Remittance in Nepal

Bitaran Jang Maden Second semester

Introduction According to IMF (2009:272), remittance denote household income from foreign economies arising mainly from the temporary or permanent movement of people to those economies. In other words remittance is the money sent back home by the workers who have migrated abroad. It would include cash or non-cash items, and could arrive in the country through a formal or informal channel. In Nepal it can be seen that most of the remittance inflow is through formal channel since the financial institutions are making it easier and assessable through the increased number of remit counter in cities and villages. However, significant amount of remittance, particularly from India still arrives through informal channels like friends or relatives. The migration of labor for foreign employment dates back to the pre-historic ages, though the phenomenon of labor migration in the modern history in Nepal started only after the Rana regime, when recruitment of Mongolian tribe to British and Indian army was officially started and so did the inflow of remittance in the country. During the Maoist insurgency (1996-2006), a large number of people were displaced from the villages, and even after the end of the conflict very little progress took place in the direction in increasing employment and creating new jobs. Furthermore the increase in the demand of Nepalese workers in the international market also forced the people to choose foreign employment and the remittance inflow in Nepal has been growing every year. The factors attracting Nepalese people to work abroad can be broadly categorized as follows: Pull Factors a) Employment opportunity b) Attractive salary c) Learn something new d) Job guarantee e) Information from partners working abroad f) To see new places
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Push factors a) Wage rate/low pay b) Low job availability/no guarantee c) High family expenses and loans d) Favoritism & nepotism in Nepalese labor market e) Local agents

f) Become self-reliant Remittance profile In the 200 years of history of foreign employment in Nepal, 108 countries are open for Nepalese labor force, though MOU has been signed with only 5 countries (Qatar, Kuwait, Bahrain, Japan and Korea) according to DoFE. The large number of departure of Nepalese labor to the international market is marked by the inflow of the equally large remittance. The remittance inflow to Nepal can be shown in the table below from 2001-2011. Financial year 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11
Source: Ministry of Finance, Government of Nepal (2011)

Remittance Inflow (in Rs. Billion) 47.22 47.54 54.20 58.59 65.54 97.69 142.68 209.70 231.73 259.53

The remittance so collected has helped Nepal tackle some of the very crucial problems in the country. The high volume of remittance has raised the standard of living and has remained as an effective instrument for poverty alleviation. The Nepal Living Standard Survey-III released in August 2011 by Central Bureau of Statistics (CBS) revealed that in the year 2010/11, the percentage of all household receiving remittances in Nepal was 55.8%, which was 31.9% only in 2003/04. This increase in the remittance has brought 18% point decline in the absolute poverty between 2003/04 and 2009/10 and only 13% of Nepalese now remain below absolute poverty. The same study presented the data that the per capita remittance of Nepal is NRs 9,245. Another favorable effect of remittance in the Nepalese economy is the attainment of favorable balance of payment by narrowing the current account
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deficit. The decline in the export and increase in the import in the country has pushed the Nepalese economy towards a very serious trade deficit, and remittance has helped the economy to balance the trade deficit. Economic Growth- Inflation- Remittance Year GDP growth (%) 6.1 4.5 4.8 3.9 4.6 Inflation Remittance Industry/GDP Export/GDP Trade (%) Growth (%) (%) (%) Deficit/GDP (%) 6.7 17.5 16.8 7.3 19.9 12.6 17.5 15.9 6.9 21.9 9.6 19.4 15.1 5.1 26.3 9.6 18.5 14.8 4.7 24.2 8.0 22.7 14.6 4.7 24.9

07/08 08/09 09/10 10/11 11/12

Figure 1: Growth in economy (GDP), Inflation and remittance.

25 19.4 17.5 17.5 18.5 22.7

20

Growth (%)

15

12.6 9.6 9.6 8 4.5 4.8 3.9 4.6

10 6.7 6.1 5

0 GDP growth (%) Inflation (%) Remittance Growth (%)

2007/08 6.1 6.7 17.5

2008/09 4.5 12.6 17.5

2009/10 4.8 9.6 19.4

2010/11 3.9 9.6 18.5

2011/12 4.6 8 22.7

The figure represents the economic situation of Nepal from 2007 to 2012. The analysis shows that the remittance has been increasing every year with the rocketed boom in 2011/12. The inflation has been declining with the rise up to the highest record double digit of 12.6 in 2008/09 and GDP growth has been declining from 2007/08 with minimum of 3.9 at 2010/11 but there are signs of progress in 2011/12 with GDP growth rising to 4.6.

