UAE took an unprecedented step by removing oil subsidies for the price of gas one pays at the pump. The subsidies that UAE is removing will amount to a saving of 5.6% of GDP for UAE. Other GCC states might follow, for Saudi Arabia it is a 11.5% of GDP spend and for Qatar 5.5%,
When the price of oil per barrel drops to less than half, oil-rich Middle East countries can no longer afford to subsidize the cost of petrol, as it is puts tremendous strain on its budgets.
Money saved in oil subsidies is money that in the case of UAE, can be spent towards public spending to spur economic activity.
In the recent months and in particularly in the recent weeks, economic reasoning is has been questioned a lot in the Gulf states. There is no doubt that oil subsidy reform will support any country’s growth and allow them to weather low-oil prices drought period, where oil-based income has dropped drastically.
The heydays of US$ 100+ per oil barrel have past us, and GCC states are faced with the real notion that they need to move their economies away from oil based income to other areas to dampen the effect of oil related income.
A recent Reuters poll suggests that all GCC states to post fiscal deficits this year (2015) and that more than half of them will post current account deficits.
Add to this mix, the financial problems in China and Russia and the effects can be seen almost immediately. Chinese and Russian wealth investment in the GCC (particularly for Emirates) has declined significantly.
With problems at home, most investors have sold out or reduced their investment exposures in the middle east. Tourist numbers have also declined (specially for Russians visiting the UAE).
All this can led to a collapse of hotel occupancy and tourist spending. It has also prompted a slow down in the construction and retail services sectors.
Whilst most of the GCC states will be able to weather the downturn, there is increasing pressure to reduce dependency on foreign workers. Previously such dependencies were countered with programs like Saudization (See: Nitaqat law) and Emiratization, where by law, companies had to hire locals instead of foreigners or at a very minimum maintain a ratio of local hires versus foreign.
Economists, businessmen and politicians are all now increasingly upset with large swaths of currency that is repatriated out of their countries as workers remittances.
Since 2007, UAE, Kuwait, Saudi Arabia and Qatar have been debating internally how to reduce workers remittances from leaving their respective economies. Desperate measures have indeed come up with suggestions of levying remittance tax so that the Dirhams or Riyals being sent back home, some of it can be stopped by virtue of tax so that the money stays in the local economy.
How exactly will these taxes be applicable across the board, no one has a clear idea. Many suggestions, but none of them have actually been implemented to see what will work and what will not.
UAE was almost at the verge of implementing the Value Added Tax (VAT) as another indirect tax, but with the recent downturn of oil prices, it has put that idea on the shelf, for now.
The main problem area is the lack of talent or unwillingness of locals to be employed in hard-labor areas such as construction. Then many locals find it beneath themselves to take employment in areas like sewage workers, or road cleaning crew and many other low-lying jobs for which they see foreigners fit for the task, but then don’t like these foreign workers to repatriate their money back home. A double-edge sword.
In 2013 I wrote about this problem: What is the future of workers remittance from the Middle East to countries like Philippines, India, Vietnam, Pakistan, Bangladesh, etc.?
There is no question in my mind, remittances will now start seeing a decline. Countries like India, Pakistan and Bangladesh pride on their every increasing numbers, also need to look at the following:
- The labor force exported to the Middle East countries has not increased with equal pace as the remittances have. So clearly there is something wrong with the numbers.
- The economic activities in these countries have not resulted in a significant increase in wages to the labor force, so this factor can be dispelled as far as increase in remittances are concerned.
- There is a make your money white program that is applicable to all incoming remittances in India, Pakistan, Bangladesh, so a lot of businesses and individuals are utilizing smurfs or money-mules in the Middle East to whiten then money (which is a very valid argument).
The GCC states will now do whatever they can to keep the US$ 100+ Billion a year in their economies, but appeasing the locals and urging them to be part of the workforce. The sewage worker might still be from Bangladesh, but the rest of the jobs, will be converted to the local talent (be it qualified or not).
How long oil remains low, is anyone’s guess, but the GCC is united in saving and retaining every Dollar in their economy, rather than it benefitting the host countries from where the labor force originates.
The next 5-7 years should be a wake up call for countries that rely on remittances. A newer trend in the UAE is for example to let go of Philippine workers as maids etc. and instead to hire African workers for the same. Price differential? 60%-70% less!
African countries like Tanzania, Kenya, Cameroon, Ghana, South Africa, Nigeria, Rwanda, Tunisia, etc. have all started to compete against the workers from South East Asia.
Even a modest saving for Gulf countries by opting for a different nationality for local help, helps!
GCC states are now steering their ships in the direction of savings, it is also time countries in South Asia and South East Asia also look at a 5-10 year policy on how to increase employment in their respective countries and how to handle the reduction in remittances which will eventually follow.
The situation is bound to get politically and economically more ugly, before it gets better.
This page was last updated on September 6, 2015.