Abstract:

This paper investigates the possible short-run and long-run causal relationships between foreign workers' remittances and financial development in the Kingdom of Saudi Arabia (KSA) as a major labor-hosting, remittance-sending country. The research methodology utilizes the Johansen Cointegration approach, Vector Error Correction (VECM) mechanisms, and the Toda-Yamamoto to estimate specified and appropriate model to examine the causal relationships between variables appearing in the model using annual data covering the period 1971-2013. The study utilizes three conventional financial indicators as proxies for financial development; respectively being the ratio of broad money to GDP (m2gdp), the ratio of banks' deposits to GDP (depgdp), and the ratio of claims of banks on private sector to GDP (clpgdp). The cointegration test results revealed the existence of long-run relationships among variables. The long-run estimation results show that remittances are pro-cyclical increasing during booms and declining during recessions. Interest rates turn out to have the expected inverse relationship with remittances, while results pertaining to financial development indicate that the alternative financial development proxies have similar negative impacts on the flows of remittances from Saudi Arabia. The Toda-Yamamoto causality procedure shows the existence of bidirectional causality between remittances, m2gdp and clpgdp but unidirectional causality running from remittances to depgdp. A policy recommendation derivable from these results is the need for more innovations in the financial sector of KSA to slow the flow of remittances and to direct them towards domestic investment opportunities instead of the current existing competition between domestic financial institutions in offering innovations that would hasten and increase these outflows. Key Words: KSA, Financial Development, Remittances, Granger Causality, Cointegration Test, Ksa, Toda-Yamamoto Causality.

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