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Figure 2: Remittance growth, Industry/GDP, Export/GDP and Trade Deficit/GDP.

30 25 20 15 10 5 0 Remittance Growth (%) Industry/GDP (%) Export/GDP (%) Trade Deficit/GDP (%) 1 17.5 16.8 7.3 19.9 2 17.5 15.9 6.9 21.9 7.3 6.9 19.9 17.5 16.8 21.9 17.5 15.9

26.3 24.2 19.4 15.1 18.5 14.8

24.9 22.7

14.6

5.1

4.7

4.7

3 19.4 15.1 5.1 26.3

4 18.5 14.8 4.7 24.2

5 22.7 14.6 4.7 24.9

Figure 2 shows that the industry growth per GDP and export growth per GDP has been declining with increase in the trade deficit per GDP. This is a very serious threat to the economy of the country since growth is declining. The graph also shows the constant growth in the remittance of the country helping it to finance the growing trade deficit. Present Scenario- Employment The Nepal Living Standard Survey, 2011 revealed that the population of workage group (15-59 age) is 54.2% of total population and the dependency ratio is 84.4% as a result 36.9% of the population is migrant population. The employment situation in Nepal is satisfactory with 78% (10+ age) being employed and only 2% of the population being unemployed. But the economically inactive population is 20% which might be the threat to the economy. The low unemployment rate is marked by the migration of the labors to the foreign land for employment opportunities. The 20% inactive population imply that most of the labor either move abroad for employment or remain idle and comes out of labor force. Hence, unemployed population is very low in Nepal. According to another report of MoLTM, annually 4,25, 000
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youth enter the labor market but two-third of them go abroad for foreign employment. Use of Remittance A significant portion of literatures on remittances argues that they are primarily spent on consumption, housing and land and are not utilized for productive investment that would contribute a long run development. Very small proportion of remittance is used in establishment of small business, improve agricultural practices or on other productive investment on capital so as to generate revenue in long run. According to the report of Nepal Living Standard Survey of 2011 the use of remittance is done in following proportions: Daily consumption- 79% Loan repayment- 7% Household property- 4% Education- 4% Other (saving, business and investment) - 6% It is was also shown by the survey that only 2.4% of the total remittance is used in the capital formation. While others are consumed, used for loan repayment and for household property. While the use of remittance for education can be viewed as investment on the human capital. The challenge of using remittance only in consumption can be shown by the following Dutch Disease and the Vicious Policy Cycle:

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More remittances

More Migration

Little pressure to improve policy weakness

Limited Job opportunities

Inadequate investment

Low growth

Low private investment

Way forward There are only limited countries with whom Nepal has bilateral labor agreements where Nepalese workers are employed. Such bilateral agreement should be made with more countries which are essential to improve the welfare of Nepalese migrant workers abroad. The economic diplomacy has to be strong. Along with the labor agreement, government should establish their embassy in other countries as well. There are a few policy instruments the government can employ to improve development impact of remittances and enhance the flow through the formal channel. Which policy instruments the government opts depends on the desired goal it intends to achieve. The use of remittance on productive sector can be encouraged by establishment of Micro-enterprise development programs for selfemployment. Additional to which programs focusing senior citizens, single women, disables, youth and children is most because they are dependent on the male member in the family working abroad in most cases. Besides increment on the investment in formal, informal education and elimination of child labor is essential for development of better human capital for future. Similarly rural-urban linkage programs,
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employment information centers, labor-intensive investment, large scale projects for employment can be introduced for regulation of labor force. The objective of the government should be to emphasize for enhancement of employment, poverty alleviation through employment instead of remittance driven poverty alleviation because it is not helpful in long run. It can be done by prioritizing the employment generating sector and mainly the following sectors like Agriculture, Tourism, Industry and trade and Infrastructure.

Assignment for 2nd semester: Bitaran Jang Maden