There is no denying that Nepal’s economy depends on remittance. The Nepal Rastra Bank’s macroeconomic report shows that the country received Rs733.22 billion in remittance over the past five months—a 25.3 percent increase from last year. From an economist’s lens, remittance significantly impacts foreign trade and balance of payment, domestic consumption and poverty reduction. Current macroeconomic indicators show Nepal’s foreign exchange reserve is at a record-breaking high. It won’t be wrong to say that the increasing remittance has been the primary contributor to this achievement for a long time. The situation is so critical that the country would go bankrupt if the migrant workers stopped sending money, even for a year.

The simple economics is that we need US dollars to import any goods or services to keep the economy running and people buying consumable goods. However, if remittance stops, Nepal’s foreign exchange reserves will deplete so quickly that our export, which is only about 9 percent of import, cannot sustain the demand. Other foreign exchange sources are insufficient to sustain our foreign reserve needs. The NRB’s statistics show that net foreign direct investment is only about Rs4.53 billion. Tourism has started to grow in the post-Covid era, but not at the rate of a widening trade deficit. On the other hand, loans and donations are not long-term alternatives for this cause.

Similarly, remittance has been a continuous income source for people in rural areas. It has alleviated rural poverty, improved people’s health and helped in education. Studies show that money sent back home by workers in foreign lands has significantly improved the livelihood of their family members. This, in effect, has provided employment opportunities, dragging the unemployment curve down. These, however, are short-term benefits. A country heavily relying on remittances cannot sustain itself in the long run. This drains skilled labour participation from the domestic market and increases the dependency on foreign employment, resulting in high unemployment and decreased economic activity.

The myths

Though the contribution of remittance is undeniable, some, particularly politicians, hold and popularise myths related to remittance to deflect from their own performances. The biggest myth is that remittance is the major contributor to the country’s gross domestic product. First, economics tells us that remittances are not part of GDP per se. However, remittances positively affect growth, providing the country with funds for investment. Yet, in Nepal’s case, studies are insufficient to show how the remittance is being used. Nonetheless, even from a cursory examination of statistics from the central bank, it is evident that this view of the growth-stimulating effect of remittances is no less than a myth.

If anything, remittances and predilections to foreign employment are engendering the so-called Dutch Disease: Consumption of imported goods is skyrocketing, and manufacturing activities are plunging. For instance, when Nepal received Rs733.22 billion in remittances during the past six months, its trade deficit stood at Rs693.20 billion. The question is, is the trade deficit bad for the economy? The answer is no.

The trade deficit is conducive to growth as long as the country imports technology, raw materials and other goods that indicate the growth of its production and manufacturing sectors. However, data shows this is not the case in our context: Out of total import, shares of intermediate and final consumable goods are 49.2 percent and 42.1 percent, respectively, and the share of capital goods is only 8.7 percent. This indicates that the country is not benefiting from the remittance-induced multiplier effect of consumption—higher production and employment.

The effect is seen in people renewing visas. During the last six months alone, 135,435 approvals have been issued for re-entry in the countries they worked in. Because of the lack of economic activities and opportunities, people try to return as their savings start depleting. Ironically, gross domestic savings began declining as remittances started increasing. Over the last decade, average gross domestic savings remained below 10 percent of the GDP, while remittances remained at 22 percent and consumption over 80 percent.

People also argue that remittance is being used in the productive sector. But the statistics tell a different story. Financial sector indicators of the NRB show that when remittances are increasing above 20 percent, domestic credit is increasing by a single digit. Highlights further show that out of the total outstanding loans of banks and financial institutions, the production sector comprises only 8 percent, the agriculture sector 1.1 percent, the wholesale and retail sector about 2 percent and the service sector 4.5 percent. These statistics suggest that economic activities are passive in the economy. It is also important to note that during the last six months, the current account remained at a surplus of Rs161.62 billion and a deficit of Rs72.16 billion and Rs623.38 billion in the last two years, respectively. It indicates that though the country receives considerable remittance, it depletes quickly due to heavy imports.

Some believe that the more remittance we receive, the better it is for the economy. Proponents of this view argue that foreign employment should not be considered worrisome as it is a continuous and long-term source of income for the country. The government also seems to be under a similar illusion. Their policies to send as many people abroad as possible by providing free visas and free tickets are indications of an already worsening economic base. Remittance is not a long-term source, particularly when not used in productive sectors. It only worsens things by depleting the skilled labour force of the country, on the one hand, and thereby reducing economic activities, on the other.

If the right policies are not formulated to utilise remittance money in the productive sectors and stop the annual exodus of the working-age population, the country will start losing whatever the remittance has contributed so far, more quickly than expected. After all, it’s not about money; it’s about losing the talent who could have generated the same amount in their own country and contributed directly to the economy.

Published on: 15 February 2024 | The Kathmandu Post