The good and the badIt is necessary to examine whether remittance is a blessing or curse for the economy.
Political chaos, a decade-long civil war, poverty, unemployment and other social and economic factors have long been forcing a major portion of the country's labour force to toil overseas. The Department of Foreign Employment issued more than 600,000 labour permits last year. With this annual exodus of workers, Nepal is receiving a tremendous amount of remittance from foreign employment. According to World Bank statistics, Nepal is among the top five countries with the highest remittance receipt to gross domestic product ratio. Nepal received remittance valued at Rs516 billion during the first seven months of the current fiscal year alone. Given the huge amounts involved, it is necessary to examine whether remittance is a blessing or curse for the Nepali economy.
At the micro or household level, remittance is hailed as a way out of extreme poverty for a large number of people. At the macro level, remittance helps to stabilise the economy in poor countries as a major source of foreign capital. Nepal is highly dependent on remittance to maintain its balance of payments. Remittance inflow is also what gives national savings a much-needed boost. In the past 10 years, gross domestic savings was as low as 10.5 percent of the gross domestic product but, thanks to remittance, national savings was about 40 percent of the gross domestic product. This shows how important remittance is for Nepal's economy.
Catastrophic side effects
At the same time, one of the most catastrophic side effects of remittance is the depletion of the country's labour force. Nepal is a young country with more than 40 percent of the population in the 16-40 age group, but the preponderance of youths applying for foreign employment is preventing the economy from benefitting from such an industrious and adventurous demographic dividend, and leaving the country with an ageing population. The situation is even worse in rural Nepal. The World Bank says that every second household in Nepal receives some form of remittance. This situation is not only depleting human capital but also hampering agricultural production. People are abandoning fertile lands due to the perceived stable source of remittance as income.
Similarly, the increased household consumption behaviour due to remittance is becoming a white elephant for the Nepali economy. The increasingly luxurious habits of Nepali consumers and the country's inability to produce such products are fuelling the ever going trade deficit. In the first nine months of the current fiscal year, Nepal imported vehicles and oil worth Rs233.2 billion. The steady loss of competitiveness through appreciation of the real exchange rate in Nepal, along with the shortage of skilled manpower, is what is making Nepali products expensive in the international market.
Thus, the question is not how much money a migrant worker has been sending back home, but how much of that money the country has been able to convert into investment. If not, the result is a prompt flight of funds from the economy through the consumption of imported goods. Unfortunately, the latter is the case in Nepal. The Ministry of Finance estimates that, due to an increased consumption behaviour, national savings is decreasing in comparison to investment need. So, it is also wise to argue that remittance has not done much for the formation of capital in the economy.
In conclusion, although remittance has done a commendable job in reducing the poverty level, narrowing the income gap at the household level, and maintaining forex reserves at the macro level, the economy cannot keep going with such a high dependency on remittance in the long term.
Things to do
Given the current government’s ambitious target to graduate the country to the middle income level by 2030, a way has to be found to stop the depletion of the labour force in the economy. Priority should be given to curb remittance and increase foreign direct investment. Since Nepal is in a safe position when it comes to public debt, international debt can also be used as a compensation for remittance. The priority of such debts should be the productive sector, which can create jobs and increase economic activities in the economy. Agricultural subsidies need to be increased to control labour migration in rural areas. The government should address the difficulties rural farmers are facing in finding market opportunities. Such moves will not only embolden farmers to get involved in the agri business, but also reduce production costs and increase competitiveness in the international market.
Since public-private partnership has been hyped as a priority of the current administration, it can also be used to embrace remittance based private investment to embolden the tradable sector economy. Therefore, the government, through the upcoming budget, has to give significant emphasis to uplifting the economy from remittance based to production based by controlling foreign labour migration and creating job opportunities in the local market, and reducing imports of consumable goods and increasing imports of foreign knowledge and technology into the economy.
Bist is a member of the faculty at Uniglobe College.