Remittance in developing countries has become a lifeline for economic development. By remittance we mean sending income in terms of money or goods in home by the migrants or workers who have their earnings outside their home country. Today due to the establishment of different agencies like Western Union, International Money Express (IME) etc, in several district headquarters of the country, the remittance flows has become popular for transferring cash or money in time to the recipients. However, it is difficult to calculate the exact size of remittance flows in Nepal due to the emergence of unofficial channels even though it has recorded in balance of payments account. (Ratha 2005). Remittance inflow has been growing substantially in recent years with a growing outflow of workers for foreign employment.
Evidently, the inflow of remittance has contributed to reduce the level of absolute poverty, as found in the recent living-standard survey, even amidst political instability and economic stagnation. Despite this, increasing dependency on remittances has resulted in a number of negative consequences for the Nepalese economy, making it a parasitical economy suffering from the ‘Dutch-disease’ type effects. Remittances in Nepal primarily have three economic implications. First, it is a stable and growing source of the foreign-exchange reserve in the country. This is vitally important from the point of view of macroeconomic stability. Second, it is the important source of income of more than 56 percent of households. Third, when remittances are received through financial institutions, it increases money/credit base and enhances liquidity in the system.
Apart from its impact on consumption and trade, increases in remittances have not translated into productive investment. In the absence of productive investment, caused primarily by collapse in the business and investment environment, remittances have continued to just facilitate a consumption-based city-centric economy. Increasingly, our economy is turning into a retail-trading hub, where money spent generates less in productive investment and more in imports. A bulk of imports goes into meeting the basic needs of our society like petroleum products and primary goods.
The most adverse impact seems to have been on the industrial sector. Our industrial sector has already been losing its strength despite trade liberalization, accession to WTO, and membership to regional trading blocs like SAFTA and BIMSTEC. With increase in remittances and the possibility of overvalued exchange rate, this sector is further undermined, especially those with export potential. Add to this the power shortage and never ending labor conflict.
According to IMF (2009: 272), remittances denote “household income from foreign economies arising mainly from the temporary or permanent movement of people to those economies. Remittances include cash and noncash items that flow through formal channels, such as via electronic wire, or through informal channels, such as money or goods carried across borders. They largely consist of funds and noncash times sent or given by individuals, who have migrated to a new economy and become residents there, and the net compensation of border, seasonal, or other short-term workers who are employed in an economy in which they are not resident.”
Initially, remittance in Nepal was introduced with Gurkha remittances. ‘The Gurkhas’ were renowned for good qualities of soldiers. That is why British India formally recruited Nepalese youth as a regular army, which later divided into British and Indian army. Nowadays, Nepalese going abroad are not only for armies but also spread all over the world for work and mostly they are concentrated in Gulf areas in civilian front (Kshetry 2003). Any Nepali to go for work legally, he/she needs to get permission from the Department of Labor under the Ministry of Labor and Transport of the Government of Nepal. From the official report of the Labor Department it is known that 107 countries are at the government list where Nepalese are allowed to go for work . But still some people are found going abroad without permission and working in the government restricted areas too. Because of this trend, data on foreign employed workers are not available in exact form.
Majority of those who have left home for overseas job are eager to earn foreign currency by hard working to support their families. With regard to the delivery of remittances, the World Bank has expressed the view that the procedure of receiving remittance in Nepal is the best one in compare to others. Remittance Transaction Company cannot receive cash directly from the Nepalese workers remaining outside. The workers have to deposit their remittances in foreign commercial banks account and the transaction company through its account delivers the remittance services to the recipients at the cheapest cost (about 1 percent of remittance income)(Annapurna Post, March 15,2005). Moreover, the Hundi system is almost closed due to the establishment of Remittance Company in Malaysian and Gulf countries.
However, the system of Hundi is still working in Japan and Korea where most Nepali workers are living even if their visa date is expired. Over the past 15 years from 1991, international migrants’ remittances have become increasingly prominent in our country. The amount of remittances reflects only transfer record in the balance of payments. Unrecorded flows through informal channels are believed to be more than the recorded flows. Regarding the transfer of remittances in Nepal, the record of banking sector showed that Rs.15.9 billion was received in FY.2000/01. However, Hundi operators or money transferring agencies handled the bulk part of remittances.
