High Transfer Cost Not Only Reason Discouraging Use of Formal Channels

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How do you see the recent trend of remittances inflow in Nepal?
Nepal receives a significant share of remittances to GDP every year. The government data shows that the total remittance inflow translated into 22.53% of the total GDP in 2020/21. It has also become one of the major sources of foreign exchange earnings. During the last five years, remittances have contributed about two-thirds of gross foreign exchange earnings. When we look at the overall annual growth from 2002 to 2021, the remittances have increased at an annual rate of 17.2%.

However, the remittance inflow to Nepal started to fall right from the beginning of 2021/22. The falling trend that continued for the first nine months of the fiscal year reversed from the 10th month (April-May 2022). According to data compiled by the Nepal Rastra Bank, remittances inflow, which had increased by 0.2% in the 10th month grew by 3.8% in the 11th month amounting to Rs 904.18 billion. Despite contraction in the first few months, the increasing ratio of inflow and growing numbers of migrant workers create a sufficient space to become optimistic in the days ahead.

Why is remittance lower in terms of volume if we compare to what other countries are receiving with similar numbers of workers abroad?
Of course, the volume of remittance that Nepal is receiving is low given that there is a surge in the number of workers abroad. There are various reasons behind this. The first and major reason is informal channels like hundi that workers choose to send remittances. Many studies have estimated that around 30% of total remittance comes through informal channels. Similarly, many migrant workers prefer purchasing gold and expensive goods such as mobile phones, TV, laptops etc. rather than remitting money. Though we don't have exact data, social networks like Facebook, investment in hyper funds, Crypto, betting etc. are said to be some of the factors behind decreasing remittance inflow in recent days. Moreover, because of the lack of proper records of the migrant workers, cross-checking of their earnings and transfer amount, the exact data of remittance may be still missing.  

The share of remittances coming through informal channels like hundi is still big. Isn't the high cost of transfers discouraging workers to embrace formal channels?
It is difficult to say if high cost alone is discouraging migrant workers from remitting through formal channels. It is, of course, responsible but may not be the single factor. According to a World Bank report of 2020, the cost of sending remittance to Nepal was 4.54% percent which is high even though it is lower than the global average. Due to limited banking access, and a lack of awareness of the risk and financial literacy, many migrant workers have been relying on informal channels to send their earnings home. Similarly, higher foreign exchange rates offered by hundi operators have also attracted Nepali workers to choose informal channels. Moreover, there are still many countries where hundreds of Nepalis are working illegally. So, due to the lack of access to formal channels and illegal status, they are forced to depend on informal channels to send money home.

What measures do you suggest to encourage workers to use formal channels for transfers?
Recently, the government has taken several initiatives to encourage workers and formalise remittance such as requirement of bank account to get work permit, remittance account and one percent additional interest on such account, quota in IPO for remitters, 50% exemption in work permit and passport renew fees etc. Most importantly, all these initiatives have to be implemented effectively. The government should also expand the access to formal channels by  facilitating opening of money transfer services. In other words, the government should strengthen its formal channels of money transfer. Although the cost of transfer using formal channels has significantly decreased, further reduction is needed to increase capital inflows through formal channels. Similarly, establishing remittance-linked development or investment bonds, as in Bangladesh, where remitters can invest and receive a certain percentage of interest and share on profit, can be a useful tool.

Besides, raising awareness of risks, increasing financial literacy to migrants and their beneficiaries, and promotion of digital remittance services are some other instruments that can motivate migrant workers to come to formal channels.

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