While the fall in global oil prices helped us almost halve the cost of fuel import costs in 2015 it has also been a key reason behind the slowdown in remittances growth. Workers’ remittances in 2015 contracted 0.5% compared to 2014; this is the first time we saw a contraction in remittances inflows since 2001 (-0.4% YOY). The main culprit is weak oil prices.
It is a known fact that foreign remittances are a source of income for thousands of families in Sri Lanka. On top of that, remittances also have a significant macroeconomic value; it is the second largest source of inflows to the Current Account in our Balance of Payments (BoP) after export earnings (goods exports). While export earnings constitute 47% of the inflows to the Current Account, remittances inflows make up 29% of it. This means remittances play a big role in reducing the Current Account deficit (CAD) and a significant slowdown in remittances inflows can have adverse effects on our external balances.
More than 50% of our remittances inflows come from the Middle East (2014 – Middle East: 54%, European Union: 18%) and within the Middle East, Saudi Arabia and Qatar accounts for more than half of our migrant workers (Qatar: 28%, Saudi Arabia: 27%). The economies of these countries depend a lot on revenue generated from oil exports. For instance, oil forms more than 80% of Saudi Arabia’s export revenues and about 90% of its government revenue comes from oil. Persistently low oil prices have put a lot of strain on economic activities of these countries. Saudi Arabia recorded a budget deficit for the first time in several years in 2014 (SAR 65bn) and Qatar is expected to record its first budget deficit this year in a decade (estimated at 4.8% of GDP).
According to the IMF, most migrant workers in countries of the Gulf Corporation Council (GCC – a political and economic union of six Middle Eastern countries consisting of Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman) are employed in non-oil sectors such as construction, wholesale and retail trade and other services. As such non-oil sector performance is the key determinant of remittances outflows of these countries. However, as IMF highlights, the oil industry is a significant driver of the non-oil sector performance.
“In the GCC, non-oil GDP is a key determinant of remittance outflows, while oil GDP is a significant driver of non-oil GDP. Based on historical trends, a 1 percent decline in real non-oil GDP in the GCC is estimated to reduce remittance outflows by ½–¾ percent annually.” – How the Oil Price Decline Might Affect Remittances from GCC, IMF
This is apparent in Saudi Arabia’s case where non-oil GDP has been seeing a slowdown in growth in line with the fall in oil prices – in 3rd quarter of 2015 it slowed down to 3.3% YOY, compared to 6.1% YOY recorded in same period in 2014.
This has led to a general decrease in remittances outflows from oil-producing nations and in turn, countries like Philippines and India have also experienced a slowdown in their remittances inflows growth in recent times.
According to IMF estimates, many of the oil producing countries in the Middle East which are our main sources of remittances require oil prices to be at least above USD 50/barrel to keep their fiscal finances intact. Tightening fiscal finances and falling foreign reserves in these countries have even led to talks of a possible tax on remittances outflows (no confirmations on this as yet).
As such, it will be difficult to see a rebound in remittances inflows if oil prices continue to remain depressed. However, the upside is that according to historical trends remittances tend to rebound quickly in line with a rebound in oil prices. The short-term trajectory of inflows would largely depend on the direction of oil prices among other factors.