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Wednesday, May 25, 2016
- The steep fall in global oil prices has hit Gulf economies severely. Saudi Arabia, United Arab Emirates (UAE), Qatar, Bahrain are expected to run huge budget deficits as shrinking revenues from selling cheaper oil cannot fund their mounting expenditures. As they tighten their belts, the brunt of adjustment will be felt by migrants, who constitute the bulk of the labour force. Reforms include cutting fuel, power, water, education subsidies and a value-added tax (VAT). This will affect migrants and reports indicate family members are returning home.
As oil prices are likely to remain depressed — as global markets “drown in oversupply”, to borrow an expression of the International Energy Agency — the Gulf economies are looking to a future beyond oil. Saudi Arabia, for instance, is looking to diversify into mining and subsidy reforms. In an interview to The Economist, Muhammad bin Salman, Saudi Arabia’s deputy crown prince and defence minister stated “there were unutilised assets: expanding religious tourism, like increasing the numbers of tourists and pilgrims to Mecca and Medina will give more value to state-owned lands in both cities”.
Other Gulf economies are thinking on similar lines. Among other options, UAE is investing big time into the India growth story. The crown prince of Abu Dhabi and deputy supreme commander of the UAE armed forces, Sheikh Zayed Bin Sultan Al Nayan made a three day- visit to India in February and inked many agreements including investing in the country’s infrastructure, energy and aviation. India intends to tap investments of nearly $75 billion from the sovereign wealth fund of this Gulf economy, besides intensifying greater cooperation on the security front.
However, the crash in oil prices is not the only challenge confronting the Gulf. At an IISS Bahrain Bay Forum meeting last November, Bahrain’s minister for industry, commerce and tourism, Zayed Al Zayani stated that economic disorder and lack of opportunity are contributing to instability in the region. He emphasised the need for “unprecedented” economic reform across the Gulf in the wake of the lower oil revenues. These policies include the generation of millions of jobs for the youth in these economies that continue to depend heavily on expatriate labour from India, Pakistan, Bangladesh and Philippines.
All of this is not good news for expatriate workers in the Gulf. The steep increase in fuel and utility charges will hit their living standards. For instance, Qatar doubled these charges in September 2015. Saudi Arabia and Oman cut subsidies in December 2015. Saudi Arabia is thinking of a VAT by end-2016. In Bahrain, the expatriate workers also face the gradual loss of subsidies. These reforms in question also include replacing expatriate with local workers — Saudi Arabia, for instance, might soon start with the 10 million jobs being occupied by non-Saudi employees.
For such reasons, migration to the Gulf is at an inflexion point. In an earlier period, when oil prices were high and rising, these economies had booming revenues to build airports, highways and ports. Since the 1970s, those who constructed such infrastructure are the 16-odd million migrants from South Asian countries like India, Pakistan, Bangladesh, Nepal and Sri Lanka. As this oil-financed construction boom is over, there is less need for unskilled expatriates. As noted earlier, the Gulf economies now have the compulsion to employ their own young and increasingly educated work force.
There is thus a troubling shadow over the sustainability of private transfers or remittances to South Asian economies. In Nepal, remittances from all sources constitute 30 per cent of GDP. The consequence of return migration thus is bound to be serious for the Himalayan kingdom’s external profile. In Sri Lanka and Bangladesh, remittances are equally important amounting to 9.4 per cent of GDP and 8.6 per cent of GDP respectively according to the World Bank. In India, the share is less at 3.4 per cent of GDP but the problem will be serious in states like Kerala that is the ground zero for Gulf emigration.
Research has established that remittances augment savings and investments of recipient households and help in poverty reduction. If such inflows reduce over the near-term, they would worsen these distributional outcomes. While remittances contribute to better economic performance, they are also a source of output shocks when they turn volatile – see a discussion paper on the effect of remittances for 24 Asia/ Pacific economies by Katsushi S Imai, Raghav Gaiha, Abdilahi Ali and Nidhi Kaicker for the Asia-Pacific Division of the International Fund for Agricultural Development.
In this context, Kerala’s experience is relevant since it vitally depends on private transfers, which amount to one-thirds of its net state domestic product. The Thiruvananthapuram-based Centre for Development Studies (CDS) has been doing pioneering work on emigration and the impact of remittances on Kerala’s economy. CDS has, in fact, completed six large-scale surveys on migration — in 1998, 2003, 2007, 2008, 2011 and 2014. These surveys point to a decreasing trend in emigration from Kerala, bulk of which is to the Gulf economies. The era of large scale emigration is over.
If more South Asian expatriates return home, there is bound to be an adverse impact on the labour market. The rate of joblessness would spike upwards. With questions as to how long the good times will last on the remittances front, there is bound to be an adverse impact on South Asian economies. With less remittances inflows, they would register higher current account deficits, which is the broadest measure of the trade imbalance in goods and services with the rest of the world. Lower remittances, in turn, would lower per capita income, all of which contribute to social tensions. The challenge for policy is to cope with such inflows becoming less important in the region.