The Impact of Workers' Remittances on Macro Indicators:The case of the Gulf Cooperation Council

This paper aims to explore the potential role of the GCC states on their way to recovery, with a special reference to potential impact of remittances on their macroeconomic indicators. In effect, this study attempts to investigate the direction of causality between main macro indicators and remittances, and to identify whether the latter helps or hinders economic recovery of the GCC states. In the past, the economic costs and benefits of expatriates have been rather overlooked in the mainstream economics. However, as remittances have become an increasingly attractive source of external funding for many developing countries, research in this area has now grown a new momentum. As the economic theory suggests, the long run net benefits from the employment of foreign workers is expected to be positive for all parties involved. Remittances generate a number of positive contributions to economic development of the recipient countries by reducing poverty, as well as increasing aggregate investment and promoting growth. Today remittances out of GCC states amount to nearly $35 billion per annum, comparable to FDI flows and significantly larger than ODA. In particular, out of 12 million expatriates living and working in the GCC, nearly 3.5 million come from four Middle Eastern developing economies: Egypt, Jordan, Syria and Yemen. According to the World Bank (2009) figures, Egyptian and Yemeni workers in GCC together have remitted around $5-$7 billion per annum to their respective home countries. Amongst many, a recent study on GCC by Naufal and Termos (2009) on the determinants of remittances has brought to surface a number of issues. In the light of this study and the previous ones, this research uses several macro indicators (real GDP, real money supply, real interest rates, real effective exchange rates, and real remittances) based on a time-series data analysis of the six states of GCC over the period 1990-2010. Our preliminary findings tend to partly support the view that oil prices do cause variations in remittances, and that in turn acts as a decelerating factor on appreciation of local currency. However, there appear to be a one-way causality from remittances to most macro indicators, indicating that GCC macroeconomy tools are not powerful enough to reduce the outflow of remittances. Furthermore, the preliminary results, based on the application of vector autoregressive modelling, tend to indicate that anticipated size of remittances can be deflationary and have no serious effect on economic recovery. However, any unanticipated levels of remittances can reduce money velocity, hence slowing down the process of economic recovery.