Impact of oil prices on remittances to Pakistan from GCC countries: evidence from panel asymmetric analysis

• Published date: 01 June 2020
• DOI: http://doi.org/10.1111/opec.12180
• Date: 01 June 2020

Impact of oil prices on remittances to

Pakistan from GCC countries: evidence from

panel asymmetric analysis

Shujaat Abbas

Assistant Professor, Department of Economics, Institute of Business Management, C-107, SSK Building,

Karachi, Pakistan. Email: shujaat.abbass@gmail.com

Abstract

International migration and remittances from oil-exporting Gulf countries are important sources of

employment, income and foreign exchange for Pakistan. This study investigates the asymmetric

impact of oil prices on remittances to Pakistan from GCC countries, over the period 1980 to 2018,

by employing the recently advanced non-linear panel pooled mean group (PMG) model. The

findings show that oil prices and remittance are asymmetrically associated. The increasing oil

prices have a significant positive effect only in the long run, whereas reducing oil prices reveal a

significant negative effect only in the short run. Findings of other explanatory variables show that

the economic condition in host countries, exchange rate, and trade relations have positive effects

only in the long run, whereas the economic condition in the home country has significant negative

effects in the long run and positive effect in the short run. This study urges oil exporters to stabilise

oil supply and prices, and Pakistan to enhance trade relations, exchange rate adjustments and

financial development.

1. Introduction

The Middle East is the major oil-exporting region in the world that holds more than 65

per cent of total crude-oil reserves. The economic performance of oil-exporting countries

is dependent on the price and export of crude oil. The oil price can be influenced by

many factors besides traditional supply and demand-side factors, such as geopolitics and

rivalry among exporters. The oil market has witnessed large volatility after oil price

shock of 2015 due to excessive production and supply of crude oil (John Baffes et al.

2015). During recent years, the oil market is witnessing a historical decline in oil prices

due to the large deterioration in oil demand, due to the COVID-19 pandemic, along with

the excess supply. The changing crude-oil prices have a considerable economic impact

on both oil-exporting and oil-importing countries across the globe.

The objective of this study was to explore the asymmetric impact of changing oil

prices on workers’remittance inflow to Pakistan from the oil-exporting Gulf countries,

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205

which are major destinations for expatriate workers and source of more than 70 per cent

of total remittance inflow. Pakistan is a major labour-exporting developing country,

which is facing an acute shortage of foreign capital due to highly sluggish growth

performance, large fiscal deficit and exploding current account deficit (Abbas, 2019).

The majority of emigrants are working on oil-rich countries in the Gulf. Worker

remittance is an important source of employment and foreign exchange for Pakistan. The

theoretical and empirical literature on the impact of oil prices on macroeconomic

aggregates of Pakistan, such as economic growth, domestic investment and inflation, is

well established with fewer studies on oil prices and remittance nexus. It is therefore

important to explore the dynamic relationship between the changing crude-oil prices and

remittances from GCC countries.

The changing oil prices can affect remittance inflow through two main channels.

Firstly, from the perspective of migrant-exporting and oil-importing countries, oil is an

important input of the domestic manufacturing process and increasing oil prices wi ll

enhance the domestic cost of living by increasing the cost of production and price level.

As a result, the altruistically motivated remittance flow to the home country will increase

(Makhlouf and Kasmaoui, 2018; Akc

ßay and Karasoy, 2019). Secondly, from the

perspective of oil-exporting and labour-importing countries, oil is a very important

source of revenue and foreign exchange earnings. The increasing oil prices will enhance

their investment and production activities, which will increase demand for international

migrants and hence remittance outflow (John, 2018). The literature on remittances and

crude-oil price nexus is nascent. Few notable studies conducted on oil-importing and

labour-exporting countries of Asia have revealed a significant positive relationship

between remittance inflow and crude-oil prices (Lueth and Ruiz-Arranz, 2007; Mallick,

2017). Similarly, studies on labour-importing and oil-exporting countries of GCC have

also revealed significant positive effects of changing oil prices on remittance outflow

(Naufal and Termos, 2009).

The above-discussed arguments have examined the linear (symmetric) relationship

between crude-oil prices and remittances and ignored the presence of non-linearity.

Akc

ßay and Karasoy (2019) urged that oil prices and remittances are asymmetrically

associated with each other. They highlighted several factors to explain the asymmetric

relationship between oil prices and remittances. Firstly, structural reforms, financial

shocks and policy changes in oil-exporting countries mostly exhibit asymmetric

behaviour (Shin et al., 2014). Secondly, changing crude-oil prices can asymmetrically

affect macroeconomic aggregates in the host countries due to inertia, hence workers’

remittances (Akc

ßay, 2019). Thirdly, the asymmetric effect of changing oil prices can

occur through sectoral allocation, uncertainty, unemployment and precautionary savings

(Herrera et al., 2015; Sek, 2017).

OPEC Energy Review June 2020 ©2020 Organization of the Petroleum Exporting Countries

206 Shujaat Abbas