Saudi mulls plan to curb $7.1bn in expat remittances

Gulf state waking up to cost of foreigners failing to spend cash within the kingdom
Nearly a third of Saudi Arabias population is comprised of expat workers
By Reuters
Thu 24 Nov 2011 08:13 AM

Saudi Arabia's suggestion last month that it 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 nine million foreign workers and their
dependents remitted SR26.8bn ($7.1bn) 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 $130bn government spending plan announced this
year, the outflow of funds may be starting to look uncomfortably large.

Saudi Arabia, 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, the world's top oil exporter. 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 SR15.3bn in the second quarter of
2006. Three economists said 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.

Labour Minister Adel al-Fakieh said in an Oct 22 television
interview that the Labour Ministry was "preparing a monitoring programme
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.

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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 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, 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 Labour 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 materialised in the way they were supposed to," Kotilaine said.

Earlier this year, the government refined its
"Saudisation" programme by rewarding companies that employ more
Saudis and making it more difficult for those that employ fewer Saudis to gain
visas for expatriate workers.

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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."

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