Remittances, funds repatriated by migrant workers to family and friends back home, provide the most tangible link between migration and development. Because remittances are unilateral transfers in balance - gifts if you will - they do not create liabilities. And they usually come with advice from migrants who have seen better on how to best use them. Thus, remittances are not simply money, but value-added money.
Officially recorded remittances to Nepal surged by 41.8 percent to Rs. 359.59 billion in 2012. The true amount, including unrecorded informal flow, is believed to be significantly larger, particularly due to open border and high labor mobility with India. Remittances through informal channels could equal as much as 50 percent of the recorded flow, states a survey of the World Bank. Like many developing countries, the total of remittances in Nepal is more than four times the official development assistance and is the largest source of external financing. Nepal is among the top ten remittances receiving countries. Nepal’s remittance-to-GDP ratio ranked sixth in 2010. From 2 percent in the early 1990s, it climbed to 23.1 percent in 2012.
At their core, remittances are private intra-family or intra-community income transfers that directly help to reduce poverty, especially rural poverty, in Nepal. Remittances augment recipient households’ resources, smoothen consumption, provide working capital, and have multiplier effects through increased household spending. For the most part, these are used to finance consumption or investment in housing, education, health care, and nutrition. In Nepal, the poverty headcount declined by 16.6 percentage points between 1995 and 2011, with a third to a half attributable to remittances. Cross-country analyses have shown that a 10 percent increase in officially recorded per capita remittances may lead to a 3.5 percent decline in poor people. It has provided a lifeline to the poor during the conflict in the past, continues to do so in the current transitional phase.
Downsides of remittances, which are almost always overlooked, are burgeoning in Nepal, even though remittances have played a pivotal role in development. How do remittances impact Nepal’s long-term growth potential? Their long-term development potential is determined by what is left over after basic consumption needs are met. The direct impact depends on how households use the remittances, how migration affects the domestic labor supply and output, how recipient households respond to this steady transfer, and whether remittances promote financial deepening.
Nepal Living Standard Survey (NLSS), 2011 unveiled that about 79 percent of total remittances received is used for daily consumption, 7 percent to repay loans, 5 percent for acquiring household property, 4 percent for education, and 2 percent for capital formation. Only 11 percent used for more productive purposes implies that the hefty growth of remittances in recent years does not support Nepal’s long-term growth. This is an overlooked aspect; but the existing policy initiative is to raise the remittance inflows whatever costs may be.
Due t migration, Nepal has been losing scarce human capital-a critical factor for development, but gaining another scarce factor - namely financial resources - in the form of remittances. Apparently, the two are not substitutes. The bottom line is that remittances cannot be a substitute for a sustained, domestically engineered development effort. Remittances, especially those from skilled Nepalese migrant workers, have been associated with brain drain, a cause for concern for the country.
Moreover, large-scale migration in recent years has been hurting Nepal’s domestic labor markets in specific sectors. Annually Nepal’s labor force grows by about 3,00,000- 4,00,000 while the outflow of Nepalese emigrants in fiscal year 2012, for instance, was 3,84,665, implying the high risk of labor shortage at home in various sectors.
Remittances have high human costs. Even at the household level, remittances have posed detrimental effects. Nepalese workers abroad are making significant sacrifices—including separation from family—and incurring risks just to find work. And they have to work extremely hard in severe working environments to save enough to send remittances. In many cases, Nepalese nannies working abroad have left their own children behind to take care of children in richer households. The households receiving remittances do have a higher consumption level, but the children of these workers grow up without the presence of their parents, the cost of which is difficult to estimate. Pernicious effects from the separation of migrants from family and high risk of economical and sexual exploitation of Nepalese migrant women are additional costs to society.
Additionally, heavy dependency on remittances has been pushing Nepalese communities toward the culture of dependency. Many household members simply stop working and wait from month to month for the overseas remittances. Such negative incentives- a form of moral hazard- also result in an increase in the reservation wage. Young men also prefer to remain unemployed and wait for the possibility of migrating, rather than taking up jobs at the local market.
Remittances increase consumption much faster than production, raising issues of long-term sustainability, which is of grave concern since Nepalese migrants to developed countries settle there and the links with home gradually erode.
Channeling remittances into productive uses has been a key development challenge for Nepal. Bringing recipient households into the formal financial sector is only the first step in using remittances more effectively. Cross-country surveys indicate that although households typically spend a large proportion of their remittances, their propensity to save can be as high as 40 percent. For policymakers, the challenge is to channel these savings into productive uses. Financial intermediaries are better means for this purpose, which can promote investment from remittances by bundling financial services like savings products and entrepreneurial loans for households that receive remittances.
Fundamentally, remittances are private funds that should be treated like other sources of household income. Efforts to increase savings and improve the allocation of expenditures should be accomplished through improvements in the overall investment climate, rather than targeting remittances.
The author is Assistant Director of Balance of Payments Division, Research Department at Nepal Rastra Bank.