It is no secret that Nepal is teetering on the scale of economic fragility. Even though the government has introduced some progressive policies and economic benchmarks, the country still struggles to stabilise its economy. This is partly due to an excessive reliance on remittances and policies favouring their growth. Remittances may appear beneficial but can lead to instability in various other sectors. Such a phenomenon is known as the Dutch disease effect.

In the 1960s, the Dutch economy grew as they discovered large swathes of oil deposits in the Northern Sea. An oil boom of this calibre can speed up the economic growth of any nation. However, such shallow development led to inflation, eventually sickening their economy. Subsequently, non-petroleum commodities became less competitive and more expensive. In other words, overly depending on a single export source led to the erosion of the value of other commodities.

Nepal isn’t known for having oil reserves and deposits like that of the Netherlands. However, several experts and policymakers have highlighted that the burgeoning inflow of remittances can cause a series of Dutch disease-like impacts akin to that of commodity booms. Since the disease affects any economy that is heavily reliant on foreign currency, foreign assistance and foreign direct investments, Nepal, in particular, becomes vulnerable. As the gap in the remittance-to-nation ratio continues to widen, the national currency value is likely to diminish.

The latest report from Nepal Rastra Bank (NRB) states that Nepal’s remittance for the fiscal year 2023-24 totalled Rs1,445.32 billion, a 15 percent increase compared to the previous fiscal year. In contrast, the data on remittance in 2016 was Rs679 billion, which is less than half the remittance as of this year. Such a level of dependency can exacerbate inflation, drive up consumption prices and intensify the real estate bubbles. When the value of properties becomes far more than its worth, it creates a mass trickle-down effect that continues to pour over other productive sectors.

The symptoms of Dutch disease continue to strain the Nepali economy for two main reasons. First, there is a significant exodus of labour migrants. Many Nepalis flock to foreign countries, either temporarily or permanently. This is encouraged by the government as well as political leaders. Second, Nepali consumers often have a preference for imported commodities. As the country becomes less independent, it relies far more than necessary on imports.

Several macroeconomic reports indicate a negative trade-off for Nepal in its exports of labour migrants and skilled manpower, with many opting to reside abroad in search of a better life. No amount of Riyals, Ringgits, or Dirhams can compensate for the loss of a long-term sustainable development. Production doesn’t become feasible for the general populace, leading to overreliance on imports.

In a nation where the balance of payments is consistently stretching towards the negative bottom, the lack of adequate labour force participation has become a hindrance in productive sectors. NRB’s empirical analysis suggests that further reliance on remittance at an increasing level can widen the trade deficits, both in the short and the long run. As consumer demand increases, the supply side can barely keep up, creating inflationary pressures and increasing prices.

Further, a nation that prides itself on its so-called vision of independence is now at the mercy of remittances. A shift in policies or geopolitical instability, rising tensions within the Gulf nations, and the spread of the Israel-Palestine conflict to other nations can dramatically affect the prospects of labour migrants sending their hard-earned money home.

There is no denying that remittance has played a significant role in Nepal’s economy. It has contributed considerably to economic growth and increased foreign exchange reserves. However, the concerned authorities shouldn’t forget that excess reliance on one economic sector can lead to a perpetual decline in other sectors. Given the threat of excess dependency on remittance, Nepal must diversify its economic portfolio. Concomitantly, with the help of effective plans and policies, the exodus of foreign labour migrants must be mitigated. Opportunities should be created and provided in the home country.

Financial institutions that draft impactful policies must adhere to congenial policies. The need for macroprudential policies, whose primary goal is to maintain financial stability and limit fiscal vulnerabilities, becomes more crucial to minimise the possibility of carrying the symptoms of the Dutch disease. Only by acting prudently can Nepal safeguard its economy.