Determinants of remittance outflows: The case of Saudi Arabia

• Published date: 01 December 2023
• Author: Muhammad Javid,Fakhri J. Hasanov
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/opec.12291

320

|

OPEC Energy Rev. 2023;47:320–335.wileyonlinelibrary.com/journal/opec

1

|

INTRODUCTION

For decades, migrant labour has been a key part of Saudi Arabia's economic activity. The oil boom of the 1970s cre-

ated great opportunities for the Kingdom. Driven by substantial revenues from oil exports, Saudi Arabia's economy has

changed dramatically over the last six decades. Since the early 1970s, Saudi Arabia has designed targeted development

plans to boost economic growth and sustainable development. The private sector's economic activity has been closely

linked to the country's overall development path since adopting the first development plan (1970– 1974). A sharp in-

crease in government spending began to shape the modern, emerging private sector. This spending has boosted the coun-

try's industry, agriculture, health care, education, transportation and hard infrastructure (Al- Rushaid,2010; Cappelen &

Choudhury,2007).

During this period, high oil revenues positively impacted Saudi Arabia's economic growth and strengthened its mac-

roeconomic position. They laid the foundation for a prosperous economy. Migrant workers have remained an integral

part of the Saudi economy since the 1970s. The share of migrants in Saudi Arabia's total population increased from 11%

in 1974 to 38% in 2018 (SAMA,2020). In addition, the share of migrant workers in the Kingdom's total employment

reached 53.6% in 2021 (GASTAT,2021). The increase in the external labour force has, in turn, led to an increase in fi-

nancial flows from Saudi Arabia. The remittance outflows from Saudi Arabia grew 152 times from $0.268 billion in 1972

DOI: 10.1111/opec.12291

ORIGINAL ARTICLE

Determinants of remittance outflows: The case of Saudi

Arabia

MuhammadJavid

|

Fakhri J.Hasanov

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided

the original work is properly cited.

© 2023 The Authors. OPEC Energy Review published by John Wiley & Sons Ltd on behalf of Organization of the Petroleum Exporting Countries.

King Abdullah Petroleum Studies and

Research Center (KAPSARC), Riyadh,

Saudi Arabia

Correspondence

Muhammad Javid, King Abdullah

Petroleum Studies and Research Center

(KAPSARC), Airport Road, P.O. Box

88550, Riyadh 11672, Saudi Arabia.

Email: muhammad.javid@kapsarc.org

Abstract

The Saudi Arabian economy heavily uses foreign labour and hence, ranks among

the top countries not only in the Gulf Cooperation Council region, but also glob-

ally in terms of remittance outflows. This study develops a theoretical model to

investigate the determinants of remittance outflows from Saudi Arabia. The coin-

tegration and equilibrium correction methods, and adjustments for small sample

bias, are applied to the data for 1970- 2021 using the theoretical model developed.

In the long run, keeping other factors unchanged, Saudi Arabia's gross domes-

tic and non- Saudi employment have positive and statistically significant impacts

on the remittance outflows, while the impacts of the price level and expatriate

levy are negative and statically significant. This study's findings may be useful for

macroeconomic policymaking, as the remittance outflows have numerous impli-

cations for the development of the Saudi economy. Particularly, remittances are

a primary channel for leaking money from Saudi Arabia, reducing the economic

growth effects of fiscal spending multipliers.

|

321

REMITTANCE OUTFLOWS AND SAUDI ARABIA

to $40.74 billion in 2021. These substantial remittance outflows have led to concern among policymakers regarding its

macroeconomic effects on the Saudi economy. Some analysts have explicitly argued that remittance outflows slow eco-

nomic growth and negatively impact the balance of payments (Ghosh,2006). The remittance outflows have a negative

relationship with domestic consumption and saving, and a reduction in saving, in turn, decreases investment (Al-Abri

et al.,2018). The remittance outflows lead to leakages of money from the Kingdom and a low propensity for consump-

tion among migrant workers. As a result, the public spending multiplier, which reflects the ability of public spending to

stimulate economic activity, is smaller (Al- Abri et al.,2018).

