REMITTANCE : Risky Reliance

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 REMITTANCE : Risky Reliance

Remittance has played a vital role in Nepal’s economy. The dependence is so high that even a small drop in remittance could pose a significant risk to the economy. There should not be any delay in designing and implementing strategies to channelise the remittances towards more productive investments, while also seeking ways to gradually move out from this risky reliance on remittance as a source of growth.


What if Nepal either stops receiving remittances or there is a significant decline in the transfer of hard-earned money by Nepali workers abroad? This question—even hypothetical—should give our policymakers a chill. Nepal's reliance on remittances runs so deep that workers’ transfer is said to be keeping the economy afloat. Remittances have not only played a vital role in maintaining macroeconomic stability, but various studies have shown that workers’ transfer has helped to reduce poverty and raise the living standard of the people. The reliance on remittance also comes with various risks.  Even a small drop on remittance can have significant macroeconomic, poverty and fiscal implications for Nepal due to the large size of remittances.  

The remittance as a source of foreign currency for Nepal has largely remained resilient to various international shocks. Be it the Covid-19 or the oil price crash, they have not significantly hit the flow of remittances into Nepal.

Despite warnings from various organisations including the World Bank Group that remittances could slow down due to containment measures introduced in various labour-receiving countries, the growth of such transfers did not stop. While other sources of foreign currency earnings, including exports and tourism receipts, have either gone down or remained stagnant, the growth of remittances continued.

But it would be dangerous to make an assumption that this trend will continue forever.

The rapid growth of remittances in the last one and a half decades is in line with the surge of workers going abroad for employment.

Nepal has quite a long history of foreign employment, labour migration, and remittance. Though formal labour migration started after the 1990s economic liberalisation, India and Britain had started recruiting Nepali youth into their armies from the early 19th century.  With the onset of economic liberalisation, Nepalis started travelling abroad massively in search of economic opportunities. As a result, the government prioritised foreign employment and migration in the Seventh Five-Year Plan (1985-90) and started issuing labour permits to migrant workers in 1994. This opened the doors for Nepali youth to move to greener pastures abroad.

Such numbers increased dramatically after 2000 when Maoist insurgency engulfed the country. Though Nepal was already receiving remittances sent by Gurkha soldiers, the country witnessed a huge growth in remittances inflow after youths started heading to the Gulf in large numbers. As more youth head to foreign lands for work or higher studies, the inflow of remittance started increasing significantly, making remittance the major source of foreign exchange earnings for the country.

Today, Nepal is one of the top remittance-receiving countries in the world. Nepal was ranked third in the world in terms of remittances ratio to gross domestic product (GDP) in 2020 at 27%, according to a World Bank's report. In fiscal year 2020/21, annual remittance inflow in Nepal was recorded at Rs 961 billion, an all-time-high figure, despite the COVID pandemic. Remittance today is a major pillar of the country's economy, equaling almost one-third of the national GDP, some estimates suggest.

Remittance income is also estimated to constitute a quarter of the income of all Nepali households and almost two-thirds of the income for those receiving money from abroad. In Nepal, remittance today stands as a crucial pillar of the country's economy.

But there are doubts whether the pillar could withstand possible shocks including global economic downturn, mass return of workers and decline in workers leaving abroad, among others.

A World Bank report in 2016 also warned about the risks of Nepal’s reliance on remittances. According to the report, in a hypothetical scenario of a 10% drop in remittances, the growth in Nepal could drop by up to 3 percentage points. Given that a 10% drop in remittances is equal to 3 percentage points of GDP, such a slowdown would affect incomes, and in turn consumption as well as GDP, in a commensurate amount, according to the report.

“Clearly, a well-designed domestic (endogenous) policy response to external (exogenous) shocks can help Nepal not only weather a shock of a slowdown in remittances, but also lay the foundation for delinking Nepal’s growth from external factors,” reads the report.

