Remittance economy of Nepal Responding to the global recession

Bhubanesh Pant

R emittances broadly refer to transfers, in cash or in kind, from a migrant to household residents in the country of origin. While other capital flows tend to augment during favorable economic cycles and decline in periods of economic downturn, remittances react less violently and reveal amazing stability over time.

Remittances are often of significance following conflict since they normally increase in times of crisis and directly contribute to household income. The stability of remittances emanates from the fact that senders are unlikely to be affected by the same shocks as recipients.

For Nepal, remittances, until recently, had been providing an important safety net for the economy both in terms of bringing stability to the external sector and helping to stabilize consumption levels of a significant number of households in the country. At the household level, remittances had helped to reduce poverty, improve standard of living and attain higher educational levels. Moreover, these inflows had been instrumental in maintaining the current account surplus despite a widening trade deficit. This subsequently had enabled Nepal to maintain a growing level of foreign exchange reserves.

However, due to the global economic recession, the volume of inflows has been facing some strains in recent months. The global slowdown is affecting the demand for migrant labor in both the South-East Asian countries and the Persian Gulf countries, the major sources of remittance income for Nepal. If this trend continues, the impact on Nepal could be severe.

Workers’ remittances in 2008/09 aggregated Rs. 209.70 billion, a rise by 47.0 per cent compared to 2007/08. Similarly, the remittances to GDP ratio increased from 17.4 per cent in 2007/08 and further to 21.8 per cent in 2008/09. As a matter of fact, Nepal was one of the top ten recipients in terms of share of remittances in GDP in 2008/09. These figures clearly demonstrate that any sharp decline in receipts from remittances could disturb the structure of the economy from the macro level. And this is exactly what has been happening since the beginning of 2009/10, thanks to the lagged impact of the global recession.

As a result, during the first nine months of 2009/10, the growth rate of remittances was just 9.6 percent compared to its significant growth of 60.3 percent in the corresponding period of the previous year. While both in 2007/08 and 2008/09 the upsurge in remittances was responsible for the huge surplus in the current account and the balance of payments (BoP), in the first nine months of 2009/10 the deceleration in the growth of remittances has led to a current account deficit of Rs. 30.24 billion, thereby weakening the overall BoP which also registered a deficit of Rs. 22.10 billion. Analogouszly, the gross foreign exchange reserves are adequate for financing merchandize imports of only 7.6 months and merchandize and service imports of 6.6 months in mid-April 2010 compared to 12.0 months and 9.8 months respectively in mid-July 2009. While the impact of the global meltdown was visible in most of the countries of the world much earlier, it started to bite the economy of Nepal only from the beginning of 2009/10. With the deceleration in remittances, there would be a reduction in household consumption and cutbacks in public expenditure. Spending on necessities such as food, medicine and schools fees would also decline.

The global recession has generated a new set of challenges confronting migrant workers and the contributions they make to their family members back home. In this difficult period where Nepal's remittances are exhibiting a downward trend, the country should proceed forward with effective economic diplomacy through its foreign missions so as to minimize the negative impact of job losses.

Secondly, human capital needs to be rigorously built up in accordance with the demands of the international labor market. Thirdly, business facilitation for returnees must be given due importance. Policies to re-integrate the returnees can include improving self-employment opportunities, support for small and medium-enterprises, and budget support to districts coping with massive returnees. Moreover, returning migrants, particularly qualified workers, bring back knowledge and experience, thus converting ‘brain drain’ into ‘brain circulation.’

Increased outreach of micro-finance institutions (MFIs) will prove to be crucial in the country's development growth as these institutions have the capacity to provide investment guidance to remittance recipients. Banks could make MFIs their working partners in the rural sector for operating microfinance activities. Nepal should look for niche market as well as improved conditions for promoting safe labor migration. It also needs to conduct regular assessment of the impact of the global recession on the economic situation in the principal destination countries.

The country requires a coherent remittance policy for maximizing the benefits of remittances in nation-building. The development of a think-tank to deal with remittance issues (i.e. policies, products, efficiency, and utilization) needs to be considered.