Paras Kharel

Senior Programme Officer, South Asia Watch on Trade, Economics and Environment (SAWTEE),

Kathmandu

Remittance as development resource: Experience of Nepal

Introductionó International migration and remittances – mainstay of

the Nepali economy

ó There are at least 2.1 million Nepali migrant workers abroad (in a population of 29 million)

ó Almost half of households have at least one absentee abroad or a returnee from abroad

ó Migrants are mostly male (93%). At least a quarter of the adult male population works abroad

ó Most of the migrants are young – 20-44 years old

ó Work-related international migration is spread across the country – across five development regions, three ecological belts, and households of different expenditure quintiles

Introduction…ó Migration is concentrated in a few

developing/emerging economies, namely India, the Gulf (mainly Qatar, Saudi Arabia, UAE) and Malaysia

ó Many migrate through informal channels

ó Most migrants are unskilled or semi-skilled

ó A quarter to a third of households receive remittances from abroad.

ó Remittance from abroad accounts for 80 percent of total remittances (including from within Nepal) received by households

Trend, role and importanceó Departures surged after 2001, as an armed conflict

intensified and administrative reforms relating to passport issuance were taken. Over 200,000 go overseas for work (through formal channel) every year.

Trend, role and importanceó A safety valve of sorts to release un/under-employment

pressure amid dismal economic growth (at 400,000 youths enter labour market every year)

ó In a period of depressing growth performance, remittances have proved to be countercyclical

Trend, role and importanceó Remittances have emerged as the largest source of

foreign exchange earnings

Trend, role and importanceó Remittances have helped keep current account

and BoP in surplus in most of the years since 2000/01

Trend, role and importanceó Remittances have helped bridge the resource

gap.

Trend, role and importanceó Remittance-financed imports are the biggest

source of government tax revenue

ó Import-based taxes (including tariff, VAT and excise) accounted for nearly 50 percent of the tax revenue in 2009/10.

ó Tax revenue has grown faster than actual government expenditure by 57 percent during 1999/2000-2009/10

ó Half of the growth of tax revenue has been due to growth import-based taxes

Trend, role and importanceó Remittances are raising living standards

ó About 79 percent of remittance is spent on daily consumption; only 2.4 percent on capital formation

ó During 2003/04-2010/11, per capita consumption of the poorest decile grew at a faster rate than that of the richest decile

ó The second bottom spending quintile have the largest share of households receiving remittances

Trend, role and importanceó Remittances from abroad have contributed to

poverty reduction

ó The headcount poverty ratio has declined by 30 percentage points in the 15-year period 1995/96-2010/11, or by an average of 2 percentage points per year

ó Increased worked-related migration (internal and international) and remittances sent home are estimated to have directly accounted for 20 percent of the reduction in poverty between 1995/96 and 2003/04, with international migration contributing about 14.5 percent (Lokshin et al. 2007)

Trend, role and importanceó Interestingly, the elasticity of poverty reduction is

significantly higher for domestic migration than it is for international migration, indicating the potential importance of domestic migration in poverty reduction (Lokshin et al. 2007)

ó Indirect contribution through other factors behind poverty reduction: e.g., increase in non-agricultural incomes (through increase in remittance-induced demand) and agricultural wages (through tightening of the labour market)

ó Role in poverty reduction could be still greater if economy-wide impacts and multiplier effects are taken into account

Costs, risks and challengesó There are symptoms of the Dutch disease,

although one cannot argue that the phenomenon is happening and hurting growth and competitiveness conclusively

Costs, risks and challengesó The structure of the Nepali economy has shifted from

an agriculture-dominated one to that of a non-tradable services-dominated one, with the manufacturing sector faltering

Costs, risks and challengesó Labour shortages rising wages could dent the

competitiveness

ó Given the sizeable presence of foreign migrant workers in a variety of sectors in the country, part of the benefits of rising wages is likely to have diverted to non-Nepali nationals

Costs, risks and challengesó This is not to suggest that remittances are the

sole and the most important factor for the dismal performance of the manufacturing and export sectors

ó Other factors constitute the binding constraints to growth : e.g., poor and inadequate infrastructure; political instability (also deteriorating of law and order, worsening industrial relations)

ó The increase in consumption demand fuelled by growing remittance inflows is a potential source of economic growth if domestic production and supply response (in turn determined by domestic investment climate) is good

Costs, risks and challengesó Remittance inflows have contributed to a real

estate boom

ó The financial sector has an alarming exposure to real estate

ó The crux of the problem is regulatory/supervisory failure. But the phenomenon also points to the challenge of judiciously mobilizing remittance-driven liquidity in the economy for increasing domestic production activities and employment generation

Costs, risks and challengesó Threat of brain drain

ó The educated and the skilled and highly skilled are also increasing going abroad for work

ó Theoretically, there are possible benefits from such migration, but the loss is almost certainly positive when people educated and trained with public resources migrate

