Kuwait and Oman are considering a tax on remittance outflows to stem what they view as leakage from their economies and to generate revenue.
Though the idea is enticing and could – assuming a flat-rate remittance tax of 10 per cent – add US$10 billion to the non-oil income of the GCC region on an aggregate basis, the introduction of such as tax has more downsides, in my opinion.
Transfer of money by foreign workers to their home countries represents a significant financial outflow from GCC countries. The World Bank estimates that more than $100bn left the GCC last year in the form of remittances from the millions of expatriates who work there. This represents 7.7 per cent of the countries’ combined GDP, a significant number compared with the United States, where remittances account for 0.7 per cent of GDP, or the United Kingdom, at 0.9 per cent.
A simple reason for this high value of remittance outflow could be the lack of investment opportunities, especially in property and stocks, for foreigners. While the stock markets of the UAE and Qatar have opened up for foreigners, most of them are still out of bounds for foreign retail investors. This lack of opportunity to invest coupled with a lack of taxes only serve to make workers cash-rich and increase the incentive for them to remit and instead make investments in their home countries.
Most of the 25 million expatriates in the Gulf region originate from countries such as India, Egypt, the Philippines, Bangladesh, Pakistan, Indonesia, Sri Lanka and Yemen. Typically they work as drivers, cooks, construction labourers, security guards and in other low-skill jobs. In the short term, the introduction of taxes would reduce the incentive to send remittances by migrant workers and may achieve the desired purpose.
At the same time, the introduction of remittance taxes could drive people to avoid official channels of remittances such as banks. They could instead prefer to remit through friends, relatives or colleagues who are travelling. The chance of people resorting to black-market remittance channels would also increase.
In the long term, the reduced opportunity to send money back home could dissipate the attractiveness of GCC labour markets for Asian workers. This could have significant implications.
The GCC economic model is based on foreign workers, especially semi-skilled and low-skilled labour. Expatriates account for more than 50 per cent of the labour force in most of the GCC countries. In Qatar, where large-scale infrastructure projects are under way, the expatriate workforce is as high as 85 per cent of the total labour market.
Disincentivising such a large component of the economy may impose long-term costs that can far outweigh the short-term benefits.
Thus, the remittance tax at best is largely cost-elastic and its introduction would be regressive for the economy. Studies that have been done on remittance outflow in the region portray it to be advantageous for Gulf, acting as a significant deflationary force – first, by keeping consumer demand in check, as expatriate labourers often lead a frugal life to increase their remittances and, second, by providing a constant influx of low-wage expatriates.
In this context, the socio-economic impact of introducing a remittance tax could be better researched before arriving at a decision.
If, however, remittances are still viewed as leaks in the economy, governments should introduce measures – such as incentivising domestic investments, opening up the economy and market for foreigners and increased opportunities to get families together – that would decrease the desire to remit in the first place.
MR Raghu is the managing director of Marmore Mena Intelligence, a research house focused on conducting Mena-specific business, economic and capital market research.
Follow The National’s Business section on Twitter