Escaping the remittance trapNepal is facing a vicious cycle of rising costs, migration and falling farm output.
There have been intense discussions among development experts in Nepal about the implications of remittance on the livelihoods of ordinary people, sustainability of the economic machine and financial health of the public economy. According to the latest economic survey of Nepal, the money sent home by migrant workers accounted for 22.47 percent of the GDP in fiscal 2021-22. The remittance inflow is greater than Nepal’s official development assistance, exports and foreign direct investment.
Remittance has helped the families of migrant workers to pay for the necessities of life ranging from housing and food to health care and education. Remittance has lifted millions of families out of extreme deprivation and destitution. This money has also increased the pace of urbanisation in Nepal and provided a safety net to households during the 1996-2006 Maoist conflict and in the aftermath of the 2015 earthquakes and Covid pandemic. It has become vital in maintaining the country’s foreign currency reserves.
Remittance also has several negative consequences. Nepal is lagging behind its South Asian peers in per capita GDP growth. In our case, there is no clear link between real per capita GDP growth and level of remittance receipts. Remittance has rather increased economic dependency causing our economy to get stuck in lower growth. That is a symptom of the remittance trap. Remittance has fuelled household consumption leading to short-term growth rather than long-term sustainable economic prosperity. The economic presumption that growing consumption will stimulate domestic industries to increase output has proven wrong in Nepal as demand is being fulfilled by imports.
One of the severe consequences of remittance is brain drain. Many industries in Nepal heavily rely on Indian workers. The country has not been able attract investment in the industrial sector due to lack of skilled and professional manpower. It has become a tendency among the elite to send their children abroad for higher education. Remittance should have provided the seed capital to start new ventures, instead it is being used to pay tuition fees in foreign universities. Remittance has had a negative impact on the effectiveness of the government too. Since people are meeting their basic necessities through remittances, this has allowed the government to sit back without being responsive to the needs of the people. As most of the youths are abroad, there is no sense of urgency among the political and bureaucratic actors to make hard efforts to bring tangible benefits for the citizens.
Due to high dependency on remittance, the country is on the verge of turning into a steady state. A steady state is a syndrome where state resources are consumed to run the current stock of state apparatuses and maintain old infrastructures leaving limited resources for growth and employment. A country that relies heavily on remittance and import-led revenues has been spending a substantial portion of its budget on unproductive, if not redundant, organisations.
Remittance also has downside effects on the current account balance as it has stimulated import for consumption, motivating the private sector to invest time, energy and resources in trade rather than in productive industries. In the fiscal year 2021-22, Nepal’s import-to-GDP ratio was 28.56 percent, and the export-to-GDP ratio was 3.95 percent, according to the Ministry of Finance. This shows that the greatest threat to our economy stems from a widening gap between imports and exports causing an intolerable level of trade deficit. Prolonged addiction to a remittance-driven, import-led economy is inherently damaging. It has undermined the state’s capacity, if not the legitimacy of pollical and bureaucratic institutions.
The income from remittance has been used for building houses in urban areas, causing an unprecedented surge in land price across Nepal. The real estate business has become a lucrative occupation for the elite to become rich in a very short period of time. Land prices are so high that the youths are forced to migrate to earn enough money to buy land and build a house. As a result, the country is facing a vicious cycle of rising cost of living, migration, declining farm output and more migration.
Breaking the vicious cycle of remittance requires strong political will and bureaucratic efforts. Nepal can get rid of this malady by investing in infrastructures like road, electricity and irrigation to keep internal production competitive and achieve economies of scale. It will provide incentive for youths to start new businesses in the country. Introduction of technical and vocational education and skill building or skill upgrading will produce adequate skilled human resources. There are huge shortages of skilled manpower in areas like plumbing, welding, brick masonry, carpentry, wall painting, river rafting, vehicle maintenance and many others. Investment in skills will generate employment for youths inside the country, helping domestic industries to obtain skilled people. This will create a virtuous cycle of investment, production, domestic jobs, more investment and further employment.
The government can generate jobs for youths by providing financial assistance to start-ups, stimulating the formation of new businesses. One of the key obstacles preventing youths from venturing into entrepreneurship is high interest rates. New ventures can be risky. Double-digit interest rates have discouraged youths from taking the risk of starting a new business. Nepal must bring down the interest rate on loans to promote investment in small and medium-sized enterprises (SMEs). Expansion of SMEs in the country is essential to escape from the remittance trap. Remittance should not become a new kind of Dutch disease for Nepal. We must liberate our economy from this trap. We must be free from this economic bedlam.