Using remittance for the better of the Nepali economy

How Nepal can convert remittance to savings, investment and entrepreneurship thereby making it a means of sustaining the national economy.

Prience Shrestha

  • Read Time 5 min.

Remittance inflows to Nepal decreased by 1.7 percent to NRs.631.19 billion in the month of March of the ongoing Fiscal Year 2021-22 from the review period in the same month of the last fiscal year. The recent remittance inflow shows a decrease of 34.32 percent from the monthly average of the last Fiscal Year which stood at NRs 961.1 billion. This particular incident concerning a downwards trend in remittance earnings has presently compromised the macroeconomic wellbeing of the country as it witnesses ballooning international payments or Balance of Payments (BoP) deficits and shrinking gross foreign exchange reserve status. Currently, for the month of March, BoP deficit stands at NRs 258.64 billion in comparison to the surplus of NRs 1.2 billion in the monthly average of last fiscal year, whereas the foreign exchange reserve stands at NRs 1171 billion in comparison to the monthly average of NRs 1399 billion of last fiscal year.

The economic significance of the remittance to Nepal can be observed from other statistical figures that depict remittance inflow to tally more than 60 percent of the foreign exchange reserve and 22 percent in comparison to the Gross Domestic Product (GDP) of the country between FY 2016/17 to FY 2021/22. Also, remittance accounts for more than 65 percent of the total current account receipts entering the country in the last two fiscal years. Therefore, remittance, presently and until the foreseeable future, can be considered as the fundamental element to stabilizing foreign exchange reserves and balance of payments surplus despite trade deficits, thereby enabling macroeconomic stability in Nepal.

Apart from being a crucial macroeconomic indicator from a technical perspective, remittance also generates a positive effect on the economy by boosting household savings, investment, growth, consumption, and income distribution.  By promoting productive use at the local level, remittances can potentially generate income and employment opportunities, and spur new economic and social infrastructure and services. 

Multiple pieces of literature identify Nepal to be heavily dependent on remittance income also based on the proportion of households dependent on remittance. It is observed that almost half of all Nepali households have at least one migrant family member currently living abroad. In migrant households, remittances form a significant percentage (as high as 60 percent) of total migrant household income. In terms of the application of received remittance income, the Nepal Living Standard Survey 2011 found that a significant proportion of remittance incomes are used for meeting household daily consumption needs and to repay debts and that only a fraction (<2 percent) is saved for investment in the productive sectors. It is often stressed that a higher proportion of remittances is spent on food, education, and healthcare, but these can be considered to be essential for building human capital, a prerequisite for development.

Remittance for gains

Hence, it can be noted that the use of remittance for productive investment, proxied by capital formation, savings, and business is minimal. As such, the total use of remittance for productive purposes stands only at a meager 3.5 percent. An essential component of the investment of remittances is to increase the financial literacy of migrants, returnees, and migrant-sending households. It is essential to enhance the financial skills of both receivers and senders with the knowledge and skills to evaluate their options (including how to send and use remittances through formal channels, and how remittances can be used to meet the financial goals of both parties) and choose the most suitable financial products, to understand how product features differ, to calculate and compare costs, and to determine what they can afford and what products are best suited to their requirements. However, reaching the individual migrants and remittance recipients and improving their financial literacy is a daunting task, and it is important to build the capacities of the financial institutions that provide services to them, such as Microfinance Institutions.

Given the significance of the remittance sector to the national economy, transitioning remittance into entrepreneurship and small business development can play an important role in helping Nepal reach its optimal growth.

Likewise, Foreign Employment Savings Bonds (FESBs) can play a crucial role in securing remittance income into gross savings and investment in the economy. FESBs targets Nepali migrant workers with the objective of channeling their remittances into investment in national development infrastructure and programs. However, the Nepal government frequently tries to secure foreign remittance money by issuing FESBs, but not with very positive results. Despite having an attractive annual interest rate of 9–10 percent, the bond was not a success as can be seen from its performance over the years. Reasons given for such poor performance include lack of awareness, complicated procedures, short sale period, and concerns about exchange rate risk, as payments are made as per the rate at the time of subscription.

However, the success of this approach highly depends on the purpose of the remittance in terms of its application for consumption, savings, or investment. At present, the current trend or obligation of the remittance recipients to utilize a major chunk of remittance for consumption purposes might not motivate recipients to take benefit of tax breaks on savings and investment activities concerning remittance. 

It is important to note that the promotion of entrepreneurship and small business development is crucial to establishing a strong foundation of economic growth in any developing country including Nepal. Meanwhile, given the significance of the remittance sector to the national economy, the ability to transition remittance into entrepreneurship and small business development can play a synergistic role in helping Nepal reach its optimal growth solely as a result of quality capital formation.

What can be done 

It can be asserted that policies and approaches to link remittance with entrepreneurship and small business development are crucial in the context of Nepal. 

First and foremost, to create synchronization between remittance income and entrepreneurship, it is important to recognize that returned migrants, apart from their investable remittance income, are a vital source of human capital, which could profitably be used to support the growth and development of micro and small enterprises. Therefore, it is important to provide sufficient knowledge and training to enable returned foreign migrants to productively use the skills and knowledge acquired during their stay abroad and to provide on-the-job technical backstopping support to enable them to open a small business back home. The primary thrust of the training support should revolve around building the confidence of the migrant workers and their families to start an enterprise for generating self-employment opportunities. On such a front, Nepali Microfinance Institutions can intervene by developing business development services such as training, business advice, marketing assistance, and skill development specifically targeting returned foreign migrant laborers and their families. 

Furthermore, Nepal could also learn from and consider replicating the successful examples of Mexico and El Salvador, which provide matching funds to the collective remittances sent by migrant organizations abroad to be used to finance local entrepreneurial activities of returned migrant laborers. On such account, equal or more amount of funds in terms of loan or equity financing of the remittance money to be invested in business development can be facilitated to individual returned migrant laborers willing to integrate into the domestic economy. 

Prience Shrestha is a researcher at Samriddhi Foundation, an economic policy think tank based in Kathmandu. The views expressed in this article are the author’s own and do not represent the views of the organization. 

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