PRABHAKAR GHIMIREAt a time when trade deficit is widening with each passing year, double digit growth in remittance inflow has come as a great relief for the country. Though remittance and trade deficit are different from each other, they are inter-connected in context of Nepal. Nepal receives remittance of more than Rs 400 billion every year, which is as much as the country’s annual budget, thanks to growing exodus of youths to foreign job markets.
Nepali migrants workers sent home Rs 360 billion through formal banking channels in 2011. Similarly, remittance flow increased to Rs 430 billion in 2012 – on level with the country’s total trade volume during the first eight months of 2012/13. Remittance contributes 22 percent in country’s GDP.
According to the latest report of World Bank, Nepal is the sixth largest recipient of remittance in terms of percentage of GDP and fourth largest country in South Asia in term of volume of remittance inflow.
Nepal’s over dependence on remittance has spurred consumption, jacked up inflation, created shortage of industrial workforce and left farm sector in a lurch as youths are leaving for foreign job markets in large numbers. Rise in consumption level of Nepalis has led to increment in imports eventually leading to trade deficit given the country’s limited export volume. However, per capita income of Nepalis increased to Rs 105,400 in 2011, up from Rs 34,698 in 2003 due to rise in remittance flow.
Data compiled by Trade and Export Promotion Center (TEPC) shows Nepal’s trade deficit increased by 28 percent to touch Rs 340.65 billion during the first eight months of the current fiscal year compared to the figures of the same period in the last fiscal year. Contribution of exports in total trade also decreased to 11.4 percent during the review period from 13.4 percent recorded in the corresponding period of last year.
“Amid healthy rise in remittance flow, it has become a challenge for the government to utilize the overseas earning of migrant workers in productive sector,” said Dr Ganesh Gurung, a remittance researcher.
Latest Nepal Living Standard Survey conducted by Central Bureau of Statistics (CBS) shows that around 78.9 percent of remittance that the country receives is used for consumption purpose. One cannot expect remittance thus earned to invest in employment generating sector given the worsening investment climate in the country. And the growing exodus of productive youths (around 1,200 per day) to overseas labor markets has weakened country’s export capacity.
Remittance-financed import is becoming a significant sector for revenue generation as more than 50 percent of total tax revenue comes from consumption tax.
Growth of agriculture sector, which contributes one-third of GDP, is expected to hover around 1.3 percent this year, as per the estimation of the budget for the current fiscal year. Similarly, manufacturing sector is expected to grow by a meager 1.5 percent.
Deepening shortage of workers in farm and manufacturing sectors has been slowly affecting Nepal’s performance in these key sectors. According to informal studies, entry of family members of overseas migrants in the labor market has dropped by 15 percent over the past decade.
Growth of remittance flows has not only contributed to rise in inflation but also led to rise in imports of even farm products. Data of TEPC shows Nepal imports cereals worth Rs 13.38 billion over the first eight months of the current fiscal year – a rise of 87 percent compared to figures recorded in the same period of the last fiscal year. Similarly, imports of vegetables, fruits, meat and dairy products also increased during the period.
Rise in income level of remittance recipient families has driven up imports of luxurious items such as gold, tobacco, alcohol, cosmetic products and energy drink, among others.
“Large swathes of land have been left fallow because of shortage of workers. This is increasing our dependence on imports,” added Gurung, who is also the former member of National Planning Commission (NPC).
Persisting industrial slowdown, absence of farm commercialization, tepid growth in tourism earning and growing exodus of productive youths to foreign markets is increasing Nepal’s dependence remittance earning. Despite this, remittance has played significant role in keeping economy at household as well as macro-economic level alive. Remarkable rise in migrant population, which has reached 7.5 percent of total population, has brought down poverty level, increased country’s foreign currency reserves and gross national savings and kept balance of payment in surplus.
We also should not forget the fact that remittance has played a key role in bringing down the level of poverty from 41.8 percent to existing 25.2 percent in just over a decade. The World Bank’s study shows that rise in inflow of remittance by 10 percent in any particular country would bring down the poverty by 3.5 percent.
Besides, overseas returnees are bringing with them knowledge, skills, modern technology and entrepreneurship. They are found involved in enterprising activities like running tea shops, fisheries, vegetables farming, poultry and livestock, among others. Such activities are also generating employment opportunities for many in Nepal itself.
More than 55.88 percent of the households receive domestic or foreign remittance and one-third of them receive remittance from abroad. Nepal’s remittance receipts have crossed the amount received from Official Development Assistance (ODA). Amid double digit rise in the inflow of remittance, its contribution in terms of percentage of GDP has jumped significantly over few years. Contribution of remittance in terms of percentage of GDP stood at 21.5 percent in 2012 up from 13.8 percent reported five year earlier.
However, source of remittances is limited in handful of countries mainly Qatar, Malaysia, Saudi Arabia, the UAE and India. If data compiled by CBS in 2009 is anything to go by, remittance inflow from India stands at 13.4 percent, Malaysia at 19.2 percent, Saudi Arabia at 14.5 percent and Qatar at 21.5 percent of total remittance receipts.
The government should immediately do the needful to prevent scattering of remittance receipts and properly channelize the amount so that it could be utilized in productive sectors.
“The government should formulate policies to attract remittance receipts into banking system by offering higher interest rates,” economist Dr Posh Raj Pandey said.
Three years ago, the government had made an attempt to channelize remittance receipts by issuing Foreign Bond worth Rs 7 billion. But the move failed due to low interest rate, lack of proper publicity among migrants and absence of clear programs to properly utilize the amount raised.
“There should be a clear policy to utilize remittance receipts in productive sector. Otherwise, remittance scattered at individual level cannot be utilized in productive sectors,” Pandey, who is also the former member of NPC, said.
Besides, there should be a policy to enhance the skills of overseas returnees and create an environment to utilize their knowledge and expertise at home.
Gurung opines that the government has to take policy of suggesting jobseekers the possible sector for investment before they leave for foreign job markets. “Migrant workers can make better use of their earnings if they make investment plan even before their departure to labor destinations,” said Gurung.
However, no one disagrees that foreign employment is not a permanent solution to keep the economy afloat. The government should devise plans to increase export of skilled workers to increase per person remittance earning and use it for accelerating economic activities. It should come up with long term plan to gradually reduce the dependence on foreign employment by creating employment opportunities at home by increasing economic activities.