Expatriates in the Gulf must have been hugely amused to learn that supermodels and rap artists have suddenly become financially savvy and are demanding that they be paid in euros, rather than dollars. For many in the Gulf, locked into fixed-term contracts that specify either a local currency or US dollar compensation, this is no laughing matter, as they seem to be losing out under current foreign exchange market conditions. While most Gulf currencies are still firmly pegged to the US dollar, such as the Saudi riyal, in practical terms, there has been some erosion in the purchasing power of local currencies due to higher priced imports and domestically induced inflation, especially in the food and real estate sector.
Those that are bleeding the most are the expatriates who are paid in dollars and in most cases, transfer their hard earned remittances to non-dollar currencies. Sterling is now hovering around the SR7.85-8.00 levels for each pound, compared with SR6.5 levels only 2 years ago, while the euro now costs SR5.65 compared with 4.670 two years ago. Such 20 percent falls in exchange rates over two years has caused hardship across the board to many expatriates — and the recent riots by construction workers in Dubai were mostly fueled by the erosion in their salaries and home remittances.
The issue of economic migrant remittances has attracted much attention — some arguing that remittances are a “drain” on host countries balance of payments, while others see remittances as a form of indirect aid to assist with migrant labor’s home economies and ease on global poverty. According to some World Bank studies and the International Fund for Agricultural Development, remittances sent home from migrant workers around the world, are worth three times as much as aid flows from rich countries and help boost the incomes of 10 percent of the world’s population. These studies estimate that 150 million economic migrants worldwide sent home more than $300 billion in 2006 to their families. Any sharp and sustained deterioration in the exchange value of remittances would cause hardship.
For Saudi Arabia, foreign remittances have been an important source of balance of payment outflow and the amounts have been increasing, as the Kingdom’s economic development deepens. According to available SAMA data, in 1985, the value of such remittances was SR18.8 billion ($5.1 billion), representing around 10 percent of the gross domestic product (GDP). By 2006, remittances had increased to SR54.6 billion ($14.56) billion) or around 14.6 percent of GDP.
While the debate about foreign remittances has, to date, been framed in terms of either more “localization” to reduce the amount of outflows with those who seek to liberalize domestic economies and attract foreign direct investment and domestic investment opportunities to keep remittances at home, few have discussed the implication of further erosion in the value of remittances and possible expatriate behavior if further erosion takes place.
Saudi Arabia has taken steps in attracting some of these remittances to remain in the Kingdom, such as allowing foreign residents to invest in the Saudi stock market through mutual funds and other limited investment schemes. This still falls short of more attractive incentives, such as real estate ownership, launched by other GCC States.
However, some of these measures seem to be launched when local markets are going sour and are not attractive to non-residents. The result is that remittances keep on flowing out. By comparison, the US which has a far greater number of economic workers than Gulf countries, has a smaller amount of remittances per capita due to a more liberal and non-discriminatory domestic investment policy. For the immediate future, the main preoccupation of migrant workers in the Gulf will be the steady deterioration in their effective real exchange rates.
Some will argue that expatriates have made a conscious choice to work in the Gulf and that they have to take their chances on the effects of deteriorating exchange rates like everyone else. That might be true in the short run. In the long run, economic migrants will act rationally and make a decision on whether the opportunity cost of staying on in the Gulf, in the face of exchange losses, is still worthwhile, and begin to make comparisons with those working at home or in countries that have adopted more flexible salary adjustment systems. Already there is anecdotal evidence that some Asian construction and semi-skilled workers in the Gulf are deciding to return home, given that some Asian economies are booming. The most agonizing decisions seem to be faced by those in the higher paid, but fixed-term contracts, who cannot make immediate salary or rate hedging decisions.
Given the mega economic city expansions in the Kingdom and other projects, there is a continuing need for skilled expatriate labor. Those with more valued skills will try to obtain shorter and more flexible contracts that might include an element of salary adjustment based on a foreign exchange index. Already some international companies are doing this with the innovative Schlumberger company calculating foreign exchange shortfalls for all its multinational work force, and adjusting these on a quarterly basis.
A contended labor force is a productive labor force seems to be their motto. Whatever options are taken, to presume that foreign employees accept their status quo is no longer tenable, given the mobility of labor skills today.
If Saudi Arabia wishes to remain competitive in international salary scales and attract the best for its mega projects, a new method of exchange indexing to trigger compensating payment shortfalls has to be found. Some employers in the Gulf might opt on a policy of replacing current disgruntled employees with cheaper expatriates when their contracts expire, and so avoid the headache of introducing more flexible salary indexing systems. This is also shortsighted, just when Saudi Arabia and others are trying to raise their global competitiveness through enhanced human capital skills. Expatriates should be encouraged to concentrate on their jobs and not become exchange experts.
Of course, expatriates have to be made aware that this can work both ways — a downward indexing in salary scales is also on the card should the dollar’s value rebound. Given the current state of the US economy and a creeping recession, this seems unlikely for some time to come.
(Dr. Mohamed Ramady is a visiting associate professor, Finance and Economics at King Fahd University of Petroleum and Minerals)