Considering the increasing number of workers, assuming four lakh per year going outside the country in this perspective, remittance received was estimated at Rs.50 billion in FY. 2001/02, (Kshetry 2003). In this regard, it is also estimated that more than 500 people per day are going abroad for foreign employment. From such migrants, about Rs.100 billion per year is expected to enter into the country through remittance income only (Annapurna Post, Oct.28, 2006). In order to provide access for transferring remittances, Western Union, IME and Prabhu Money Transfers are found active in Nepal. Of these agencies, more than 200 sub-agents of single Hulas remittance including banks, finance companies, trading concerns, enterprises etc. under the province of Western Union have been opened in five Development Regions of Nepal.
These agents deliver remittances to the recipients of local areas within a short span of time. Remittances account for 23 percent of the total value of goods and services produced in the country (generally termed as gross domestic product—GDP), according to estimates by World Bank economists. Remittances have been the backbone of our economy, especially after 2000 when remittance inflows started to skyrocket. So far the extent of its impact has been discussed based on anecdotes and observations. Lately, its true reach and impact at household and national levels are estimated in two forthcoming studies based on surveys, namely Nepal Living Standard Survey (NLSS) III and Nepal Migration Survey (NMS) 2009. The findings are startling, both positively and negatively, and they indicate the laxity of our politicians and policymakers in enacting the needed reforms for structural transformation.
According to NLSS III, over the last six years absolute poverty declined to 13 percent of total population, down from 31.5 percent in 2003/04—an incredible 18 percentage point decline in poverty, or three percentage point decline each year. Nominal average household income and nominal average per capita income have increased by 153 percent and 175 percent respectively. Furthermore, nominal per capita consumption of the poorest households has increased by 165 percent while that of richest households by 66 percent only. Also, average household income of the poorest and richest 20 percent households has increased by 297 percent and 133 percent respectively. It has contributed to a decline in income inequality, measured by Gini coefficient, to 0.35 from 0.41 recorded in the second NLSS. The average daily wage in agriculture sector has increased by 127 percent between the two surveys, but that of non-agriculture sector by 98 percent only. Access to other facilities has also improved. What has led to such an astounding positive results at the household level at a time when the major macroeconomic variables are either stagnating or deteriorating amidst increasing political uncertainty?
The only convincing factor you can think of is remittance, which has increased by 327 percent 2004 and 2010. These positive changes have not come about due to hard work of our policymakers and political leaders. They are due to high remittance inflows directly to households sent by hardworking Nepalese sweating and risking their lives in various employment destinations abroad. The massive jump in average household income—particularly that of the poorest households which make up the most of the 55.8 percent of households that receive remittances—has nothing to do with the policies that were implemented in the last six years. So much resources and efforts have been invested to reduce poverty but its effect seems to have faltered in the face of the impact of remittance at the household level. In reality, the NLSS III results indicate a policy failure and a resounding victory of remitters in reducing income poverty and inequality directly and most efficiently than any initiative carried out in the past six years. Now, some might argue that access to roads, services (education and health) and wage increase might have led to that. But, the impact of these factors is not as fast and as deep as that of remittances, which directly bumped up household income.
Also, since these factors have not contributed to boosting economic growth, it appears poverty has decreased without a convincing growth rate. May be it is about time to change policy strategies to fight poverty in Nepal. Unfortunately, the positive changes in the short run have masked a dangerous trend at policy and macro economy levels. First, rising remittances and increase in income of the poorest lot have made politicians and policymakers, especially at Ministry of Finance (MoF) and National Planning Commission (NPC), complacent about the automatic changes at the household level. They should not claim credit for the positive changes outlined above because no substantial policy level initiative has been carried out over the last six years to reduce poverty expect for the customary efforts through Poverty Alleviation Fund (PAF). The only credit they should take is for their contribution to the exodus of remitters to destination abroad because of their failure to create enough employment opportunities at home.