ó Danger of vicious circle: poor domestic business and investment climate pushing high-skilled people abroad and the lack of high-skilled workers contribute to the poor climate and limit the supply response to reform

Costs, risks and challengesó As the largest source of foreign exchange

earnings, remittances may also be indirectly financing capital flight

ó Capital flight from Nepal was at least US$8 billion during 1990-2008, or 8 percent of GDP on average, and over US$4 billion during 2000-2008 (UNDP 2011)

ó The bulk of capital flight is attributable to trade mispricing (UNDP 2011)

ó Remittances sent through the hundi system (although declining) are another source of capital flight

Costs, risks and challengesó There are human, social and financial costs at the

household level

ó Adverse effects on family life

ó Exploitation and abuse; migration through informal channels

ó High initial financial cost of going abroad for work

ó Cost is a critical barrier for the poor to get overseas employment

ó Dependence on informal credit sources that charge exorbitant interest rates to fund migration increases indebtedness

Costs, risks and challengesó Informal channels dominate the transfer of

remittance (particularly from India), although use of formal channel is increasing

ó The cost of remitting money through formal channels varies, but in general has reduced substantially and is one of the lowest in the world

ó Reasons for use of informal channel:

ó Lack of awareness, procedural complexities, legal and regulatory constraints in destination countries, inadequate penetration of banking services across Nepal

Costs, risks and challengesó How to utilize returnees?

ó There are an estimated 735,000 foreign employment returnees in the country (in 2009), with an average age of just under 30 years

ó More than two thirds of returnees are in agriculture (47 percent) or inactive (22 percent).

ó Majority of returnees are thinking of re-migrating

Costs, risks and challenges

ó Negative external shocks to migration and remittances could have a disastrous impact on the economy – from the macro level to the household level

ó The global financial and economic crises of 2008-09 negatively impacted departures and remittances, albeit temporarily – a stark reminder of the risks

ó Main risks emanate from the uncertainty of the direction of oil prices, given the deepening European debt crisis

ó At the mercy of destination-country policy changes (e.g., indigenization programmes in GCC countries)

Leveraging remittances for sustainable development

ó Critical developmental challenge facing Nepal: how to leverage remittances for growth and development?

ó Government of Nepal has adopted strategy to mobilize the earnings of the Nepali diaspora for infrastructure development

ó The central bank has floated Foreign Employment Bonds twice (2010 and 2011), but the response has been poor

ó Reasons for poor response: from lack of adequate homework to regulatory constraints in destination countries

ó Attempts to attract investment from Non-Resident Nepalis (permanent migrants) in big infrastructure projects have not succeeded

Leveraging remittances for sustainable developmentó Alternative measures should also be considered:ó increase the savings of recipient households once

they receive remittances and mobilize the same for development work

ó pooled/collective remittances and matching fund schemes – for community investment projects, setting up of micro-enterprisesó in the long term, the option of “securitizing” remittance

flows

ó Deposits in the domestic financial system have to be directed away from speculative activities and real estate towards infrastructure and production-oriented sectors

ó Overall business and investment climate must be improved, and other development plans, policies and strategies implemented in war footing

How can international community help?

ó Relax restrictions on temporary movement of labour in the low/-semi-skill category from LDCs. Implement Paragraph 9 of the LDC Modalities of the GATSó Respond positively to the pursuit of bilateral

agreements on migration by LDCs, and favourably consider LDCs’ concerns, interests and priorities

ó Ratify international instruments and conventions aimed at protecting migrant workers’ rights, including the Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families, and agree to a robust enforcement mechanism

How can international community help?

ó Help labour-exporting LDCs regulate recruiting agencies effectively by providing accurate and timely information, as well as take prompt action against recruitment-related malpractices on their soil

ó Develop and implement (in destination countries) proactive remittance-supporting policies, including by supporting migrant associations, facilitating low-cost remittance transfer through formal channel, greater relaxation and competition in money transfer markets, improving access of remittance service providers to national payment and settlement systems, and improving banking access of immigrants (World Bank 2006)

How can international community help?

ó Assist money transfer companies from LDCs to set up branches on destination-country soil, and also facilitate the issuance of development bonds targeted at migrant workers by LDC governments

ó Assist LDCs in the establishment and maintenance of bilateral migration database

ó Set clear milestones and timeline for the establishment of International Migrants Remittance Observatory.

ó Assist, through the provision of special aid packages, in reducing the negative impacts and increasing the positive impacts of high-skill emigration from LDCs

How can international community help?

ó Create a mechanism (rewards and penalty) for the return of migrants

ó In collaboration with LDCs, explore ways to leverage ODA to increase the development impact of migration e.g., through the provision of training programmes for unskilled and semi-skilled would-be migrants; supporting self-employment schemes for returnees

ó Provide technical assistance to LDCs on remittance management