Dr Kamal Raj Dhungel

Since the First World War, Nepali youth have continually migrated to foreign countries in search of livelihood. The growth of migration rapidly accelerated in the last two decades after Nepal underwent policy changes conducive to opening up and liberalizing the economy. In the beginning, the thrust of these economic policies was to either privatize or dismantle public enterprises. Policy failures have continued because of the inability of the private sector to operate such enterprises. Actions have been stalled in spite of the negative implications on the economy in the short as well as in the long run. This, in turn, has created chronic unemployment.

Economic transformation did not produce any significant positive effects and instead, started to decline over time. In addition, Nepal experienced a decade long armed conflict since the late 1990s. It is estimated that the conflict cost the nation around 2.5 percent of GDP growth per annum since 2000. All these factors further added to the migration trend.

Employment to potential Nepali workers depends on the need of foreign countries. The outflow of people in search of opportunities in foreign countries has increased over the years. Foreign workers contribute remittances - transfer of funds by workers (remitters) living and working in developed countries, typically to their families in their home countries. Examples include Middle Easterners living in Europe, Latin Americans in the United States, and Koreans and Filipinos in Japan. Although the use of remittances varies from country to country, the recipients of remittances commonly rely on them for meeting living costs, education and investments. A significant number of Nepali youth, over two million, work in different countries of the world, particularly India, East Asia and the Middle East. These youth send remittances to their families. The number of youth who migrate from Nepal and hence, remittances they send home have increased significantly over the years and it is believed that remittances play a pivotal role in providing livelihood to the majority of people who live in rural areas.

Nepal received around USD 2.9 billion remittances in 2009, up from USD 0.8 billion in 2004, an increase of 262 percent in just 5 years. In 2009, the total remittance was four times greater than export earnings, 81 times greater than FDI, eight times greater than the earnings from tourism and nine times greater than grants. Remittance contributed 18 percent to the total GNP of Nepal in 2006, the highest in South Asia. This figure has been constantly heading north.

In 2004, remittances constituted 14.2 percent of GDP and jumped to 41.1 percent in 2009, an increase of 189 percent. This data reveals that the dependence of Nepal’s economy on remittances has been increasing over the years and this trend looks set to continue for some time to come. Tourism is a promising sector in Nepal but income from tourism seems to fluctuate, indicating fluctuation in employment opportunities. Export and tourism earnings as a percentage of GDP were 11 percent and 5 percent respectively in 2009. This indicates that the growth of domestic sectors that earn foreign exchange is not as pronounced and encouraging as remittance.

Over 1100 Nepalis leave the country every day in search for greener pastures. The country could be in trouble if there is a mass return of foreign workers. The bulk of inflow of remittance in Nepal has been increasing over the years. The expenditure trend of the remittance received indicates that it may have significant role in reducing poverty. Out of total remittances, 78.9 percent is spent on daily consumption followed by loan repayment (7.1 percent), household property (4.5 percent) and education (3.5 percent). This pattern indicates that there is a considerable implication on the livelihood of people as a major portion of remittances is spent on consumption. Merely 2.4 percent is spent on capital formation. Lack of employment generation due to the unproductive use of remittance will definitely hit the economy in the long run as the country is now caught in a ‘remittance trap’.

This writer has found a positive relationship between per capita GDP variable and per capita workers’ remittances over the time period of 1976 to 2009. The growth elasticity of remittances in that time period was 0.02. It indicates that a 1 percent change in remittance will change the GDP by 0.02 percent. To explain further, a 0.02 percent growth in GDP requires a 1 percent growth in remittance.

Remittance amounted to USD 2.9 billion in 2009 and plays a vital role in meeting the livelihood needs of people of Nepal. The trend of spending the remittances, as mentioned above, implies that the use of remittance is not mobilized in productive sectors, making the future of Nepal’s economy even more uncertain, unsustainable and vulnerable. The elasticity coefficients of remittance is ‘positive but less than one’, which implies that the change in GDP associated with the change in remittance income is not proportional. This is mainly due to the utilization of earnings in unproductive sectors.

The implication is that the government should adopt a policy of achieving export-oriented growth, together with remittances. From this study, it is seen that remittance has affected growth, at least in the short run, but it cannot be considered as a permanent component with long term implications on our economic growth. However, it cannot be denied that remittances play a hugely significant role in providing livelihood to the majority of people in Nepal today.

The author is associate professor, Central Department of Economics, TU

Published on: 20 June 2012 | Republica