International migrant remittances have increasingly become one of the major sources of foreign exchange earnings for a large number of developing economies.[1] Remittance earnings received by developing economies showed a whopping increase of approximately 91.66% i.e., an increase from USD 276 billion in 2014 to USD 529 billion by the end of 2018[2]. In this context, Nepal also is one of the highest recipients of remittances in the world. Nepali migrant laborers had sent home USD 8.1 billion in the fiscal year 2018/19, making it the 19th biggest beneficiary of funds sent by migrants around the world[3]. Remittance has been a contributing factor in reducing poverty, improving human capital and financing imports in Nepal.[4] A look at the multidimensional poverty index (MPI)- an official national poverty measure, which is aligned with the Sustainable Development Goals (SDGs) further showed that the percentage of people living under poverty in Nepal has reduced drastically. The incidence of MPI has gone down from 39% in 2011 to 28.6% in 2018[5], and remittance earning was a major contributing factor in this decrease.
Although the inflow of money from migrant laborers has considerably improved people’s standard of living in Nepal, both the public and private sectors have repeatedly failed in optimizing such earnings. A report released by the National Living Standards Survey (NLSS) revealed that out of the USD 8.1 billion remittance earnings that had entered into the economy during the previous fiscal year, only 6.5% of it was saved and another 10% was invested in the purchase of land and other tangible assets. The remaining 83.5% of total earnings were spent on consumption such as for consumption of food (60%), purchase of clothing (42%), medical treatment (36%) and education (35%)[6]. The government’s failure in investing household savings in productive sectors has resulted in a low level of private investment and entrepreneurship. This has further propelled migrant workers to invest a very meager amount in the financing of infrastructure or other development projects.
Is remittance the Dutch Disease of Nepal?
The term ‘Dutch Disease’ was first coined in 1959 after the discovery of ‘Groningen Natural Gas Field’ in the Netherlands and its subsequent impact on the manufacturing sector. The discovery of the gas field expanded the revenue coming into the economy from the manufacturing sector but this inflow of profits was short-lived as, the rapid development of the manufacturing sector largely hampered the growth of other sectors. Excessive gas exports led to an influx of foreign currency which increased the demand and strength of Guilder (then the Dutch currency). While this made the economy look stronger and gave the manufacturing sector a comparative edge in the global market, the other sectors of the economy were less benefitted. Likewise, as gas extraction is relatively a capital-intensive business, only a few jobs were created. The significant appreciation of the national currency from the large capital influx soon resulted in higher unemployment rates and economic unrest across the nation. Thus, overdependence on the export of natural resources soon resulted in the volatility of commodity prices and this mechanism was strong enough to destroy the entire Dutch economy.
The virtue of the Dutch disease can currently be applied in the case of Nepal’s economy. The heavy inflow of foreign currency into the economy through remittance earnings or foreign direct investment (FDI), can massively appreciate the domestic currency i.e. the Nepalese Rupees (NPR). Digging deeper, we can further analyze this scenario in two different cases:
Remittance Earning: Remittance earning received by Nepal has continuously grown in the past four decades. Our GDP primarily depends on money being sent by migrant laborers working abroad. As most of it is spent on personal household consumption, a meager 17% of it is saved and invested in other productive sectors. Even with high rates of inflation (averaged at 8.17%)[7], our dependence on remittance earning is at an increasing trend.
Export and Import: While Nepal’s import rate has massively surged over the last four decades, the export rate has not seen much of an improvement. The economy does not hold the same tenacity as remittance as export is not one of Nepal’s strengths. Total imports and exports of the economy stood at NPR 112.526 billion and NPR 8.5 billion, respectively in FY 2018/19. This data further validates the widening trade deficit that the economy is currently facing. Hence, imports are soaring but due to a low relative comparative advantage (RCA), our exports are declining at an alarming rate.
Conclusion:
Remittance earnings are increasing the disposable income for households across the nation. This also increases their purchasing power and importing capacity. Thus, with expanding income, imports are also are rising. This is widely increasing our import bill. However, on the other hand, exports are rapidly declining. Foreign currency or reserve coming into the nation is largely being spent on paying off our import bill. Thus, the government needs to make use of policy instruments to ensure that remittances are entering into productive sectors. Within this, they could reach out to remittance receivers through micro-finance infrastructure (credit unions, commercial banks, NGOs, cooperatives etc.) along with facilitating its migrants abroad through migrant’s service bureau and allowing tax breaks on capital goods imported by them[8]. Moreover, bringing households into the formal financial sector also assures effective use of remittance earnings. According to a survey, households savings can be as high as 40 percent in Nepal[9]. However, a larger proportion of this income is spent on personal consumption. Hence, the government needs to incentivize households to save more and needs to channel these savings into productive use.
Although remittance earnings are making things rosy for the economy right now, Nepal is yet to see its real impact on the GDP. Hence, it might be true to say that if the current path of economic transactions is allowed for, the economy could soon head towards downfall and that remittance could be our Dutch disease.
References:
[1] “Migrant Remittances and Economic Growth: The Role of Financial Development and Institutional Quality”, 2018. Retrieved from- https://www.persee.fr/doc/estat_0336-1454_2018_num_503_1_10859#
[2] “Remittances”, Migration Data Portal, 04 June 2019. Retrieved from- https://www.google.com/search?q=remittances+earned+by+developing+countries+today&oq=remittances+earned+by+developing+countries+today&aqs=chrome..69i57.8040j0j7&sourceid=chrome&ie=UTF-8
[3] “Nepal is the 19th largest receiver of remittances with USD 8.1 billion”, The Kathmandu Post, 10 April 2019. Retrieved from- https://kathmandupost.com/money/2019/04/10/nepal-is-19th-largest-receiver-of-remittances-with-81-billion
[4] “Remittance Inflows to Nepal: Economic Impact and Policy Options, Nepal Rastra Bank (NRB), 2005. Retrieved from- https://www.nrb.org.np/ecorev/pdffiles/vol18_art2.pdf
[5] “Making sense of money”, The Kathmandu Post, 05 June 2019. Retrieved from- https://kathmandupost.com/editorial/2019/06/05/making-sense-of-the-money
[6] “Remit for Remittances”, Editorial, NepaliTimes, 14 June 2019. Retrieved from- https://www.nepalitimes.com/editorial/remit-for-remittances/
[7] “Nepal Inflation Rate”. Trading Economics. Retrieved from- https://tradingeconomics.com/nepal/inflation-cpi
[8] “Mobilizing Remittances for Productive Use: A Policy-oriented Approach”. Nepal Rastra Bank (NRB), December 2008. Retrieved from- https://www.nrb.org.np/red/publications/working_papers/NRB_Working_Paper–NRB-WP-04–Apr_2008;_Mobilizing_Remittances_for_Productive_Use__A%20Policy-Oriented_Approach–Bhubanesh_Pant.pdf
[9] “Mobilizing Remittances for Productive Use: A Policy-oriented Approach”. Nepal Rastra Bank (NRB), December 2008. Retrieved from- https://www.nrb.org.np/red/publications/working_papers/NRB_Working_Paper–NRB-WP-04–Apr_2008;_Mobilizing_Remittances_for_Productive_Use__A%20Policy-Oriented_Approach–Bhubanesh_Pant.pdf
