Remittances in Nepal

Chandan Sapkota

South Asia Seminar Series (SASS), 18 September 2013

1 18/09/2013

The views expressed are solely those of the author. The presentation is based on ‘Remittances in Nepal: Boon or Bane?’ published in The Journal of Development Studies. http://dx.doi.org/10.1080/00220388.2013.812196

Presentation Outline

Introduction

Migration of Nepalese Workers

Remittances in Nepal

Impact of Remittances

Conclusion

Productive Use of Remittances

18/09/2013 2

Introduction

18/09/2013 3

Significance of Remittances

Remittances, ODA and FDI Top remittance recipients in 2011 (% of GDP)

18/09/2013 4

•Remittances inflows are far higher than ODA.

o USD 401 billion in 2012 (e) o USD 515 in 2015 (f)

•Low volatility of inflows.

Contributed to achieving economic and development outcomes (MDGs)

47

31 29

27

23 22 21 21

18 18 17 16 16 14

13

0

5

10

15

20

25

30

35

40

45

50

Migration of Nepalese Workers

• May 1815 agreement opened up the avenues for employment overseas

• Push factors – Lack of job opportunities – Unfavorable investment climate – More influential since 2000

• Pull factors – Relatively high wages – High demand for labor in low to

medium skilled sectors • Manufacturing • Construction • Hotel/catering

18/09/2013 5

0

1

2

3

4

5

6

7

8

1941 1952-54 1961 1981 1991 2001 2011

Absentee population (% of total population)

Average Daily Number of Migrants is Increasing

18/09/2013 6

6

560

1243

0

200

400

600

800

1000

1200

1400

Age distribution of remitters: •15-29 years: 34.2% •30-44 years: 37.8%

Migration Destination and Cost

• Migration destination varies with HH wealth

• Migrants from low income HHs tend to prefer India – Geography, logistics,

permit, language

• Average cost of migration: o India: NRs5,250

o Malaysia: NRs109,700

18/09/2013 7

294,094

354,716

384,665

453,543

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

FY2010 FY2011 FY2012 FY2013

Malaysia

Qatar

Saudi Arabia

UAE

Others

Kuwait

South Korea

Bahrain

Oman

Japan

Afghanistan

Lebanon

Israel

Total

Migration destination

Remittances in Nepal

18/09/2013 8

Migration and Remittances

18/09/2013 9

0

5

10

15

20

25

30

-

50

100

150

200

250

300

350

400

450

500

Rem

itta

nce

s (%

of

GD

P)

Nu

mb

er o

f m

igra

nt

wo

rker

s (i

n t

ho

usa

nd

)

Migrants (thousand) Remittances (% of GDP)

Remittance Inflows > ODA and FDI

-5

0

5

10

15

20

25

19

74

/75

19

76

/77

19

78

/79

19

80

/81

19

82

/83

19

84

/85

19

86

/87

19

88

/89

19

90

/91

19

92

/93

19

94

/95

19

96

/97

19

98

/99

20

00

/01

20

02

/03

20

04

/05

20

06

/07

20

08

/09

20

10

/11

Sh

are

of

GD

P

Remittances Aid FDI

• Substantial inflows (% of GDP) since FY2001

FY1996

– ODA: 4.6% – FDI: 0.2% – Remittances: 1.7%

FY2001 – ODA: 4.3% – FDI: 0.01% – Remittances: 10.7%

FY2013

– ODA: 4.2% – FDI: 0.5% – Remittances: 25.5%

18/09/2013 10

Sources of Remittance

18/09/2013 11

Remittance inflows from overseas account for over 80% of total household remittance inflows.

Per capita Remittance Inflows and Recipients HHs

Percentage of household receiving remittances

Per capita remittances for all Nepal (NRs)

18/09/2013 12

23

32

56

0

10

20

30

40

50

60

1995/96 2003/04 2010/11

625

2,100

9,245

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1995/96 2003/04 2010/11

More number of households are receiving more remittances.

Per Capita Remittance Received and Its Use

• Per capita receipt tends to increase with HH wealth.

• HHs in the poorest quintile received more remittance from India.

• But, almost 80% is used for consumption purpose.

• Only 2.4% for capital

formation.

18/09/2013 13

Impact of Remittances

18/09/2013 14

Indicative Impact of Remittances

18/09/2013 15

Helped Reduce Poverty and Support Growth

18/09/2013 16

• Remittances contributed between one-third and one-half of overall reduction in poverty between 1995 and 2003.

•Corroborated by the latest MPI analysis based on NLSS III. • Boosted per capita consumption of households in the poorest deciles. •Over half of the contribution to GDP growth from services sector, supported by consumption of imported goods financed by remittances.

Increased Foreign Exchange Reserve

18/09/2013 17

0

50

100

150

200

250

300

350

400

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

To

tal f

ore

x re

serv

e (R

s b

illi

on

)

Shar

e o

f to

tal f

ore

x re

serv

e

Remittances Tourism Investment Exports Diplomatic Aid Misc Total forex (NRs billion)

Remittances account for around 65% of total foreign exchange earnings.