Govt promoting labour exports!
Recognising the impact of remittances on the economy, the government and policymakers have been promoting the export of labour. Various rules and regulations including the Foreign Employment Act, the establishment of the Department of Foreign Employment, and the opening of embassies mostly in the labour receiving countries are a testament to the government’s approach. The Ministry of Labour, Employment, and Social Security’s performance is measured by its success to search markets for Nepali workers abroad, rather than its efforts to create jobs within the country.

The government formulated the Foreign Employment Act in 1985.  This Act has been enacted to amend the law relating to foreign employment in order to make foreign employment businesses safe, managed and decent, and to protect the rights and interests of the workers who go for foreign employment and entrepreneurs who are involved in the promotion of the foreign employment business. The Act incorporates provisions like up to five years of imprisonment to those cheating workers. Likewise, the Act has also made bank guarantees worth Rs 3 million (now Rs 10 million) mandatory to get approval for operating foreign employment businesses in Nepal.  The Foreign Employment Promotion Board and Employment Welfare Fund being operated today were also envisaged by this Act. Similarly, the Act also states that there should be a mandatory agreement between employer institutions abroad and the worker prior to his/her departure to the destination country.

The government introduced Foreign Employment Tribunal Rules in 2012, under the Foreign Employment Act, primarily to address disputes in the foreign employment sector. The Tribunal Rule basically has jurisdiction to adjudicate on violations of the Foreign Employment Act, 2007 and Foreign Employment Rules, 2008. It inspects the operation of foreign employment business without a proper licence and other frauds witnessed in the foreign employment sector and settles disputes that arise.

Nepal has signed labour agreements with nearly a dozen countries to ensure that the rights of Nepali migrant workers are protected. Such agreements have not only helped to provide protection to workers, but also ensure their safety and security. So far, Nepal has inked labour agreements with 10 countries including Qatar, UAE, South Korea, Bahrain, Japan, Jordan, Malaysia and Mauritius.

It is a globally acknowledged fact that labour migration is playing a crucial role to boost economic growth of different countries, easing unemployment pressure and bringing in foreign exchanges through remittances. Different countries, including India, Pakistan, Sri Lanka and Bangladesh, among others, have developed necessary legal frameworks to encourage their citizens abroad to send remittances to their country of origin. These countries have allowed their citizens abroad to maintain bank accounts in both local and foreign currencies, have allowed them to invest in local securities/shares, allowed them to make investments in immovable properties in destination countries. All these facilities provided by different governments intend to attract remittances from their citizens. India, for example, has eased regulations to ease remittance inflow by eliminating the black-market premium on its currency. Countries have also slashed charges on sending money through banking channels in a bid to discourage the inflow of remittance from the informal channel. Some countries in South Asia, including India, have also set up welfare funds for migrant workers aimed at upholding their interests.

Acknowledging the positive impact of remittance on Nepal’s economy, Nepal has prioritised promoting foreign employment and mobilisation of remittances to Nepal. The Nepal Rastra Bank (NRB), the country's central bank, started issuing licences to private firms in the remittance-transfer business. Today, there are 56 registered remittance service providers sending remittances to Nepal. Banks are the unique institutions mandated to manage foreign exchange and provide international remittance services.

The government has also granted permission to manpower agencies to open foreign currency accounts in Nepali banks for management of foreign currency income that they realise under the prevailing rules. In line with the increasing inflow of remittance in the country, the central bank has also introduced ‘Remittance Regulation, 2011’ in a bid to effectively govern and regulate the remittance industry.

Despite increasing labour migration and inflow of remittances, huge sums of remittance to Nepal come from unofficial channels which shows that the government has not been able to formulate effective policies that encourage workers to use formal channels to remit money. Though stakeholders and experts have been suggesting that the government reduce the cost of remitting money to Nepal through banks and remittance companies to encourage migrant workers to send money home using formal channels, Nepalis abroad still find informal channels to send money more cost-effective. As the cost of formal remittance is high and informal remittances give higher exchange rate, Nepali workers go for informal channels as there is little incentive for people to move to formal channels. In Nepal, an informal system of remittance called ‘Hundi’ is very popular where money exchange takes place outside the banking channel. There are hassles for workers abroad to visit the offices of remittance companies or bank branches and do paperwork that dissuade them to embrace formal channels for money transfer.

