Remittances in Nepal: Boon or Bane?

Abstract

Nepal is one of the highest recipients of remittances (percentage of GDP) in the world. For a small land-locked economy battered by a decade-long Maoist insurgency (1996–2006), prolonged political instability, slow growth rate and large exodus of youths for employment overseas, high inflow of remittances bears a huge significance both at micro and macro levels. Exploring various facets of high migration and remittances, this article shows remittance-induced Dutch disease effects and policy laxity to improve investment climate in Nepal. Since it is costly to sterilise the impact of remittances each year, it might be prudent to learn to live with it and gradually channel remittances to productive usages with a goal to boost productivity.

Acknowledgement

I sincerely thank the Editor of The Journal of Development Studies, and the anonymous referees for their valuable comments and suggestions. The views expressed are solely those of the author and do not reflect the views of the ADB, or its Board of Directors, or its member governments.

Notes

1. While the time series data do not reflect informal flows of migrants and remittances, household surveys data reflect remittances coming from almost all destinations and channels.

2. The fiscal year in Nepal starts on July 16 and ends on July 15 of the next year.

3. The DoFE started keeping gender disaggregated migrant workers data since 2006/07 only.

4. It noted that since the survey was carried out during May and June, which is also the time when migrant workers temporarily return home for harvesting agriculture production, the total migrant number might underestimate the true figure. Since almost all the seasonal returnees come from India, it is estimated that the total number of migrants to India alone could be anywhere between 1.5 and 3 million (World Bank, 2011).

5. The total figure for remittance inflows does not include those coming by way of informal means. The latest household survey shows that of the total remittances 77 per cent was transferred by person, 19 per cent by way of financial institutions, 3 per cent by way of hundi (an informal means of money exchange using agents in both sending and recipient countries) and 2 per cent by other means (CBS, 2011b).

6. Due to a change in consumption aggregates used to compute the poverty line, the poverty figure in 2010/11 cannot be fully compared with the earlier figures. Using similar consumption aggregates, like in previous household surveys, the absolute poverty rate fell to 13 per cent (CBS, 2011c, pp. 21–22).

7. Between 1995/96 and 2010/11, the increase was around 400 per cent.

8. Diplomatic refers to convertible foreign exchange earnings from diplomatic missions. Aid refers to foreign aid, and investment refers to forex earnings as interest receipts.

9. Gross domestic savings are calculated as the difference between GDP and total consumption expenditure in the national accounts statistics, that is, GDP at producer's prices (current) minus consumption. Gross national savings are calculated as gross national income less total consumption, plus net transfers. Remittances are a big part of net transfers.

10. Data for consumption and real GDP sourced from MoF (2012) and labour productivity sourced from APO (2012).

11. Average annual inflation between 2000/01 and 2010/11 was 6.82 per cent (NRB, 2012).

12. Nepal Migration Survey 2009 shows that most of the migrants are in the 20–44 age group (World Bank, 2011). Also, males from remittance receiving households reduced labour supply by 15 per cent.

13. See Adhikari (2011); Sapkota (2012).

14. Wages in agriculture and non-agriculture sectors have increased by 127 per cent and 98 per cent respectively between 2003/04 and 2010/11.However, this is not matched by the increase in productivity of around just 10 per cent over the same period.

15. For computing REER, export and inflation data are sourced from the IMF's database IMF (2013) and nominal exchange rate data are sourced from Quarterly Economic Bulletin (NRB, 2012).

16. The inflation in other trading partners can also be considered as the price of tradables (fixed externally) and inflation in Nepal as the price of non-tradables (fixed domestically). A rise in REER (depreciation of currency) indicates that the tradable sector has become more competitive than the non-tradable sector. There will be incentives to switch resources to tradable from non-tradable production (Jongwanich, 2010).

17. Using SITC classification and following Sachs and Larrain (1993, pp. 657–660), the tradable sector broadly comprises: agriculture, fishery & forestry; mining & quarrying; and manufacturing. The non-tradable sector comprises electricity, gas & water; construction; restaurants & hotels; transport, communication & storage; financial & real estate; and community & social services.

18. The increase in the ratio of tradable to non-tradable production after 2007/08 has more to do with a decline in the contribution of the real estate, rent and business activities sector, the transport, storage and communications sector, and the education sector than increase in contribution of tradable sector.

19. For instance, several of the provisions outlined in the Industrial Policy 2010, and various budgets remain unimplemented (Sapkota, 2011b).