Remittance dip can spark social tension: WB study

KATHMANDU, June 30: A World Bank study has warned that continuing growth in remittance income might slow the economic growth rate and weaken poverty reduction efforts if due attention is not paid to improving the business environment through acceleration of economic reforms. [break]



Along with several positive contributions of migration and remittances, there is a risk of slowdown in future economic growth due mainly to appreciation of the real exchange rate - similar to the Dutch Disease, said the study. Elaborating on possible sequences, it said that increase in remittance increases consumption, which in turn increases wages in real terms, thereby eroding external competitiveness and slowing future growth.



This is one of the biggest challenges for Nepal´s economic policy makers, the report said and stressed that ensuring a good investment climate and public infrastructure, adaption of well-prioritized spending and sustaining macro balance are critical for avoiding the trap and enhancing resilience to the shocks.



The study highlighted that high income and spending by households, lower poverty and higher real wages are some of the remarkable gains of increased remittance income for Nepal.



According to the outcomes of an ongoing study, which will be made public in the near future, there is a possibility of remittances to Nepal declining by 2.5 percent in a low-case scenario but they can decline upto 4 percent on the back of the lingering global financial crisis. Any decline in remittance income, which constitutes about 25 percent of the GDP when remittances from India and through informal channels are added, will have grave consequences on the socio-economic front.



The cost of any social crisis generated by a squeeze in remittance incomes will be higher than the financial crisis that might appear, said the report. "In an economy where 500,000 enter the labor force every year and private jobs are not being created, this would significantly increase social tension," stated the study.



The study also took note of the possible positive impact of a marginal decline in remittance and added that it would help ease investment in real estate, providing an opportunity for a soft landing for the real-estate bubble. In this process, some banks, which took excessive risks with realty and margin lending, may be strained, said the study.



The study stressed that creating a business environment conducive to private investment that can create jobs, accelerating the process of state building and achieving higher economic growth are the best responses, if overseas job opportunities for Nepalese contract.



The study recommended the government explore the possibilities of increasing spending on public works with increased implementation capability, to cope with such a situation. Ten percent increase in capital spending can hire 100,000 workers, provided the government implements the work, said the study.

Related story

Spark Adventure 2023 sets sail with over 200 participants to di...