s Ratha observed that some recent initiatives by governments and banks are expected to encourage some people to transfer money through informal channels.
“By their very nature, informal remittances are not recorded formally. Therefore, they are difficult to estimate. People turn to informal channels largely because formal remittance channels are often more expensive. Therefore, it is very important to work towards the Sustainable Development Goal (SDG) target of reducing remittance costs to three percent and eliminate corridors above five percent,” he said.
“Unfortunately, de-risking, the closing down of bank accounts of money transfer operators due to anti-money-laundering regulatory risks, and exchange controls introduced in many countries in short-sighted response to balance payments difficulties are leading to increased remittances costs and diversion of flows to informal channels,” Ratha added. “It is important for regulators to recognize that small remittances are not money laundering.”
In the UAE, the Foreign Exchange and Remittances Group (FERG) and its members, along with officials at the country’s Central Bank, are keen to bolster standards to avoid the risk of regulatory violations and have been working hard towards its fulfillment. Similarly, the Central Banks in other GCC countries are also doing their part in curbing the illegal transfer of money.
Adeeb Ahamed, CEO of Lulu International Exchange, said: “We do realize that money laundering and keeping guard against illicit money flows in a region ensnared by sanctions and instability are big challenges for the money transfer industry.” He continued: “Stringent measures need to be taken so that there is an -informed pathway as to how money is transferred from one hand to another. Exchange houses too are taking steps for greater scrutiny on their customers and the money they handle, to tackle the increasing risk for terror-financing and money laundering.”
Meanwhile, UAE Exchange’s Shetty is of the opinion that strong regulations, evolved technology, reduced cost, better exchange rates and great customer service would go a long way in keeping customers loyal to exchange houses and containing the flow of informal remittance.
“The GCC is one of the major remittance hubs in the world. With apt regulations in place, innovative technology and healthy competition among remittance firms, customers will continue to send money home the formal way, as there is little incentive in terms of price and speed to resort to informal channels,” he summed up.