Intra-regional remittances: Our tooth fairy

Florence Eid presents an overview on how remittances to Egypt and the MENA region will fare over the coming year

Remittances are a critical source of income in the Middle East and North Africa (MENA) region. Particularly among oil importers, remittances tend to support investment and private sector activity, boosting the recipient country's external positions. Overall, decreased unrest across the region and the continued expansion in the region's oil exporters should pave the way for increased remittance inflows to the region's oil importers. In fact, Saudi Arabia is one of the world's top 10 employers of expatriate workers, and continued government spending in the kingdom is likely to reflect in increased remittance inflows across the region's oil importers in the short to medium term. In the long term, however, prioritising "Saudisation" could lead to a drop in the amount of expatriates currently representing 60 per cent of the Saudi labour force.

The World Bank places Egypt as one of the world's top 10 recipients of remittances, as inflows defied expectations and remained strong in 2011 and the first half of 2012, despite the slowdown in the global economy and the return of a significant number of workers from Libya.

Latest statistics point to a 36.2 per cent year-on-year (Y/Y) deterioration of the current account deficit in the first three quarters of the fiscal year 2011/2012 to $6.4 billion from $4.7 billion. Remittances over the same period, however, increased by almost 44 per cent to circa $12.8 billion. The receipt of almost $400 million of remittances from workers employed in Iraq in the 1990s in the first half of 2012 helped improve Egypt's deteriorating balance of payment (BoP) position. This is roughly 10 per cent of total remittances in the first quarter of 2012. Second quarter 2012 data is yet to be released. This is part of a recent trend across MENA whereby remittance inflows across the region increased by almost six per cent in the first quarter of 2012, with the majority originating from Gulf Cooperation Council (GCC) countries.

More than half of Egypt's remittances come from Asia, particularly the GCC. Continued increases in social spending as well as infrastructure investments in the GCC should sustain the momentum of remittance inflows to Egypt at least into 2013. Most Egyptian expatriates in the GCC reside in Saudi Arabia, and government expenditure in the kingdom should remain in an expansionary mode at least for the next two fiscal years. The gradual improvement of economic conditions in Libya should re-open the market to Egyptian workers in FY 2012/2013, further boosting inflows.

Our forward projection of data indicates that remittances, along with multilateral assistance, could be vital pillars on which Egypt can rely to provide much-needed relief to its balance of payments position. Preliminary data indicates that FY 2011/2012 saw the highest-ever level of remittances in Egypt; almost double levels seen at the top of the market (2007).

We project forward the average yearly growth of remittances since the financial crisis of 2008 (around 27 per cent) and among the results are remittance inflows above $25 billion for FY 2013/14.

We believe the assumptions are reasonable: upside risks to our remittance forecast include the eventual return of one to 1.5 million Egyptian workers to Libya, and sustained economic activity in the GCC. Downside pressures, including the slowdown in the Eurozone and North America, are less significant, as Europe accounts for less than 15 per cent of remittance inflows for Egypt.

Efforts by various ministries to encourage expatriates to invest in Egypt, and increase their private transfers, should also contribute to this trend. An improvement in remittance inflows could also provide much needed support to international reserves. This could, in turn, help finance Egypt's funding gap, estimated at $12 billion in FY 2012/2013.

Further incentives to boost the inflow of remittances could also have spillover effects on different sectors of the economy. Should remittances be used towards land purchases or the support of small and medium enterprises (SMEs), both investment and infrastructure activity could increase. Though remittance levels are broadly independent of political stability in the recipient country, decreased political uncertainty remains critical if investment-linked inflows are to continue growing in the next two years.

The slowdown in the Eurozone should continue to adversely affect tourism flows and remittances to North Africa, especially in Morocco. In the past two years, roughly half of the country's 800,000 migrants who work in Spain, and a third of those working in Italy, lost their jobs. This could also further the impact on the stock market, as investments by non-resident Moroccans account for around 30 per cent of the market value of the Casablanca Stock Exchange.

In Tunisia, the return of workers from Libya increased the official unemployment rate from 13 per cent in May 2010 to 18.3 per cent in May 2011. Recovery in Libya, however, could see a sizeable proportion of workers returning there, with positive effects on remittance inflows to Tunisia. Though Tunisia has recently granted freedom of movement, employment, ownership and investment to Maghreb nationals (excluding Libya), the decision is unlikely to be reciprocated by Algeria, particularly in the immediate future.

Lebanon is another important recipient of remittances, particularly from GCC countries and North America, averaging almost 20 per cent of GDP, the highest in the region. Remittance inflows defied expectations and remained stable in 2011 at around $7.6 billion according to the World Bank. The balance of payments deficit, on the other hand, expanded to reach $916.1 million over the period January-April 2012 relative to $597.8 million in 2011 -- a 53.2 per cent deterioration Y/Y.

After declining by 5.2 per cent in 2011, the level of remittances in Jordan recovered in the first half of 2012, reaching 978 million Jordanian Dinars (JD) over the period January-May 2012 relative to JD 922.6 million over the same period last year -- a six per cent increase. Decreased unrest across the MENA region (for example in Syria) should contribute to a further improvement in remittance inflows into Jordan, especially those used for real estate investments in the country.

Continued growth and social spending in GCC countries, in Iraq, as well as in Libya should increase remittance inflows to the region's oil importers, especially in North Africa. But political stability in recipient countries will be central to maximising the proportion of such inflows going towards investment activities.

The writer is founder and CEO of Arabia Monitor. The study was co-authored with economists Ayah El-Said and Said Benmehidi.

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