Meanwhile, equal blame goes to the insensitive, visionless, and selfish political leaders who have created a mess that has led to closure of factories, capital flight, and loss of employment and entrepreneurial opportunities, triggering migration of youths. Second, the MoF and the NPC have been increasing the size of fiscal budget without any substantial impact on the economy, where still 76.3 percent of households depend on agriculture. In the last six years, the economy saw economic growth above 5 percent in 2007/08 only. This was not the result of any miraculous policy intervention, but due to blessing of monsoon that boosted agriculture production.
The laxity in enacting real reforms has triggered consumption binge (only 2 percent of household remittance is spent on capital formation). Worse, since domestic production is insufficient to satisfy domestic demand, we are forced to import goods and services, resulting in ballooning trade deficit. Now, the increase in labor costs will further increase cost of production and make our products even more uncompetitive, forcing us to import even more. Note that the exodus of workers has created a shortage of labor and an increase of average daily wage in agriculture sector by 127 percent and that of non-agriculture by 98 percent between the two surveys.
There is even more dangerous trend directly attributed to remittances, as revealed by NMS 2009, at the macro economy level: symptoms of Dutch disease in the Nepalese economy. Simply, a Dutch disease occurs when an economy depends on one sector so much that it leads to decline in manufacturing sector. In Nepal, increasing remittances at the household level have led to high consumption demand, high imports, and appreciation of real exchange rate, resulting in the erosion of manufacturing sector and its competitiveness.
Remittances are typically helpful to meet specific needs of the family members and thus tend to increase their standard of living. In lower class or poor households, they may finance their remittances to fulfill their basic needs, such as in consumption, housing, children education and health care and to pay for loan. In middle class or rich households, they may provide either loan for individuals going abroad or capital for businesses and entrepreneurial activities. From macroeconomic point of view, this source may be more stable than capital flows. It is said that remittances has represented more than 10 percent of GDP in Nepal in the late 1990s.
Moreover, it would be highly beneficial to the country, where there is natural calamities, political conflict, people war, low investment in entrepreneurial activities and economic recession. The inflow of remittance has been possible because of massive exodus of youth. Several media recently reported about 40000 workers leaving every month to Gulf States and other destinations. A large number go to India which is not often reported in the media. By any account, that is a substantial number. Although this trend has been easing a job crisis at home, it will have serious economic and social consequences.
Yet foreign employment may not be a long-term solution for employment, and remittance inflows will not make economy productive and competitive. One obvious example of this is on rising pressure on wages because of such mass exodus of workers. There are many anecdotal stories of people having to pay much more even for a menial work. Moreover, import-based consumption supported by remittance cannot generate employment. More importantly, workers at lower-skill end, which constitute the bulk of our workers, are vulnerable to several other factors including long-term structural changes in the host country, rapidly changing technology, and the short-term nature of the work.
To summarize, we are in a conundrum — while remittance is indispensible, we also suffer from its adverse effects. Hence, our dependency on remittance can best be characterized as parasitical in nature. Unless we change we will be in no different position than a parasite which eventually dies when the host rejects it. Our policy makers better recognize the need to generate employment in the country and do all that is necessary to develop a healthy and sustainable economy.
Remittances and Economic Growth
There are a number of potential costs associated with remittances. If remittances are large, the recipient country could face an appreciation of the real exchange rate that may make its economy less competitive internationally. In this regard, some argue that remittance can also create dependency, reduction in recipients’ incentives to work and thus slowing economic growth. But others argue that remittance may also have human costs. Basically, remittances are private funds that should be treated like other sources of Households’ income. In terms of asset formation, larger number of remittance receivers uses their funds to purchase land or buildings in town areas. Someone purchase means of transportation as a part of their investment. Very rare is found in promoting agriculture and tourism. In short, it could be asserted that the productive use of remittance income is yet to be sought though it forms a significant part of GNP.