Impact on economy
Nepal is one of the largest remittance recipient countries in the world and remittance income is one of the major sources for capital formation in Nepal. Remittances are the major factor contributing to increasing capital formation in Nepal, increasing per capita income of Nepali people, and poverty reduction. In fact, remittances in Nepal are equal to 25% of the gross domestic product (GDP) value. Nepal receives remittance largely from India and Gulf countries where a majority of its migrant labourers are based.

Remittance has played several positive roles in Nepal’s economy in terms of reducing poverty and unemployment, maintaining foreign exchange reserves and correcting balance of payments. Similarly, remittances have been an important source of supplementary finance for many Nepali households and their benefits – improved livelihoods, greater economic security, and increased human, social and other capital. Compared to foreign aid, the household-to-household nature of remittances makes it an important and direct vehicle in achieving accelerated poverty reduction.

Remittance has its downsides too
The growing dependence on remittance has reduced labour supply and created a culture of dependency that inhibits economic growth in Nepal. Many development or construction projects complain about the shortage of labourers in the country. Construction companies say that they must rely on Indian labourers for roads, bridges, buildings and other infrastructure projects.

While more migrant labourers will increase the inflow of remittance to Nepal and ease the pressure on unemployment rate, losing Nepali workforce will also result in a crunch of skilled human resources in the country itself which will affect the overall development process.

Extensive dependency on remittance has also made Nepal’s economic growth unpredictable as the growth of the economy is largely affected by the ups and downs of remittance inflow in Nepal. Likewise, increasing remittance inflow is also said to have negatively affected Nepal’s competitiveness in the global markets.

Agriculture sector at receiving end
As a big share of the working-age population is abroad for foreign employment, the agriculture sector is suffering in the country due to a lack of farm labourers. Similarly, the remittances have also fuelled the import of agriproducts.

The trend of Nepal's imports of agricultural produce in the recent few years is alarming. Nepal imports more than 80% of the grains it consumes, while spending on food imports has increased by over 60%. Crops like rice, lentils and vegetables that used to be farmed extensively in Nepal in the past are also imported in huge quantities in recent years.

In the first 11 months [between mid July and mid May] of FY 2021/22, Nepal imported agriculture-based products worth Rs 369.711 billion, while the trade deficit on such items is Rs 250.71 billion. In 2019, Nepal imported rice worth Rs 33 billion, maize worth Rs 15 billion, and millet worth Rs 15 billion. Agro economist Yamuna Ghale says that the shortage of workers in the country for farming has contributed to the decline of the agriculture sector.

Compared to 80% of the population engaged in the agriculture sector, this sector currently provides livelihood to only 65% of the population. Agriculture sector’s contribution to the gross domestic product (GDP) is also on a declining trend. According to the Economic Survey report published by the Ministry of Finance in mid-May, , the share of agriculture in the GDP declined to 23.9% in the previous fiscal year from 32.7% in the fiscal year 2011/12. The agricultural sector’s decline is partly blamed on the shortage of workers amid growing numbers of Nepali leaving the country for employment abroad.

“Foreign employment is one of the factors that has led agriculture production to decline. The government should implement its plans and programmes to encourage migrant worker returnees to take up agriculture business,” Ghale says. Government officials point out subsidised loans that the Nepal Rastra Bank has introduced as one of the programmes to encourage youth to embrace agro-business.

Paras Kharel, an economist who works with South Asia Watch on Trade, Economics and Environment (SAWTEE), says that the shortage of workers due to the growing trend of Nepali going for employment abroad has led to increased labour costs for the domestic industries.

Social dynamics
Earnings sent by workers abroad has not only become a catalyst for reducing poverty in rural parts of the country, but also helped in boosting Nepal’s performance on some key socio-economic indicators. Between 1990 and 2019, Nepal’s HDI value increased from 0.387 to 0.602, an increase of 55.6%. A higher level of HDI indicates a country's higher life expectancy, higher access to knowledge, and higher standard of living.

