‘Diversification of foreign exchange earnings is an important fundamental’

Remittance growth has dropped steeply since the second month of this fiscal. Contraction in the outflow of migrant workers and slowdown in Gulf economies due to rampant fall in oil prices from last year are considered as major reasons for the slowdown in remittance inflow. While remittance recipient countries have been experiencing this problem since last year, Nepal bucked the trend as migrant workers sent more remittances for relief and rehabilitation of their family members back home in earthquake-hit districts. As the country has been largely dependent on remittance for maintaining its foreign exchange reserves, decline in remittance poses near-term risk for the country’s economy. The country had faced similar challenges in fiscal years 2009-10 and 2010-11 following the global financial crisis. Senior Economist Keshav Acharya, who served as chief economic adviser at the Ministry of Finance between 2009 and 2011 spoke to Pushpa Raj Acharya of The Himalayan Times about the adverse impact of remittance slowdown and what sort of policy measures the government had adopted to cope with the situation back then. Excerpts:

What are the likely near-term economic risks due to remittance growth plummeting in recent months of this fiscal?

Remittance has been lubricating our economy since 2000 as the flow of migrant workers started to rise consistently. Remittance mainly played a crucial role in easing the supply-side despite our weak production base. Imports into the country have surged heavily in the last one-and-a-half decades as our capacity to import goods and services increased. Remittance has also strengthened our negotiation capacity while taking foreign loan and grants because it helped to boost our foreign exchange reserves. On the other hand, remittance became a ‘Dutch-syndrome’ for us, where we became largely dependent on remittance to strengthen our foreign exchange reserves like the Netherlands was entirely reliant on oil and gas during the 1970s. For the first time, we issued Foreign Employment Bond in 2009-10 to transform remittance into wealth creation and enterprise development. But there was lukewarm response in the bond because of the government’s weak capital spending, which raised questions on the government’s credibility. As the oil exporting countries’ economies have been hit hard due to fall in the oil prices, it is definite that workers’ remittance will be affected. The government has to look into this issue very cautiously because the slowdown in remittance poses adverse impact on the country’s economy. We are reliant on remittance for the import of goods and services because export earnings are not sufficient even just to import petroleum products. Contraction in import will directly hit the government’s revenue. There will be adverse impact in the domestic economic activities, which will hit the smooth growth of various sectors, including banking, which has been contributing Rs 50 to 60 billion to government’s coffers as their letter of credit business, other loan expansion as well as loan recovery would drop along with the slowdown in economic activities in the country. Import surge would cause pressure on the Balance of Payments (BoP) in this condition.

The country had witnessed BoP deficit in fiscal 2009-10 as import surged by 37 per cent compared to the previous fiscal, because of remittance slowdown. How had the government handled the situation back then?

We had faced BoP deficit in fiscal 2009-10 after two-and-a-half decades as foreign exchange reserve weakened along with slowdown in remittance inflow. We had curbed the import of gold from mid-fiscal back then because we found rampant import of the precious metal. We analysed the actual demand of gold and fixed import quota and authorised only commercial banks to bring in the precious yellow metal. The BoP crisis had prolonged for a long time because our proposal to hike the customs tariff of gold had lingered in the Parliament for long. After the quota for gold import was fixed, some of the traders had transferred money to the banks of Hong Kong through forged import documents. Market players created bubbles in the unproductive sectors like real estate as remittance slowdown hit the real sector. How the market had reacted back then could be a case study for policymakers now, so they have better idea of where they have to intervene.

What are your prescriptions for the government to cope with this challenge?

We have to increase our domestic spending to resurrect the economic activities affected by two subsequent economic shocks brought on by the devastating earthquake and the disruptions of supply lines in last fiscal. Diversification of foreign exchange earnings is an important fundamental because we have already faced the difficulties due to over-concentration on remittance. While remittance is not a reliable source, we do not have any other option to improve our production base for the sustainability of the economy. For this, the government and the private sector need to work together. The government has to focus its investment in infrastructure and the private sector in production sector. Around three million Nepalis are working in oil-exporting countries and a majority of them are working in lower-end jobs, like construction and other sectors. Because of the fall in oil prices, Gulf nations have started adopting austerity measures or shifting focus on other sectors. In this condition, even if one-third of the migrant workers were sent back home, there will be a hue and cry because we cannot generate employment for them. So, the government needs to have a contingency plan in place to diversify the labour destinations.

As you said earlier, the government had curbed import of gold and other luxury items following the BoP crisis of 2009-10. However, the contraction in import in fiscal 2010-11 hit the government revenue.  How can the government change this scenario?

Import and remittance are interlinked to each other and import is the base of our economy. All types of economic activities, including the investment of private sector would be affected along with the slowdown of remittances. Secondly, expenses of families who are directly dependent on remittance will be hit at first. This would eventually push them below poverty line because those working at the low-end in oil exporting countries are mostly from low-income households. Thirdly, oil exporting nations will not increase the labour force if they cannot be shifted to other sources of income. Then it would be tough for us to generate jobs for returnee migrants as well as fresh labour force. Increasing migration of people from villages to the urban areas would also create additional pressure on public facilities and infrastructure. Therefore, the government needs to negotiate with other possible labour destinations like Japan, South Korea and Israel, among others. The government should bring back higher-end workers equipped with good skills and support them in setting up ventures to accelerate enterprise development. Lastly, the government has to increase incentives to remitters so that they will be encouraged and bring home more remittance through formal channels. The government should also keep a close eye on the outgoing foreign exchange as commission from the manpower companies to their agents in the labour destinations.

The government has escalated the size of budget for next fiscal in expectation to generate Rs 565.9 billion from revenue. But there is risk of contraction in fiscal space if the remittance growth is to drop further. What do you have to say on this?

If remittance growth continues to plummet, the government would not be able to meet its revenue generation target because around 60 per cent of the revenue is generated through imports. The government cannot encourage imports when it starts facing pressure in BoP. Both the government and the private sector have not worked seriously to figure out how to cure the economy from the ‘Dutch disease’. The government is happy with revenue generation and the private sector also with short-term trading business. We have witnessed how the economy suffers due to our weak production base during border blockade. It has been assumed that the country’s economy faced more losses during the blockade than because of the earthquake. Over-dependence on remittance to strengthen our foreign exchange earnings, over-dependence on oil-exporting countries to send labour force, over-dependence on India for import and export — all these could be toxic for us, but we have not thought about diversifying from them.

Recently, the World Bank unveiled a report on remittance, in which it has assumed that 10 per cent drop in remittances could lead to a drop in economic growth by up to three percentage points. So, what do you think does the government need to do to achieve its economic growth targets?

It is natural because we cannot sustain our export for long if the import starts being squeezed along with the drop in remittances. This is because we are dependent on other countries for raw materials of our major export items. Foreign exchange reserve would also decline as export earnings go down. There will be adverse impact in supply side along with the slump in import. This, in turn, will cause high inflation in the country. There will be multiplier impact in the country’s economy if the remittance slows down and it will be tough to achieve the desired growth. To spur growth despite all external shocks, the government needs to accelerate investment in infrastructure and reconstruction.

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