To reduce the dependency on foreign labour and increase employment opportunities for Saudis, the government of

Saudi Arabia has shifted its policy regarding migrant workers. Since the launch of the Saudi Vision 2030 master plan in

2016, the government has steadily taken steps to diversify its economy away from oil. In this regard, reforms and initia-

tives have been introduced to promote the employment of Saudi workers. These reforms align with other Saudization

policies, such as the new Nitaqat policy and the expatriate levy. Nitaqat is a Saudi government programme to increase

employment opportunities for Saudi citizens in the private sector. These measures adversely affect migrant employment

in the Kingdom and, thus, have reduced remittance outflows (see Figure2).

Against the background above, this study aims to assess the impacts of the determinants on the remittance outflows

from Saudi Arabia and propose policy insights. We applied cointegration and equilibrium correction methodology to

the data of a half- century to assess the long- and short- run impacts. Examining the drivers of remittance outflows from

Saudi Arabia is an interesting and useful case study for various reasons. Firstly, Saudi Arabia is one of the largest desti-

nations for migrant workers and the world's third largest remittances sending country. Secondly, as mentioned above,

Saudi Arabia has implemented new labour market regulations, such as the new Nitaqat policy and the expatriate levy

on foreign labour, to boost work prospects for Saudi citizens. Understanding the impact of these policies on remittance

outflows is critical. No previous studies cover these reforms in their empirical analysis, which have considerable impli-

cations for the remittance outflows and the domestic labour market. Thirdly, in contrast to existing studies based on an

ad hoc approach, we have developed a theoretically articulated macroeconomic framework to examine the determinants

of remittance outflows from Saudi Arabia. Finally, this is one of the pioneer studies for Saudi Araba that investigates

remittance outflows by addressing integration- cointegration properties of the time series data while accounting for small

sample biases to have robust results from the empirical analysis and more informed insights for policymaking.

The rest of this paper is structured as follows. Section2 provides an overview of migration to Saudi Arabia and trends

in remittance outflows. Section3 surveys existing studies on remittance outflows from Saudi Arabia. In Section4, we

describe our theoretical framework, and in Section5, we present the data sources, definitions of variables, and the meth-

odological approach used for the analysis. In Section6, we present the econometric estimation and testing results, and in

Section7, we discuss the empirical findings. Lastly, Section8 concludes the study with some policy insights.

2

|

REMITTANCE OUTFLOW FROM SAUDI ARABIA: SOME STYLIZED

FACTS

In the last three decades, the international migrant population has increased drastically. International migrants world-

wide increased from 153 million in 1990 to 281 million in 2020. This growth corresponds to an average increase of 2.7%

per year (see Figure1a) (United Nations,2020). In other words, the number of international migrants increased 1.84

times in the last three decades. The annual average rate of change in international migration was 1.6% between 1990 and

2005 and 2.95% between 2005 and 2020.

Statistics from the World Bank(2023a) show that the remittance flows increased sharply from $65 billion in 1990 to

$471 billion in 2020. Remittances from migrants were 7.2 times greater in 2020 than in 1990 (see Figure1b). In 2021,

the United States was the largest source of remittance outflows, sending $72.7 billion to other countries, followed by the

UAE, which sent $47.5 billion of remittance to other countries, and Saudi Arabia was the third largest source of remit-

tance outflows, which sent $40.7 billion (see Table1). In terms of percentage of GDP, the UAE was the largest source of

remittance outflows, sending 11.5% of its GDP, followed by Saudi Arabia, which sent 5% of its GDP (see Table1).

The number of migrant workers in Saudi Arabia increased from 5 million in 1990 to 13.5 million in 2020, correspond-

ing to an average annual increase of 5.5%. In 2020, migrant workers were 38.6% of Saudi Arabia's total population,

whereas they were 30.8% of the total population in 1990. Saudi Arabia is also the second- largest destination for migrant

workers in terms of population percentage (see Table1).