Likewise, Nepal’s life expectancy at birth increased by 16.4 years, mean years of schooling increased by 3.0 years, and expected years of schooling increased by 5.2 years during the period, according to a recent report by the UN.

The progress Nepal has made in terms of human development is partly attributed to the remittances that almost one out of two households have been receiving. Analysts say that the progress in school enrolment rate, fall in the dropout rate and other indicators in the education sector are a result of remittances earned by most families. Studies have shown that the higher earnings received in the form of remittances lead families to increase not only their consumption but also investments on education, health care, nutrition and housing.

Remittance has social costs too. There has not been much study about the social strains caused by foreign employment. Lack of protection and welfare in destination countries has led to the exploitation of Nepali workers. There are numerous cases of sexual and physical abuse of Nepali workers in destination countries. Hundreds of Nepali workers die abroad every year. Those - mostly women - struggle hard to reintegrate into their communities when they return home from employment abroad.

News reports and anecdotal evidence suggest that foreign employment has also fuelled separation of family members, estrangement and divorce in husband-wife relationships and disputes between family members for control over resources. The social consequences of foreign employment are rarely factored in while assessing the impact of remittances.

Utilisation of remittances
There are widespread concerns about how remittances are utilised by households. Migrant workers have to allocate a huge portion of their income to repay the loans that they borrow from informal channels.

According to a survey conducted by the Nepal Rastra Bank (NRB) in 2016, 25.3% of the income of migrant workers is spent on repayment of loans. "As the cost to go for employment is high and there is a compulsion to borrow money at exorbitant interest rates, migrant workers have to allocate a huge portion of their earnings for repayment of their loans," reads the report.

According to the report, 28% of remittance is used for savings, while 9.7% goes for education and health.

But, the majority, or nearly 23.9%, of the remittances is spent on daily consumption. The finding of the central bank's report is based on the field survey of 320 remittance receiving households in 16 districts. A Nepali migrant worker sends home an average of Rs 44,333 per month, according to the report.

While utilisation of a certain percentage of remittance on loan repayment and consumption cannot be ruled out, experts say that the government should come up with policies to encourage workers and their families to direct such incomes towards productive investments.

“The policies and initiatives undertaken so far to augment the impact of remittances are primarily aimed at encouraging workers to send remittances through official channels. But the utilisation aspect of remittances has been largely ignored by the government authorities,” says Bhuvanesh Pant, the author of ‘Trade, FDI and Remittances: Selected Writings’.

“Hence, directing remittances to productive investments is a challenge for the government. Families of migrant workers should be encouraged and trained so that they are able to undertake small businesses. This will generate jobs and help improve the domestic economy,” adds Pant, who is also a former executive director of the Nepal Rastra Bank.

Efforts to send more remittances
The government as well as Nepal Rastra Bank (NRB) have been taking some initiatives to encourage workers abroad to increase and send their savings through formal channels. The central bank has been issuing foreign employment saving bonds every year since fiscal year 2009/10.

However, these bonds, issued with the objective of bringing foreign currency savings of Nepalis working abroad through a formal channel and encouraging them to invest in Nepal, have so far received lukewarm responses.

Though the central bank offers higher interest rates than on other bonds or interest rates offered by banks on deposits, such bonds remain under-subscribed massively every year. Earlier in fiscal year 2020/21, only 5.52% out of Rs 1 billion of the foreign employment saving bonds was subscribed.

Foreign employment bonds are part of the domestic debt that the central bank raises on behalf of the government to finance its budget. In other words, the government has tried to mobilise remittances to finance its development works.

However, such efforts have largely proven futile either due to a lack of information about this investment opportunity or because the process to buy such bonds is cumbersome. Some experts opine that the government should issue project-specific bonds to attract remittances for development initiatives, including mega hydropower projects, rather than mobilising such funds for deficit financing as it has been currently doing. This will give a sense of involvement in certain development projects while also ensuring them a return on their savings.

