Migrants’ remittances, one of the largest and reliable sources of external funds for developing countries, have been soaring in recent years. Although they are second only to foreign direct investment (FDI)  inflows with respect to scale, remittances amount to over three times the value of official development aid and eight times private capital. These flows have surged five-fold in the past 15 years. This upsurge as well as the potential for remittances to lower poverty and economic vulnerability, improve family welfare, and accelerate economic development has renewed academic and public policy interest on the issue.

According to World Bank’s latest Migration and Development Brief released in April 2018, remittance flows to low- and middle-income countries (LMICs) rose by 8.5 percent to $466 billion in 2017. The increase is expected to continue in 2018 to reach $485 billion. Likewise, remittances to South Asia increased by 5.8 percent in 2017 following a decline by 6.1 percent in 2016. This trend is also likely to prevail into 2018 owing to stronger economic conditions in developed economies (especially the United States) along with a modest increase in oil prices that should have a positive impact on the Gulf Cooperation Council (GCC) countries. An important challenge for the governments of South Asia is to employ remittances to nurture their financial sectors and invest in targeted development projects, especially in infrastructure.

Benefits, motives and risks

Macroeconomic studies demonstrate that though remittances are affected by the economic cycles of source and host countries, they provide a crucial avenue of foreign currency, boost national income, finance imports and contribute to the balance of payments. While other capital flows appear to rise during favourable economic cycles and fall in periods of economic downturn, remittances seem to react less violently and exhibit incredible stability over time. For instance, a year after the global financial crisis in 2008, remittance inflows to emerging markets continued to go up by 6 percent while capital flows plummeted by 14 percent.  Likewise, remittances seem to be better targeted at the requirements of the poor, over foreign aid or FDI, as recipients generally rely on remittances to cover daily living expenses or to undertake small investments in business.  Likewise, migrants have been sending more money to their families back home in periods of economic downturns, financial crises, or natural disasters.

Theoretically, remittances are guided by different motives, which can also justify their behaviour during business cycle fluctuations. For instance, if the motive is generally altruistic, remittances are likely to be countercyclical, that is, they rise when a recipient economy is in a slump. Another view looks at remittances as an investment by migrants in their home country, encouraging them to send more money to garner higher future returns. In these instances, remittances can be pro-cyclical. In the case of low income countries, however, unlike other types of capital flow, remittances respond to the needs of households and not the profit-seeking aims of investors.

Global evidence indicates that recipient households generally have higher levels of consumer spending and lower incidences of extreme poverty than those who do not obtain remittances, implying that remittances have been playing an instrumental role as a ‘powerful anti-poverty force’.

According to the International Fund for Agricultural Development, about 40 percent of total remittance flows are directed to the rural areas, thereby facilitating the growth of the agricultural economy, improving food security and creating employment opportunities, especially for the youth. 

Despite these potential benefits, it is also contended that massive remittance inflows could have adverse consequences for the economy (in the country of origin) through brain drain and decreased supply of active labour force, inflation and exchange rate appreciation. Another criticism is that they can create a “dependency effect” among the family members that are left behind, who opt to rely on remittances rather than continuing to explore employment opportunities.

Nepal’s experience

In Nepal’s case, remittance transfers often consist of relatively small amounts in themselves but connote a lifeline for

the recipients, contributing to a sizable share of the gross domestic product (GDP)—about 29 percent in 2017. This income has been increasing the standard of living, particularly of those in rural areas and also covering basic needs such as food, education, health and housing. It has also created opportunities to save, invest and build assets. Moreover, it has also acted as a form of insurance for the country against exogenous shocks such as the great earthquake of April 2015 where it played a pivotal part in the rehabilitation efforts in the country.

While there have been apprehensions about the brain drain, remittance-dependence, and the adverse impact on Nepal’s export competitiveness due to pressure on currency appreciation, remittances so far seem to have made positive contributions to the economy. However, different case studies have divulged that remittances have been primarily utilised to finance consumption rather than being channelled to increase productive capacity. Still, spending remittances on consumption often leads to improved health, education and human capital, augmenting both private and public welfare. Similarly, a large portion of the remittance-related investment have also increased the stock of wealth of the migrant household in the form of land and housing, all of which have indirect macro-economic impacts on development.

Remittances, as private flows, can be leveraged via incentives that safeguard migrants’ rights while allowing them to make use of their earnings in pro-development ways. In this respect, projects need to be based on the requirements and priorities of the local population. Likewise, financial services need to be customised through novel means. While financial services can, on the one hand, incentivise savings and investment behaviour, they also need to consider the diverse needs of remittance recipients on the other.  However, this is not happening in Nepal.

 Overall, the positive impacts on poverty and development become greater when remittances can be saved and invested in infrastructures and productive capacity. Moreover, the development impact of remittances can only be fully achieved in partnership with sound and realistic public policies and priorities, along with private-sector initiatives. Still, it must be clearly understood that while the inflow of remittances can make a vital contribution to poverty reduction and local development in the country, it should not be regarded as a substitute for national development and poverty reduction strategy.

- Pant is with Nepal Rastra Bank