The largest and holiest Muslim religious event of the year, the Haj, ended this year in excellent circumstances. Almost three million Muslims, including up to 1.2 million from abroad, came to Makkah and its environs to perform Haj over a five-day period from Jan. 18 to 22. While it may cause hardly a ripple on the global economy, its economic impact on Saudi Arabia and the Muslim world is immense. First, the impact on Saudi Arabia.
In economic terms, the impact of overseas and domestic pilgrims is slightly different. The 1.2 million visitors from abroad bring with them two economic benefits to Saudi Arabia: the foreign exchange or liquidity brought from abroad, and (2) demand for lodging, transportation, food, health care and a whole host of goods and services the pilgrims purchase. The economic benefits brought by domestic pilgrims are different in two ways.
First, domestic pilgrims do not bring any foreign currency or liquidity into the economy. Second, their demand for lodging, transportation, food and other goods and services is only the net additional amount they spend over and above what they would have spent anyway if they hadn’t gone to Haj. In quantitative terms, the direct economic impact of Haj can be measured by the money all overseas and most domestic pilgrims pay for local Haj-related services.
As an example, India — which sends one of the largest contingent of pilgrims — charges around SR6,000-8,000 per person for Haj. Excluding round trip air fare of around SR2,500, the amount spent on the ground in Saudi Arabia would be around SR3,500-5,500. Using these numbers as guide, the amount spent by 1.2 million overseas pilgrims would total around SR4-6 billion. This is also the amount of new liquidity or foreign currency brought into the domestic economy by the overseas pilgrims.
A domestic pilgrim may spend an average of SR2000 net for Haj (i.e., excluding spending they would have done otherwise anyway), giving us a total of around SR8-10 billion for the 3 million pilgrims. This represents the direct additional domestic demand during the Haj season. Economics tells us that there will be a multiplier effect of this discretionary spending: as the money goes to someone local as income, he also spends part of it for his own purposes.
Assuming a multiplier of 4 (this is typical, if a person spends 75 percent of his income and saves 25 percent), total impact on Saudi GDP can be estimated at around SR32-40 billion. Note that the immediate economic impact is clearly magnified because it is concentrated in time (two months maximum) and space (Makkah and surroundings). At the macro level over the year, it will lead to increased imports (of goods the pilgrims demand), increased exports (of Haj-related services), increased liquidity or money supply, increased F/X reserves and small increase in interest rates and inflation during the period. The impact on other Muslim countries will be correspondingly opposite.
(Khan H. Zahid, Ph.D. is chief economist and vice president of Riyad Bank. Email: [email protected])