As part of its efforts to address the shortage of liquidity and encourage workers to remit their money through formal channels, Nepal Rastra Bank (NRB) allowed banking institutions to offer at least one percentage point higher interest rates on deposits coming from remittances through formal channels. Most banks have introduced deposit schemes with higher interest rates targeting remittances. This measure is not only expected to serve as an incentive to send money through formal channels and save their earnings, but also boost the liquidity in the banking system and foreign exchange reserve of the country. Bankers say that there is a growing attraction among Nepalis living abroad to open bank accounts and transfer money due to the higher interest rates.

Some of the government announcements to encourage overseas Nepalis to embrace formal channels to remit money are either limited to paper or have become largely ineffective. For example, the government had announced a 25% discount on registration fee of land and housing units bought from cash remitted through formal channels. But this provision did not get implemented. In 2017/18, the government introduced a concept of ‘remit hydro’ to encourage migrant workers to invest their hard-earned money in productive sectors. That also got limited to the paper.

Crypto impact
Growing cryptocurrency investment, although illegal in Nepal, is likely to hit remittances inflow from formal channels. Fall in the remittances occasionally is partly attributed to the growing investment in cryptocurrency by Nepali workers mostly in advanced economies like the US, Australia, South Korea, Japan, Germany, and other European countries. Bibek Oli, a PhD student and a researcher living in Hamburg in Germany, for example, has channelised his earnings toward such instruments.  Until recently, he used to send his family in Nepal money for investment. Oli's family residing in Kathmandu would mainly invest the money coming from Germany in real estate. However, with the rise of cryptocurrency and non-fungible tokens (NFTs) and noticing his circle of friends enchanted with soaring returns, Oli stopped sending money home and instead started to put his money in the crypto market.

If this trend continues or goes upward, it could have consequences on the inflow of remittances to Nepal. Nepal Rastra Bank (NRB) officials worry that such temptation to invest in such instruments may hit remittances flowing into the country. NRB has recently issued a notice stating that investment in cryptocurrency is banned for Nepalis and is a violation of the Foreign Exchange Regulation Act 1962.  The notice reads that even Nepali nationals living abroad are subject to punishment for violating the Foreign Exchange Regulation Act if they facilitate capital flight from Nepal.

However, digital currency champions opine that, if legalised and managed systematically, digital money could be beneficial for countries like Nepal where the cost of transfer of money has been discouraging many workers to adopt formal channels to send money.  

How to Promote Use of Formal Channels for Remittance Transfers:

Provide Quota in IPO and FPO
Nepali workers residing in various countries are now looking at various alternatives to invest the remittance amount they send back home. Also, they have now started applying in initial public offerings (IPOs) and further public offerings (FPOs) of shares of public companies. In order to motivate and encourage them to send remittances through formal channels, the government should allocate some quota in IPO and FPO to the workers who send remittance through formal channels. As this plan has already been incorporated in the budget for the current fiscal year, the government should implement this provision. By requiring fund transfer through banks or remittance companies, the government can encourage workers to embrace formal channels to transfer their money to their home country.

Discounts and waivers on transfer charges
The government can provide various discounts to send remittances through formal channels or reduce the cost of transfers. As per the data of World Bank, the cost of a remittance transfer to Nepal was 4.54% in 2020. In order to promote and motivate senders to opt for a formal channel in sending remittances, the government should take some initiative to subsidise this cost of transfers and provide at least 50% discounts on sending charges or making the transfer totally free of cost. This could be one way of motivating the senders to use formal channels.

Awareness Campaigns
Sending remittance through informal channels like Hundi is very risky. There are many news reports where the senders have lost their money while sending through Hundi. Also, such transfers don’t get registered in the country’s accounting system. The money sent through informal channels also cannot be considered a legal source of income. This means s/he will be trouble in case of a situation where the sender is required to show a legitimate source of income. The transfer of such funds also prevents Nepal from getting foreign currency which is a major source of import financing. Hence, the government should organise various awareness campaigns to educate and motivate the Nepali workers to send remittances through formal channels only.

(With inputs from Tamish Giri, Pema Yangzom Sherpa and Priyanka Mandal.)

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