Remittance plays a huge role in Nepal’s economy, and it is time to remit the migrant workers their due. In general, these workers do not command the respect they deserve at home–either in government policy or in people’s minds. The government can–and should–do a better job at safe migration and protection of migrants’ rights in the host countries, and at the same time, work toward changing the average Nepali’s perception about these jobs. Because a significant portion of these workers are unskilled or semi-skilled, they for the most part are looked down upon. This is myopic. It is these semi-skilled jobs and the remittances thereof that are laying the foundation for skilled jobs in the future.

The history of remittance–a transfer of money by a migrant worker to his or her family back home–in Nepal is short, but its contribution to the economy has gone vertical. In the 2020-21 fiscal year ended mid-July last year, remittances were Rs961 billion, which is 22.5 percent of the Rs4,266 billion in nominal GDP. These earnings’ role in poverty reduction in the country cannot be emphasised enough, not to mention the foreign currency sent home. As a resource-constrained economy, Nepal heavily relies on imports, with minimal exports. This requires foreign currency. In 2020-21, Nepal’s foreign exchange reserves were Rs1,399 billion ($11.8 billion), a significant portion of which is owed to remittances.

Globally, remittance has played a major role in lifting small and developing economies. In the 19th and 20th centuries, several European countries like Ireland and Italy relied heavily on these earnings. In the last two decades, remittances have seen a sharp increase. China is the second largest economy in the world with nearly $17 trillion in nominal GDP yet received $53 billion in remittances in 2021. The honour of the leading recipient last year went to India with $87 billion, with Mexico completing the top three with $53 billion; Nepal figured in the top 10 with $8.5 billion. In South Asia, in fact, these earnings make up the largest source of foreign exchange in several countries.

Counter-cyclical role

Nepalis’ desire to go work overseas surged at the turn of the century when the Maoist insurgency (1996-2006) was at its peak. Migration is currently concentrated in India and the Gulf. In the first six months of the current fiscal through mid-January, Saudi Arabia, Qatar and the United Arab Emirates were the top three destinations, with 167,513 having left the country, up from 15,049 in the comparable period last year, which was negatively impacted by Covid-19; Malaysia was a top destination until 2019-20, but is negligible currently. Migrants are predominantly male, accounting for more than 90 percent. Importantly, most of them are unskilled or semi-skilled.

The money they send home plays a crucial role in the overall betterment of particularly the rural population. In several households, kids who would otherwise not attend school now have an opportunity to do so. On a micro level, the living standards of family members left behind improve, while on a macro level the whole economy gets a shot in the arm. Remittances often play a counter-cyclical role. Covid-19 drastically cut the flow of Nepali workers going overseas; but because of steady departures over the years, there is already a decent stock of labour out there. Against all expectations, and despite the thousands that returned home post-pandemic, migrants sent home a record amount in the last fiscal.

As most things in life, there are pros and there are cons. These migrants are in their 20s and 30s, and their departure causes the labour supply to shrink. Further, now that their family members have financial support, the latter may not feel the need to find work themselves, lowering labour force participation. A culture of dependency is born. This can cause labour shortages and hurt, for instance, manufacturing. However, this is not that big of an issue–not now anyway–as they would not leave in the first place if there were sufficient manufacturing jobs. Migrants primarily use informal channels, such as the hundi, in sending their money home–particularly from India–and this is a real issue.

Capital formation

The use of formal channels such as banks and registered money transfer services is growing, but the gap remains. This will have a direct impact on Nepal Rastra Bank’s foreign exchange reserves, which are under pressure. By mid-January, reserves were Rs1,166 billion ($9.9 billion), which was only sufficient to cover six months’ worth of imports of goods and services; a year ago, the $12.8 billion in reserves would have covered 12.6 months. This is taking place at a time when tourism–another reliable source of foreign exchange–has taken a severe hit. In 2021, tourist arrivals were 149,833, versus record 1.2 million in 2019; last month, 16,975 tourists were welcomed.

To preserve the depleting reserves, the central bank in recent months has introduced several measures to discourage imports. This is a catch-22. Remittances have helped raise the average Nepali’s purchasing power; and not surprisingly, most of this income is being spent for consumption. This dynamic can change over time. The demand for consumption is likely to be less for circular migrants, who move back and forth between their home and host countries, versus new migrants. This should lead to higher savings over time, and this can be channelled better toward productive sectors. This is where government policy comes in. Most of these workers are unskilled or semi-skilled, and they need hand-holding.

The trick is to pool their income and use it toward creating skilled manpower. By that time, the economy hopefully will have matured enough to produce sufficient jobs, reducing a need to migrate in the first place. But the journey from here to there is difficult. It is the government’s job to channel the currently consumption-focused income toward capital formation. Attempts like foreign employment bonds have gone nowhere. One way this could work is by requiring migrant hopefuls, when they are completing their application papers, to commit to set aside a small percentage of their income for savings purposes; mandatory cooperation from recruiting agencies and banks will be needed.