Nepal | September 27, 2020

Encourage remittance inflows: But not dependency syndrome

Bhubanesh Pant
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The successful mobilisation of remittances for productive purposes basically hinges on the capacity of the government to build a ‘development-centred’ macroeconomic environment and supporting a viable and inclusive financial sector

The inflow of remittances is an old topic in the study of migration, but one that has stimulated renewed policy focus in recent years. As global remittances are taking an upward trend to a degree that is on par with global development assistance and foreign direct investment (FDI) in the developing world, it is not surprising that this subject is of interest to policymakers.

Illustration: Ratna Sagar Shrestha/THT

Many reasons have been cited as to why migrants send money home. These include explanations of remittance behavior, such as ‘altruism’, which indicates that remittances go up when the economic requirements of families back home rise; the notion of ‘exchange’ which suggests that migrants are effectively repaying family and relatives for investments in the education or travel of the migrant; and the notion of ‘co-insurance’ where both migrants and family provide monetary and in-kind transfers to safeguard the other against short-lived shocks. It is generally agreed that remittances are likely to be higher in conditions where the migrant leaves the country due to economic rather than social or political factors, where they have temporary rather than permanent resident status, and where they have a family left behind.

The 2019 United Nations Report on the world’s progress toward Sustainable Development Goals (SDGs) divulges that personal inflows of remittances from migrant workers are the largest source of external financing for low and middle-income countries (LMICs). According to the World Bank’s latest Migration and Development Brief, remittance flows to LMICs grew by 9.6 per cent in 2018 (up from the 8.8 percent rise in 2017), to reach a record $529 billion. They represent more than three times the size of official development assistance. Moreover, as FDI has been taking a downward trend in recent years, remittances stood close to the level of FDI flows in 2018. Further, in 2018, remittances represented more than 30 per cent of GDP in countries such as Tonga (35.2 %), Kyrgyz Republic (33.6 %), Tajikistan (31.0 %), and Haiti (30.7 %).

Remittance flows have a direct impact on recipient households by lowering poverty and inequality and increasing consumption and social well-being. They also have a positive impact on financial sector developments, such as increasing the access and use of financial intermediaries. They support in improving credit ratings of countries and help raise external financing.

Although remittances have a host of advantages, the remittance market, to a large extent, has not been exploited for prospective financial services. Furthermore, remittances are often not directed into productive investments  due to a) dearth of investment knowledge of the remittance clients, b) inconsistency in remittance transactions, and c) inappropriate investment-friendly climate. Again, remittances can produce currency appreciation, causing export prices to surge and import prices to be cheaper. Thus, there is a drop in export levels, and rise in import levels, which can impact the production markets by reducing employment.

An important disadvantage is that it can also encourage more migration of labour as family members obtaining remittances realise that they would be better off moving to other destinations and earn more money rather than staying back in their home country. Another drawback is that the country’s dependence on remittances increases. And, this could be alarming as an abrupt stop in these financial inflows could lead to a financial debacle.

In Nepal’s case, migrant remittances from abroad are a crucial source of income for the economy. They represented 2 per cent of GDP in FY2000, 22 per cent in 2010 and 28 per cent in FY2018. Though remittances have been generally used to finance consumption in the country rather than being channeled to raise productive capacity, spending remittances on consumption has, to some degree, led to improved private and public welfare.

However, there are also detrimental outcomes of being over-dependent on remittances. Too much dependence opens up Nepal to exposure to external shocks linked to remittance-sending countries. Likewise, remittance inflows have had a knock-on effect on imports. With exports dwindling, trade deficit has expanded.

Still, the overall impact of remittances in comparison to other types of international financial transfers has been encouraging and should be fortified more with appropriate policies without creating a dependency syndrome.

Remittances to Nepal have been generally observed as an important tool to reduce poverty and inequality, to impart social benefits, to act as buffers against economic shocks, and to produce other positive impacts. Still, their full developmental potential has not been realised so far.

The successful mobilisation of remittances for productive purposes basically hinges on the capacity of the government to build a ‘development-centred’ macroeconomic environment along with supporting the establishment of a viable and inclusive financial sector. Likewise, joint and intensive efforts must be aimed at establishing and improving the mechanisms through which the principal actors, especially the individual remittance senders and recipients, can leverage these flows for developmental purposes.

Pant writes on globalisation and trade issues

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