Financed Ballooning Imports

18/09/2013 18

-30

-20

-10

0

10

20

30

40

19

74

/75

19

75

/76

19

76

/77

19

77

/78

19

78

/79

19

79

/80

19

80

/81

19

81

/82

19

82

/83

19

83

/84

19

84

/85

19

85

/86

19

86

/87

19

87

/88

19

88

/89

19

89

/90

19

90

/91

19

91

/92

19

92

/93

19

93

/94

19

94

/95

19

95

/96

19

96

/97

19

97

/98

19

98

/99

19

99

/00

20

00

/01

20

01

/02

20

02

/03

20

03

/04

20

04

/05

20

05

/06

20

06

/07

20

07

/08

20

08

/09

20

09

/10

20

10

/11

Shar

e o

f G

DP

Merchandise export Merchandise import Remittances Trade deficit

Merchandise imports are surging and are financed primarily by remittances.

FY2000 •Exports: 13.1% •Imports: 26.2% •BOT: 13.6% •Remittances: 3.3%

FY2013 •Exports: 5.1% •Imports: 32.2% •BOT: 27.1% •Remittances: 25.5%

Helped Maintain External Sector Stability

18/09/2013 19

As goes remittances (growth), so goes CAB and BOP!

0

10

20

30

40

50

60

-4

-2

0

2

4

6

8

10

FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013

Gro

wth

of

rem

itta

nce

in

flo

ws

CA

B, B

OP

(%

GD

P)

CAB (% of GDP) BOP (% of GDP) Remittances growth

Increased Revenue Mobilization

18/09/2013 20

0

5

10

15

20

25

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11

Re

mit

tan

ces

(% o

f G

DP

)

Sh

are

of

tota

l ta

x r

ev

en

ue

Customs Consumption Land-house Income Remittance (%GDP)

•Revenue performance hinged to remittances-fueled consumption demand of imported goods. •Very weak relation to GDP growth. •Consumption tax + customs duty = 72% of total tax revenue

Induced Dutch Disease Effects REER appreciation T/NT production

18/09/2013 21

0

2E-06

4E-06

6E-06

8E-06

1E-05

1.2E-05

1.4E-05

1.6E-05

1.8E-05

0

5

10

15

20

25

RE

ER

Rem

itta

nce

(%

of

GD

P)

Remittances (% of GDP) REER

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

0

5

10

15

20

25

T/N

T p

rod

uct

ion

Rem

itta

nce

(%

of

GD

P)

Remittances (% of GDP)

Tradable/Non-tradable

Spending effect • High remittance inflows = high HH income and expenditure > output and productivity capacities. (+ve income elasticity) • Rise in wages in T and NT sectors = loss of competitiveness. •T/NT shrinks.

Resource movement effect • Labor and capital attracted to high income sectors, i.e. overseas migration •Further creates shortage of workers and puts pressures on wages in both T and NT sectors.

Fostered Policy Laxity Government effectiveness Regulatory quality

18/09/2013 22

0

5

10

15

20

25

30

35

40

-0.9

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

Ra

nk

Sco

re

Percentile Rank (0-100) Governance Score (-2.5 to +2.5)

0

5

10

15

20

25

30

35

40

45

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

2000 2002 2003 2004 2005 2006 2007 2008 2009 2010

Ra

nk

Sco

re

Regulatory quality

Percentile Rank (0-100) Governance Score (-2.5 to +2.5)

Vicious policy cycle: High remittance inflows, low pressure to improve policy weaknesses, inadequate investment climate reforms, low investment, low job opportunities, high overseas migration, …

High remittance inflows lower governance performance.

Conclusion

18/09/2013 23

Supported Progress in Growth and Development

• Supported GDP growth (esp through services sector growth)

• Supported achievement of development objectives, including some MDGs

• High revenue mobilization

• Financed imports

• Maintained external sector stability

• Increased GNS

• Boosted forex reserves

18/09/2013 24

But Not For Boosting Productive Capacities and Investment

• Fueled high consumption of imported goods.

• Volatility of inflows has affected CAB.

• Very low capital formation.

• Induced Dutch disease effects (REER appreciates and T/NT production shrinks).

• Fostered policy laxity.

18/09/2013 25

Learn to Live With Persistent Inflows!

• Short-term option: Don’t go against the tide. Learn to live with persistent high inflows. – Too costly to sterilize its impact each year.

• Medium and long term option:

– Incentivize migrants to invest in productive sectors. – Offer incentives to channel remittances to finance

long term development needs with a goal to boost productivity. • Infrastructure (energy, roads, ICT, irrigation),

agribusiness, education, healthcare • Can readily absorb technology

18/09/2013 26

18/09/2013 27

Productive Use of Remittances

Productive Use of Remittances • Use of remittance depends on economic, social and legal environment.

– Improvement of investment climate is necessary.

– Enhancing financial market efficiency.

• Diaspora bonds (successful launch in Israel and India)

• Matching funds (3x1 matching fund in Mexico and El Salvador)

• Promoting remittances as collateral for private loans

• Encouraging productive investments

– Purchasing agricultural equipment

– Building house/business

– Purchasing land

– Improving farm mechanization

• Subsidization by government

– Education and business loans for family members of migrants (remittance as collateral)

– Tax breaks on imported capital goods

• Financial literacy

18/09/2013 28

18/09/2013 29

Thank You!

Absentee Population and Remittances by District

18/09/2013 30

Absentee population + migration destination tend to influence remittance inflows to districts.

HH Preference for Migration Destination

18/09/2013 31

Migrants from poor HHs (mostly FWDR and MWDR) prefer India.

Real Effective Exchange Rate (REER)

18/09/2013 32

A decrease (increase) in REER indicates real appreciation (real depreciation) of Nepali currency.

Remittances have more appreciative effect than other variables such as foreign aid.