If we observe the economic growth rates of some SAARC countries in 2006, we find the highest growth rate (8.2 percent) of India and the lowest growth rate (1.9 percent) of Nepal. Sri Lanka has received the second position (7.0 percent) then Bangladesh (6.7 percent) and Pakistan (6.6 percent) (Annapurna Post, Dec.15, 2006). In such a circumstances, Nepal has reached the insignificant growth rate because of prevalence of the political conflict, unfavorable climate for agriculture and reduction in export of readymade garments. However, Bangladesh has received the third position in economic growth rate mainly by increasing the flow of remittances and maintaining strong production sector. Thus, remittance as a major source of foreign exchange earnings can improve a country’s creditworthiness and enhance its access to international capital markets Contribution of Remittance to GNP
Remittance as major component of current account plays a vital role in increasing current transfers in balance of payments. The basic factors of determining current transfers are grants, workers’ remittances, pensions and others including excise refund also. Thus, it is clear that the remittance income has become an important contributor to the current transfers in balance of payments of Nepal Socio-Economic Implications of Remittances
The income of migrants from the foreign employment has not only increased their Personal income but also their social prestige. The rural people lying below the poverty Levels have succeeded to uplift their economic standard receiving the opportunity of foreign employment. Moreover, the downside of remittance reflects the view that the shortage of labor due to emigration has not only compelled to keep barren land in rural areas but also hamper agricultural productivity and ultimately the country would be liable to import the large quantity of food grains. Despite these, remaining young generation from the families for long time may affect their reproductive age and their vulnerability may be subject to communicable diseases.
It is also possible that if they come back with good skills and earnings, they may not normally cope with the environment of the homeland and consequently they will have a Tendency to leave the country again. Thus, the remittances from foreign employment on the one hand, has played an important role to increase their personal income and thereby improve standard of living and a risk of diseases like HIV/AIDS through migrants on the other may enter into the country. More specifically, this type of communicable disease may be due to poverty, illiteracy, gender discrimination, women exploitation, insecurity, and the lack of legal advice as well as proper treatment. Thus, to minimize this problem, especially rural people should be made aware of the communicable diseases through mass media, education, health care and training cum workshops. Furthermore, a part of remittance income should set aside by the government through welfare scheme that may become the long run solution to the problem of communicable diseases.
The current development path on growing dependency with remittances economy may not be beneficial for long term development of Nepal. Moreover, using remittances fund for the productive sector and managing quality emigrants’ participation has indeed influential causal relations putting positive impacts in increasing economic growth through quality remittances income. However, domestic environment like insecurity, land-locked geopolitics and policy factors are crucial to using remittance fund for long term economic growth. Poor banking system and less conducive policy environment cannot create stimulus investment climate.
The bright side of remittances depends on revival of economy by using physical, human and social capital to mitigate its negative impact on the economy. Remittances fund has been regarded as compensation of Nepal’s lost-labor efforts. It has long term economic and social negative impact to cultivate home economy. Government policy may improve the condition through intervention on migration cycle, coordinating the remittance use, information, knowledge transfer and exchange.
The biggest contribution of remittances has been found to the welfare and improved livelihood of the receiving households in terms of basic needs, better health and education and to a smaller extent in terms of savings. Though these are useful goods and safe investment, but in macro-economic terms, non-productive assets with no lasting impact on country’s real income. Hence it is essential to understand that only meaningful utilization of remittance money can pave the way to the better prospects of the nation. Mere collection of remittances in banks and financial institutions does not bring desired outcome in the economy. Such funds should be kept in proper channels in different layers of the economy to meet twin goals: poverty alleviation and sustainable development of Nepal. The real GDP of the nation could be magnified in the long run with the better use of remittance.
Nepal Government, Ministry of Finance (MOF). 2006. Economic Survey, FY.2005/06. Kathmandu: Ministry of Finance.
Heller, P. 2005. Fiscal Space: What It Is and How to Get It? Finance and Development 42 : 32-33. Kshetry, D.B. 2003. Remittances: Costs and Benefits. Nepal Rastra Bank Samachar 48 : 9-12.
Nepal Rastra Bank. 2005. Main Economic Indicators (May-July), Monthly Report, NRB, Research Department, Kathmandu.
Ratha, D. 2005. Remittances: A Lifeline for Development. Finance and Development 42: 42-45.