The Cost of Remittances

Published On: July 10, 2024 08:35 AM NPT By: Dikson Limbu

Dikson Limbu

Limbu is an MBA graduate from Kathmandu University School of Management

 Is Nepal Sacrificing Its Future for Present Gains?

The unproductive use of remittances, combined with inflation in health, education, and consumer goods, and the possibility of a real estate bubble burst, could have severe repercussions for Nepal's economic future in the long run.

Recently, I was at the Tribhuvan International Airport (TIA), a place where I usually visit with mixed emotions. This time, I was there to bid farewell to my childhood friend from my village Panchthar, who was on his way for foreign employment, a decision born out of financial necessity. We had once dreamt of starting a tea business together, combining our skills and ambitions to create something meaningful in our hometown. But as economic pressures mounted, his dreams of entrepreneurship were replaced by the harsh reality of seeking work abroad.

The airport was filled with similar stories. Thousands of young Nepalese, mostly semi-skilled, were bidding tearful goodbyes to their families. Their eyes were filled with hope and anxiety, each one carrying the weight of their family's expectations. The scenes were heartbreaking, reminding me of the day my brother left for the UAE to complete his Bachelor of Hotel Management (BHM) internship. He frequently shares stories of the relentless overtime work and the physical and emotional toll it takes on him. My brother will soon return to Nepal, as his internship comes to an end. Despite his joy at reuniting with family and returning to his homeland, he experiences sadness and skepticism about finding a good job when he returns. The promise of a bright future that once drove his departure appears to have been overshadowed by the harsh realities of Nepal's job market.

Adding to the emotional turmoil, news reports frequently highlight the tragic fates of many Nepalese migrants. The sight of coffins arriving at TIA, carrying the bodies of those who perished abroad, serves as a stark reminder of the high price we pay for remittance. Birendra Shah of Chaurpati, Achham, and Sujan Rawat of Mahabu, Dailekh, were killed during a protest in Balkumari, Lalitpur, last December.They were among many who were looking for ways to leave Nepal for work and send money back to their families.

This experience led me to question: Is the remittance really worth it for Nepal?

Approximately 500,000 people leave Nepal per year to work abroad, with 1500 individuals leaving on a daily average. The Department of Foreign Employment reports that 335,979 workers were sent abroad by licensed organizations between July 2023 and June 2024, indicating that the labor force in Nepal is compelled to choose foreign employment due to the country's low-pay scale and lack of employment opportunities. Since unskilled labor makes up the majority of the workforce, these people will inevitably work in 3D (dirty, dangerous, and difficult) jobs, which put their lives in danger. The Ministry of Labor, Employment, and Social Security reports that 10,230 workers who were employed abroad passed away in the last ten years. The unofficial figure could be considerably higher. The government should be alarmed that people are putting their lives in danger just to send money home.

The dependency of the Nepalese economy on remittance is not novel. The remittance-to-GDP ratio, which was only 1.92% in 1990, has averaged 20% in the present scenario. 

Remittance has positively affected consumption, investment and been the source of the foreign exchange reserve in curtailing BOP (Balance of Payment), source of saving and deposit for bank and financial institutions, source of trade and business transactions.  However, if not utilized in productive sectors, over-dependence on remittance-based economy will have negative impacts in the long term on the overall economy reflecting Dutch Disease effect, despite having positive short-term impact.

The impact of remittances in Nepal will be dual-edged. Remittances are being sent to Nepal by migrants primarily driven by altruistic motives and an implicit family contract in order to prevent a negative economic shock in their households. By increasing the households' purchasing power and disposable income, the remittance will push aggregate demand in the market, improving living standards and lowering poverty. To put it simply, this will have an effect on individual spending.

However, there are concerning signals and things to be aware of if we examine the expenditure patterns of the families receiving remittances. When we conduct an analysis of our neighborhood and speak with the families who receive remittances, the majority of them will say that their goal is to acquire at least a plot of property somewhere. A survey by Nepal Rastra Bank (NRB) in 2008 depicted that 49% of remittances are used for buying land and houses, 25% for repayment of debt, followed by daily consumption, health, and education. In a similar vein, researches from the Central Bureau of Statistics (CBS) in 2011 and NRB (2012 and 2016) have revealed that while over 70% of remittances are used for everyday consumption in Nepal, roughly 3.5% of remittances are utilized for productive purposes, including capital formation and business activities. Setting aside other speculative real estate investors, the escalating value of real estate in Nepal, particularly in major cities like Kathmandu, Pokhara, Butwal, etc., can be seen as an adverse outcome of remittance. The unproductive use of remittances, combined with inflation in health, education, and consumer goods, and the possibility of a real estate bubble burst, could have severe repercussions for Nepal's economic future in the long run.

Mid- and long-term labor market distortion in key sectors, including manufacturing, agriculture, and industries, will result from this dependency syndrome in the long run. Brain drain will occur as a result of human resource migration to overseas jobs. Nepal's import-dependent economy will be negatively impacted by the increasing demographics of the non-working population, which includes children and the elderly, as well as by the increased barren lands. During my last visit to my village Ektin, Panchthar, in Dashain, I was shocked to discover that a once agriculturally self-sustaining community now buys most of its food. The elderly lamented, “The  village has become empty. It seems that we should now teach our children to plough fields and cut grass instead of sending them to school.” This situation exacerbates Nepal's unemployment crisis, as the negative effects spread throughout our agricultural, manufacturing and industrial sectors. As more young people leave, the remaining population struggles to stay productive, creating a vicious cycle of economic stagnation and increased reliance on foreign remittances, in the long run.

Remittance inflows climbed 19.2% in the final ten months of this fiscal year, according to NRB, compared to a 23.4 % increase in the same period last year. Nepal's economy is susceptible to external shocks due to its import-based economy and excessive reliance on remittance. Remittance flows can be greatly impacted by changes in host country immigration laws, worldwide crises, or downturns in the economy, all of which can cause instability in the economy. For instance, remittances from unskilled migrants have been impacted by the recent COVID-19 pandemic and Malaysia's new laws regarding foreign labor. Remittances from overseas students will also be impacted by Australia's decision to double visa costs for international students and the UK's policy changes to reduce immigration.

The real estate industry and other import-oriented businesses should continuously assess how the shifting remittance shocks will affect their operations. The shift of remittance and foreign reserves will affect those sectors with shift in demand and change in government policies like the import ban policy initiated in 2022. Furthermore, since women make up the majority of remittance recipients, the government should focus its policies on creating financial products and workshops that improve women's financial inclusion, economic empowerment, and knowledge of safe investing practices.

As we navigate the complexities of our remittance-driven economy, we must ask ourselves: Is this dependency truly sustainable, or are we trading short-term gains for long-term vulnerabilities?

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