Monday May 25, 2020 | |

Before weaning the economy off remittance


Samikshya Siwakoti

In the last two decades, Nepal has endured a 10-year Maoist armed insurgency, a royal massacre, a revolution that led to the abolition of 240-year-old monarchy, unstable government led by multiple prime ministers, a massively destructive earthquake, devastating floods and an Indian blockade. In order to find better economic opportunities, many working age Nepalis have turned abroad. According to Nepal Rastra Bank, about 1,400 Nepalis left the country daily in 2014/15 to work overseas. In 2014/15, remittance contributed 29% to the Gross Domestic Product (GDP). This remittance helps many who are without social support or local opportunities to earn.

However, the global economic slowdown, low fuel and commodity prices and the subsequent decline in investment, especially in construction and security services, have been weakening economic activities in the countries to which Nepalis migrate. For instance, in November 2017, around 150 Nepali migrant workers were stranded in the Gulf state of Kuwait without jobs and many without valid stay permits after they were laid off by Kharafi National, a leading construction company. This type of scenario is leading to a deceleration in remittance income flowing into the country. The overseas migration growth averaged 14.2 percent between fiscal years 2012 and 2014. The number of workers going abroad decreased by 2.8 percent in 2015 and then by a further 18.4 percent in 2016.

Addressing this issue is crucial for the Nepali economy. But just as any public policy issue, the problem has to be analysed from multiple perspectives. While encouraging migration in support of strengthening remittance flows undermines the growth of the domestic economy by incentivizing young workers to leave Nepal, an increasing number of families are expected to be adversely affected if remittance inflow declines as these inflows are their key source of income.

 Given the current scenario, it is imperative for Nepal to pursue policies that will encourage more inflow of remittance in the short run and to invest in productive sectors that can gradually minimize the economy’s over-dependence on remittance over the long run. Sustaining remittances is necessary in the immediate term to protect the most vulnerable members of our population.  However, broader dependency of the economy on migration is not sustainable as this type of income is susceptible to external shocks and international economic conditions. Some of the recommended policies to address this issue are discussed below.

Encourage migrants to send money via formal channels

Many migrant workers use informal channels to send money to Nepal which results in less resources for the government to make productive investments, encourages tax evasion, and negatively affects governance and exchange reserves. There are three approaches that the government can take in order to encourage migrants to send remittance via formal channels.  One would be to carry out country-to-country diplomatic dialogue to bring down transaction cost of sending home remittance. Dhananjay Shah highlights in his article “Hundi in South Korea: Nepal’s Remittance Channel”that Hawala is a popular remittance transfer channel among Nepali migrant workers under Employment Permit System in South Korea due to the high cost of transferring money via formal channels.  Economist Chandan Sapkota in his article titled “Remittances in Nepal: Boon or Bane?” states more than 80 percent of Nepali migrant workers use Hawala to remit money. It is recommended that the central bank initiates diplomatic dialogues with countries such as South Korea for reduction in such transactional costs.

Secondly, the government should invest in technology-based solutions such as digital payment methods to lower the financial transaction costs for low-income migrant workers. It could also subsidize the costs of these transactions to attract more migrant workers into formal channels to send remittance.

Issue diaspora bonds at competitive interest rates 

The government should incentivize migrants to invest the fraction of their earnings not used for essential household consumption on government bonds by offering them a lucrative interest rate. Chandan Sapkota’s research has shown that about 80 percent of remittance flowing into a household is spent on daily consumption and just 2.4 percent in capital formation. Given the sheer volume of remittance inflows to Nepal, the government could raise billions of dollars by issuing diaspora bonds and use it to finance productive investments. However, the rate of return in these bonds should be higher than the fixed deposit interest rates offered by banks and financial institutions for this policy to be effective.

Long-term investment and import substitution strategies

With resources coming into the country through remittance and diaspora bonds, the government should finance long-term infrastructure such as roads, hydropower projects and those sectors that can readily absorb technology such as telecommunications. Apart from that, investment in tourism sector will also be helpful in increasing foreign currency earning. These policies would not only reduce the nation’s dependence on remittance, it would also contribute toward sustainable economic growth by stimulating the local economy. These policies can also serve as import substitution strategies to absorb the potential shock in remittance inflows.

Transform the migrants structure from unskilled to semi-skilled and skilled 

Most of the Nepalis who go for foreign employment are unskilled. They have low level of earning resulting in a smaller fraction of income to save and send home. To address this issue in the face of declining number of outbound workers, the government should establish skill training centers for potential migrants across the country.

Use fact-based research to inform policy design 

There are many instances when we tend to make assumptions about what policy works and what does not. However, using a scientific approach is more credible. If we can perform studies specific to Nepal, we should invest in country-specific research that involves rigorous data collection and analysis. When we don’t have resources to fund specific studies, policymakers can derive lessons from experiments carried out in other parts of the world. For instance, research by Nava Ashraf, Diego Ayciena, Claudia Martinez A, and Dean Yang has shown that financial products that provide migrants with greater ability to monitor and control how remittance are spent can lead them to send more money home. Another similar study by Ayciena, Martinez A, and Yang has shown that reductions in remittance fees lead to large increase in remittance sent to the migrant’s home country via partner financial institution i.e. through formal channel. Similar programs can be tried out in Nepal and smaller pilot studies can be conducted before scaling up any policy.

Thus, the implementation of policies such as those that encourage migrant workers to use formal channels to send money to Nepal, investment in long-term infrastructure and tourism, and deriving policy lessons from evidence-based research is the need of the hour. These policies will fend off the economic and social blowback arising from the slowdown in remittance. Hence, this issue needs to be prioritized and addressed promptly by the policymakers in Nepal.

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