Unprecedented jump in expat remittances sounds alarm bells

A suggestion last month that Saudi Arabia will try to limit how much money expatriate workers send home showed concern about the cost of having foreigners make up nearly a third of the population. An estimated 9 million foreign workers and their dependents remitted SR26.8 billion ($7.1 billion) out of the country in the second quarter of this year, central bank data shows. That amount was equivalent to 17 percent of Saudi Arabia's current account surplus at a time of historically high oil revenues. With the stability of the global financial system threatened by the euro zone debt crisis, and Saudi Arabia keen to use more of its monetary resources domestically under a $130 billion government spending plan announced this year, the outflow of funds may be starting to look uncomfortably large. The Kingdom, which wants to develop its economy to reduce its reliance on oil revenue, also appears to be waking up to the opportunity cost of having so much economic output produced by foreigners, most of whose money is not spent or invested within the Kingdom. “The balance of payment considerations are obviously a risk, and they are a structural risk in that if oil prices come down, they would become a challenge,” said Jarmo Kotilaine, chief economist of National Commercial Bank in Jeddah. “But the Saudi economy has gone through a number of rough patches over the decades without compromising the basic stability of the monetary situation.” He added, “It's not an unmanageable problem, but the issue is the opportunity cost of the remittances. Many residents live here for the pure purpose of making as much money as they can and sending as much of it back home to their families as they can. That money isn't being used to stimulate domestic economic activity.” Expatriates account for nine out of 10 private-sector jobs in Saudi Arabia. They fill roles that range from domestic service and factory work to management positions in large finance companies. The value of their remittances has almost doubled in the past five years from an officially recorded SR15.3 billion in the second quarter of 2006. Three economists told Reuters that the true figures for money outflows were probably much higher because they did not include informal transfers. “In practice, when oil prices are high remittances go up, and when oil prices fall, remittances go down automatically because employment falls and new recruitment falls,” said Khan Zahid, chief economist of Riyad Capital. Labor Minister Adel Fakeih said in an Oct. 22 television interview that the Labor Ministry was “preparing a monitoring program aimed at reducing the huge quantity of transfers of foreign workers.” He did not elaborate, and economists said it would be difficult to develop practical measures to limit remittances, partly because money can be taken out of the Kingdom in many different ways. Most of the money is thought to be remitted by lower-paid workers, most from South and Southeast Asia, who frequently carry cash with them on trips home rather than making formal bank transfers. Higher-paid workers tend to spend more of their income inside Saudi Arabia because they are more likely to bring their families with them, but they often have their salaries paid directly into foreign bank accounts. An even bigger obstacle to controlling remittances is the fact that foreign workers are needed to keep the economy running. Weaning businesses off them is a difficult and long-term task. “Theoretically there is an opportunity cost because when expats do not consume here they are not adding to domestic demand, which is a leakage from the economy,” said Zahid. “But foreign workers are producing more than they consume, making a net contribution to the economy. The only way to avoid this is to have Saudi workers instead of foreigners.” Addressing unemployment among Saudi nationals, which officially stands at 10 percent, is a key goal for Custodian of the Two Holy Mosques King Abdullah in a country where the population is growing more quickly than the government can provide public sector jobs. Around half of Saudis in full-time employment work for the government, central bank data shows, and King Abdullah announced the creation of tens of thousands of new Interior Ministry jobs earlier this year. On Oct. 21, Al-Eqtisadiah newspaper reported that the Kingdom planned to cap the number of long-term foreign workers at a fifth of its total population — a measure which, if implemented, could mean an exodus of several million people. The newspaper quoted an unnamed Labor Ministry source and did not give a time frame or details of how the goal might be reached. Economic reforms over the past decade have aimed at creating jobs by strengthening the private sector, while the government has tried to force companies to employ Saudis in these posts by using a quota system. “Saudi Arabia went through years of ambitious regulatory and institutional reforms which had significant success in accelerating economic growth, yet somehow the job opportunities for Saudis haven't materialized in the way they were supposed to,” Kotilaine said. Earlier this year, the government refined its “Saudisation” program by rewarding companies that employ more Saudis and making it more difficult for those that employ fewer Saudis to gain visas for expatriate workers. Efforts to move local people into the workforce are contradicted, however, by a decision to provide a more generous social safety net in the wake of this year's Arab Spring social unrest elsewhere in the region. In March, King Abdullah announced an unemployment benefit which will start to be paid when the new Islamic year begins at the end of this week. Economists also point to a perception among private companies that a substantial proportion of Saudis are unwilling to work hard, lack the skills to replace foreign workers and are protected by a legal framework that makes them hard to sack. For these reasons, cutting the flow of worker remittances out of the country substantially may be impossible for at least several years. “You can trim remittances and it won't have too much impact on the economy,” said Gamble. “But there are costs to the private sector because they need to train nationals to make them suitable for the positions they would want. It means the transition may well cause some short-term disruption.”