Targeted policies are needed to break the cycle of remittance coming in and going out to pay for imports.

Bhoj Raj Poudel

Last week, South Asia Watch on Trade, Environment & Economics (SAWTEE), a Kathmandu-based regional think tank, organised an interaction programme to share the findings of a study entitled Can Remittances Support Development in Nepal? A few days later, there was a news story about Tribhuvan University launching a master’s level course in labour studies. These are some indications that our efforts are in the process of being recalibrated in order to understand the future course of the country’s economy that is highly sensitive to external factors. Migrant workers sent home $8.1 billion in 2018, making the country the 19th biggest beneficiary of remittance. But that money was spent mainly for consumption purposes in the absence of a right set of policy frameworks.

In 2013, economist Chandan Sapkota recommended living with the remittance money and gradually channelling it into productive usages with the goal of boosting productivity in his paper entitled Remittances in Nepal: Boon or Bane? Going further, Sapkota also warned of Dutch disease effects and policy laxity to improve the investment climate in Nepal. Looking at the foreign direct investment inflow in the country and enterprise growth in the last seven years, one can say that Sapkota’s warning regarding policy laxity has turned out to be true. However, the flip side of the coin is that the discourse is ongoing, and institutions have started to concentrate on understanding various facets of high migration and remittances.

Remittance for transformation

Coming to the findings of the study undertaken by SAWTEE, there are several issues that need to be carefully weighed to redesign our policy framework. The paper emphasised that there could be higher remittances leading to lower revenues for household (non-farm) businesses due to the reduced labour supply. The study further highlights that there might be other (unidentified) obstacles to enterprise growth. Against the case, the paper recommends adopting policy measures that help develop a conducive entrepreneurial ecosystem—including capacity building and market intelligence which may encourage and nurture entrepreneurs.

The government, in its approach paper of the 15th Periodic Plan (2019-20 to 2023-24), has envisioned a policy framework that facilitates direct remittance in productive sectors. This is going to be challenging as studies have shown that domestic job creation is being hampered by remittance. The Industrial Policy 2010 also talks about creating jobs in the domestic market. But almost a decade down the line, the policy has shown little results.

The private sector’s perception of little job creation seems to be quite close to reality. An unfavourable regulatory environment, lack of infrastructure support and lack of credit facility are the key factors that are hindering non-farm enterprises from growing. The ‘second generation of entrepreneurs’ in Nepal needs to be supported with the right policy environment and other necessary assistance so that a bridge can be established between returnee migrant workers and entrepreneurship.

Nepal’s broader macroeconomic picture also indicates that there is not much contribution from remittance in productive sectors. In order to break the cycle of remittance coming in and going out to pay for imports of consumer goods, the government should introduce targeted policies that accommodate the objectives of migrant workers with national goals. The reason many youths flee for overseas jobs is to provide basic facilities to their families live a decent life. Against this backdrop, the government should introduce programmes to establish planned urban housing and provide basic facilities such as health insurance and education.

There might be a possibility that migrant workers will use their money to buy bonds or save it for future investment. There is a reason why Nepal Rastra Bank's Foreign Employment Bonds flopped. Migrant workers have their own immediate priorities instead of fulfilling the government’s need by buying financial instruments isolated from the daily lives of the people. Remittance has both positive and negative impacts on the economy. Returnee migrant workers have been catalysts in the domestic market. The government should provide support so that the country’s goal of becoming a mid-income country can be realised by the end of this decade.

Fiscal federalism

Provincial and local governments should issue bonds that migrant workers can buy in their respective areas. The Ministry of Finance might have to even consider amending the Inter-Governmental Fiscal Arrangement Act 2017, especially clause 14, to allow local governments to issue bonds for specific purposes. This will serve the twin purposes of truly institutionalising federalism from the fiscal point of view and channelling remittance money into productive sectors to develop infrastructure that will eventually support economic transformation.

The federal government alone cannot bring in $15 billion in investments annually for infrastructure development. There should be cooperation between local, provincial and federal governments to develop critical infrastructure. There could be a multi-purpose policy package that can unlock the path of growth which also supports the broader goal of functional fiscal federalism in the country. Let’s hope graduates completing a master’s level course in labour studies from the country’s most prestigious university will not be standing in a queue to get their passports to flee for temporary overseas jobs.

Published on: 26 January 2020 | The Kathmandu Post