How did remittances continue to grow in low-income countries including Nepal amid COVID-19?

Remittances play a very important role in sustaining several economies around the world. The COVID-19 pandemic has inevitably affected the number of workers going abroad for work and the remittances they send.

However, given strict restrictions on movement of labor and contraction of economies, data shows that the impact of the pandemic on remittances has been subdued. According to the World Bank, in least developed and developing countries, remittances have decreased from USD 548 billion in 2019 to USD 540 billion in 2020, a decline of around 1.5%. Despite the scale of the pandemic, this decline is minimal compared to the Global Financial Crisis when remittances declined by around 5%.

Compared to the previous year, in 2020, remittances have declined in East Asia, Central Asia and Europe and increased in Latin America and the Caribbean, South Asia and, the Middle and Central East and North Africa by 6.5%, 5.2% and 2.3% respectively. This data suggests that low-income countries have been less affected in terms of remittance inflows compared to developing countries.

It was expected that Nepal would witness a steep decline in remittance inflows in following the pandemic, which, in turn, would affect the country’s imports, balance of payments, foreign exchange reserves, consumption, deposits, loans and interest rates. However, Nepal had better results in terms of remittance inflows according to the records published for the FY 2077/2078.

After the onset of the pandemic, along with the decline in foreign trade, tourism and government expenditures, remittance inflows also ceased. For instance, the inflows decreased from NPR 79.3 billion in Falgun 2076 to NPR 3.45 billion in Chaitra 2076. Post Chaitra, the numbers rose to an all-time high of NPR 101.40 billion in Asadh 2077. Analyzing monthly trends of remittances in Nepal, it can be seen that the prediction of Nepal suffering during the pandemic proved to be wrong.

Remittances averaged better in the next 15 months of the pandemic (post Chaitra 7076) than 15 months pre-Chaitra 2076. The average inflows post Chaitra was NPR 81 billion compared to an average of NPR 73 billion pre-Chaitra.

The annual statistics show that the inflow of remittances has gone up from NPR 875 billion in 2076/2077 to NPR 961 billion in 2077/2078 which is a 9.8% increase. This amount equals 22.5% of Nepal’s GDP.

Remittances are largely dependent on changes in foreign employment status, economic and political conditions of destination countries, salaries and allowances of laborers, and the means and charges on sending remittances.

It is estimated that more than 4 million Nepalis are employed in foreign countries. With the onset of the pandemic, there was a 55% decrease in people applying for labor permits in FY 2077/2078. Decline in people going abroad and increase in remittances was a common trend observed during the pandemic for counties such as Bangladesh, Sri Lanka and Pakistan. Moreover, the contribution of remittances was considered a major positive in the otherwise sluggish economy of these countries.

Why did remittances not decline amid the COVID-19 pandemic? 

Increased use of formal channels: One major reason for the rise in remittances was the decline in the hundi and hawala system due to restrictions on movement. Moreover, with the increase in the usage of digital platforms during the pandemic, people have shifted from informal channels of remittances towards formal ones.

Decline of in-kind remittances: The practice of migrant workers sending products like mobile phones, televisions and gold to their families declined due to travel restrictions. Considered as remittance-in-kind, a large chunk of such remittance was not realized in previous years. With movement restrictions, people were compelled to send remittances in cash rather than in kind, which might have increased the volume of remittance inflows.

Less impact on migrant stocks: Despite decline in the number of Nepali workers going abroad during pandemic, there still exists a large stock of workers (estimated more than 4 million) abroad. The government data shows more than 500,000 Nepalis rescued from abroad during pandemic and assuming 80 percent of them as migrant workers, around 400,000 Nepali workers might have returned home. Out of them more than 100,000 workers have already prepared their work permit to go back again. Hence, it was seen that remittances did not get hampered as the total stock of workers was not heavily affected by the pandemic.

Changes in consumption and expenditure patterns:  The consumption patterns of people have changed during the pandemic due to the need to save money amidst the difficulties faced in terms of lockdowns, travel restrictions and safety measures. Therefore, the spending trend of people involved in foreign employment shows that the expenditure in travel and recreation has been reduced and remittances have increased in the process.

Other factors: In some countries, despite the pandemic, raise in the workers’ pay could be one of the reasons for the increase in remittance inflows. The Nepali rupees’ devaluation prompted many people living abroad to send additional money through remittances to provide support for their families during the pandemic. Moreover, the drastic rise in the Nepalese stock market during the pandemic also increased investments from Nepalis living abroad in the share market through remittances.

Despite uncertainties regarding remittance inflows, so far there are no alternatives to it for the Nepali economy. Therefore, until a better alternative is found, further efforts should be made to enhance the skillsets of workers, incentives should be provided to increase the use of formal channels and there should be better data management regarding foreign employment and remittances. We should also think of ways to increase domestic production and employment to make the gradual shift away from being a remittance-dependent economy.

The Nepali version of this article first appeared in bizmandu on August 8, 2021. The Nepal Economic Forum (NEF) team interpreted the article in English. The English interpretation is published on the NEF website with the author’s consent.