Remittance earnings globally, as estimated by International Fund for Agricultural Development, stand at US$ 401 billion. According to the World Bank, developing countries in 2006 recorded remittances to the tune of US$ 206 billion, making it one of the largest sources of external finance. This amount is two-thirds of foreign direct investment (US$ 325 billion) and almost twice as large as official aid (US$ 104 billion). Economists say every remitted dollar generates an additional three dollars in economic activity in the receiving country.
Empirical findings show significant correlations between economic variables and remittances implying that increase in remittances in developing countries lead to long-term economic growth.
Emerging role
Although agriculture has been a major contributor to Nepal´s GDP, it is now remittance and service sector, which are major contributors to growth. For the past five years consecutively, remittance has been the top contributor to foreign exchange earnings. Its share in total foreign exchange earnings increased from 36.6 percent in 2003-04 to 46.7 percent in 2005-06.
Based on the total remittance inflows and numbers of emigrants, the Development Prospects Group reveals, in the year 2005, on average, each individual Nepali remitted US$ 124.5 per month. This amount is about 2.5 times higher than the monthly wage received by a worker with higher education or a trained worker and about four times higher than average GDP per capita per month. According to Department of Labor and Employment Promotion, the number of workers going abroad for employment has increased by almost 13 percent in 2007/08 as compared to 2006.
Remittance has contributed to 26 percent growth in convertible currency reserves by playing a crucial role in savings, investment, growth, consumption and poverty and income distribution. With regards to poverty, a recent study conducted by World Bank, Department for International Development and Asian Development Bank reveals that out of 10.9 percentage point of reduction in the incidence of poverty between 1995/96 and 2003/04, remittances’ contribution to poverty reduction was as high as 6.1 percentage point. Although debatable, a cross-country data shows that a 10 percent increase in per capita official remittances may lead to a 3.5 percent decline in the share of poor.
The impact of remittances is not only economic; it has a social, cultural, intellectual (skills and know-how), political (lobbying and advocacy) and financial impact. Remittances’ high social returns manifest in the form of increased household investments in education, entrepreneurship and health. It is more stable than private capital flows.
Although the top three recipients of remittances are India, China and Mexico but in terms of remittances as a share of GDP, the biggest recipients are smaller economies such as Tajikistan (36.7 percent), Kyrgyzstan (31.4 percent), Moldova (30 percent), Afghanistan (29.6 percent), Tonga (27 percent) and Guyana (22 percent). In Nepal, the contribution of remittance to GDP growth is close to 18 percent, which is the highest in South Asia excluding Afghanistan.
Macro- & micro-level impact
In Nepal, low domestic savings has pushed up real interest rates thereby discouraging investment. Domestic savings rate is actually falling since 2000 by 9 percent of the GDP. But investment rate as percentage of GDP is 28 percent. If we consider gross national savings rate, which includes remittances, this gap is being financed by remittances. Secondly, despite 16 percent trade deficit to GDP, Nepal has current account surpluses, which is largely because of remittances. It has helped reduce external debt as percentage of gross national income from 49.5 percent in 2002 to 37.8 percent in 2006.
A recent study reveals about 70 percent of Nepali workers abroad are unskilled and 27 percent are semi-skilled. A study on Nepal’s remittance receipt from India conducted by Nepal Rastra Bank shows that out of the total sample population, only 32 percent had primary education and another 34 percent had lower secondary education. It indicates that in Nepal, since migrating workers are unskilled or semi-skilled, migration does not lead to skill drain. In case Nepal needs skilled workers, because of open border and easy access, they can be available from India. Nepal currently has 15 percent of skilled labor from India. Therefore, at present, out migration is a not a critical constraint to growth.
Remittances augment the income of the recipient households. Increased income has impact on consumption and livelihood. Remittances increase household expenditure on health and education. It also provides working capital. Nepal does not keep data on the overseas unofficial potential remittances because the true magnitude of unrecorded remittances and their economic implications have received relatively little attention.
About 40 percent of Nepali households in the rural western Mountains/Hills receive transfer income. The proportion of households that received remittances were 32 percent in 2003/04, an increase from 23 percent in 1995/96. According to Nepal Living Standards Survey (NLSS) II, per capita remittance for the entire country has more than tripled in nominal terms between two rounds of NLSS.
In many countries in Africa, where official aid flows have fluctuated considerably from year to year, remittances have been more stable than both foreign direct investment and official aid. However, the extent of its impact depends on its use by recipient households and channels through which the remittances are transferred.
Negative impact
Remittances also have negative impacts. Women are vulnerable and at risk while their husbands are away from home. As large and sustained remittance inflows can cause an appreciation of the real exchange rate and therefore a loss in relative export competitiveness, countries receiving large remittances inflows may need to devise appropriate policies to deal with possible negative consequences.
The cost of remittance transactions is uncomfortably high for small transfers typically made by poor migrants. The efforts to reduce the cost of sending remittances can provide access to migrants and their families to formal financial services. Governments who reduce fees and expand remittances have promoted competition in remittance transfer markets by lowering cost for remittance services and encouraging transparency. Furthermore, efforts should be made to bring unrecorded flows to formal channels.
As a step in this direction, the Reserve Bank of India has recently launched a cross-border one-way remittance scheme from India to Nepal for Nepali migrant workers in India. 12 transactions per year per sender is allowed with a maximum amount of Rs 50,000 by paying a transaction fee of Rs 50 for less than Rs 5000 and Rs 75 for amount above Rs 5000. This provision is yet to be executed.
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