Nepal is one of the highest remittance recipients in the world with remittance comprising up to 29% of Nepal’s GDP in FY 2015/16 and remittance inflows worth USD 6.2 billion in FY 2015/16 alone. Remittance has been catalytic to Nepal’s economic and social landscape over the past few decades and plays a pivotal role in the Nepali economy. However, the number of people choosing to go abroad for work has been on a decline over the past year with a 22% drop in outbound workers observed at the start of FY 2015/16; which is likely to have a direct impact on remittance inflow and consequently the Nepali economy.
Role of Migration and Remittance on the Economy
Remittance has played a key role in sustaining macroeconomic stability in Nepal by stabilizing the current account as well as maintaining foreign reserves, with the Nepal Rastra Bank (NRB) constantly recognizing the direct contributions of remittance in managing the country’s Balance of Payments (BOP). In addition, remittance inflows have also led to a growth in disposable income with Gross National Disposable Income (GNDI) growing 1.5 times faster than Gross Domestic Product (GDP) between FY 2000/01 to FY 2015/16. This has not only fueled consumption but has also helped in reducing poverty substantially, wherein poverty levels has decreased by 28% from FY 2003/04 till FY 2010/11.
Impact of Global Crude Oil Prices
The slowdown in departure of migrant workers can be attributed to the April 2015 earthquake whereby potential migrant workers opted to stay at home in order to rebuild households and support their families. Additionally, the decline of crude oil prices worldwide has also led to weaker demands for migrant workers from oil producing countries such as Gulf Cooperation Council (GCC) countries. With GCC countries reliant on oil exports, the global decline in crude oil prices have stagnated these economies with major development projects cancelled or put on hold, thereby reducing employment opportunities for migrant workers.
Impact of New Regulatory Structures
Meanwhile the number of migrant workers travelling to Malaysia has declined substantially in response to new policies implemented in the country barring foreign employment in major economic sectors such as manufacturing and construction. Malaysia is a popular migrant destination with over 700,000 Nepalese currently working there as of FY 2015/16. According to the Department of Foreign Employment, the number of migrant workers going to Malaysia has declined from 202,828 in FY 2014/15 to 60,979 in FY 2015/16; a 69.9% decline over the previous fiscal year.
Furthermore, the implementation of the Zero Cost policy by the Government of Nepal, which requires free visa and air tickets for migrant workers has further led to a decline in workers leaving the country for foreign employment. Manpower agencies have opposed this policy citing it as impractical since a majority of the costs fall upon them. As a result, there has been a considerable drop in overseas migration numbers; which decreased by 18.4% in FY 2016, compared to a 14.2% increase in FY 2012/13.
Consequently, remittance inflow has been directly impacted with remittance decreasing by 2.5% in the first month of FY 2016/17. The lower remittance inflows are expected to impede growth in service sectors as it primarily depends on remittance-financed consumption of imported goods. With the service sector making up for 50% of the GDP, this will in turn bring down overall economic growth.
To highlight the impact of slowdown in remittance inflow in Nepal, one can look at the impact of the 2008/09 global financial crisis. While Nepal was not directly affected by the crisis, remittance inflows were hampered as growth rate in GCC and Malaysia slowed down to 0.1%, from a five year average of 7.3%. Even imports decreased from 37% in FY 2009/10 to 8% in FY2010/11. This in turn led to lower growth rates in the service sector which further slowed down overall economic growth.
According to the World Bank report published in 2016, a 10% drop in remittance could lead to a drop in GDP by three percentage points, which will in turn affect income and consumption. Lower remittance inflows will also lead to lower government revenue collection, as it is largely reliant on trade-related taxes. Current account balance will also be adversely affected by lower remittance inflow and could lead the current account to drop into a negative value. This in turn can lead to lower foreign exchange reserves and a negative BOP. Meanwhile household expenditures will also be affected by the slowdown in remittance which will also increase the incidence of poverty in the country.
The best course of action to take in response to the slowdown in remittance inflow would be to exercise appropriate monetary and fiscal polices. Reforms need to be imposed to boost investment and create jobs for would be migrant workers. Appropriate investment instruments that can transform short-term remittance deposits into long-term infrastructure financing should also be considered. Development and growth in Nepal have always been reliant on exogenous factors such as the demand for Nepali workers abroad. Therefore, a clear domestic policy response to an exogenous shock can help Nepal mitigate any adverse effects pertaining from the shock.