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Remittances in Nepal

Chandan Sapkota

South Asia Seminar Series (SASS), 18 September 2013

The views expressed are solely those of the author. The presentation is based on Remittances in Nepal: Boon or Bane? published in The Journal of Development Studies. http://dx.doi.org/10.1080/00220388.2013.812196
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Presentation Outline
Introduction Migration of Nepalese Workers Remittances in Nepal Impact of Remittances Conclusion Productive Use of Remittances
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Introduction

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Significance of Remittances
Remittances, ODA and FDI Top remittance recipients in 2011 (% of GDP)
50 45 40 35 30 25 20 15 10 5 31 47

29

27 23 22 21 21 18 18 17 16 16 14

13

Remittances inflows are far higher than ODA. o USD 401 billion in 2012 (e) o USD 515 in 2015 (f)

Low volatility of inflows.

Contributed to achieving economic and development outcomes (MDGs)

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Migration of Nepalese Workers


May 1815 agreement opened up the avenues for employment overseas
8

Absentee population (% of total population)

Push factors
Lack of job opportunities Unfavorable investment climate More influential since 2000

7 6 5

Pull factors
Relatively high wages High demand for labor in low to medium skilled sectors
Manufacturing Construction Hotel/catering

4 3 2 1 0 1941 1952-54 1961 1981 1991 2001 2011

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Average Daily Number of Migrants is Increasing


1400 1243 1200

1000

Age distribution of remitters: 15-29 years: 34.2% 30-44 years: 37.8%

800

600

560

400

200 6 0

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Migration Destination and Cost


Migration destination varies with HH wealth Migrants from low income HHs tend to prefer India
Geography, logistics, permit, language
Migration destination
500,000 453,543
450,000 400,000 354,716 350,000 300,000 250,000 200,000 150,000 294,094 384,665 Malaysia Qatar Saudi Arabia UAE Others Kuwait South Korea Bahrain Oman Japan Afghanistan Lebanon 50,000 0 FY2010 FY2011 FY2012 FY2013 Israel Total

Average cost of migration:


o India: NRs5,250 o Malaysia: NRs109,700
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100,000

Remittances in Nepal

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Migration and Remittances


500 30

450

Number of migrant workers (in thousand)

400 350 300 250 200 150 100 50 -

25

20

15

10

Migrants (thousand)

Remittances (% of GDP)

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Remittances (% of GDP)

Remittance Inflows > ODA and FDI


25

Substantial inflows (% of GDP) since FY2001


ODA: 4.6% FDI: 0.2% Remittances: 1.7%

20

FY1996

15

Share of GDP

10

FY2001
ODA: 4.3% FDI: 0.01% Remittances: 10.7%

0 1974/75 1976/77 1978/79 1980/81 1982/83 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 2002/03 2004/05 2006/07 2008/09 2010/11

FY2013
ODA: 4.2% FDI: 0.5% Remittances: 25.5%

-5

Remittances
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Aid

FDI
10

Sources of Remittance

Remittance inflows from overseas account for over 80% of total household remittance inflows.

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Per capita Remittance Inflows and Recipients HHs


Percentage of household receiving remittances
60
56 50

Per capita remittances for all Nepal (NRs)


10,000
9,000 9,245

8,000
7,000

40

6,000
30 32 5,000

4,000
20 23 3,000

10

2,000
1,000

2,100

0
1995/96 2003/04 2010/11

625 1995/96 2003/04 2010/11

More number of households are receiving more remittances.


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Per Capita Remittance Received and Its Use


Per capita receipt tends to increase with HH wealth. But, almost 80% is used for consumption purpose.

HHs in the poorest quintile received more remittance from India.


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Only 2.4% for capital formation.


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Impact of Remittances

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Indicative Impact of Remittances

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Helped Reduce Poverty and Support Growth

Remittances contributed between one-third and one-half of overall reduction in poverty between 1995 and 2003. Corroborated by the latest MPI analysis based on NLSS III.
Boosted per capita consumption of households in the poorest deciles. Over half of the contribution to GDP growth from services sector, supported by consumption of imported goods financed by remittances.
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Increased Foreign Exchange Reserve


100%
90% 80%

400
350 300

70% 60% 50% 40% 30% 100 20% 10% 0% 50 0 250 200 150

Remittances

Tourism

Investment

Exports

Diplomatic

Aid

Misc

Total forex (NRs billion)

Remittances account for around 65% of total foreign exchange earnings.


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Total forex reserve (Rs billion)

Share of total forex reserve

Financed Ballooning Imports


40 30 20

Share of GDP

10 0

1991/92

1993/94

1995/96

1974/75

1975/76

1976/77

1977/78

1978/79

1979/80

1980/81

1981/82

1982/83

1983/84

1984/85

1985/86

1986/87

1987/88

1988/89

1989/90

1990/91

1992/93

1994/95

1996/97

1997/98

1998/99

1999/00

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

-10
-20 -30

Merchandise export

Merchandise import

Remittances

Trade deficit

Merchandise imports are surging and are financed primarily by remittances. FY2000 Exports: 13.1% Imports: 26.2% BOT: 13.6% Remittances: 3.3% FY2013 Exports: 5.1% Imports: 32.2% BOT: 27.1% Remittances: 25.5%

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2010/11

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Helped Maintain External Sector Stability


10 60 8 50

40 CAB, BOP (% GDP) 4 30 2 20 0 FY2003 -2 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 10

-4 CAB (% of GDP) BOP (% of GDP) Remittances growth

As goes remittances (growth), so goes CAB and BOP!


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Growth of remittance inflows

Increased Revenue Mobilization


100% 90% 80% 20 25

Share of total tax revenue

70% 60% 50% 40% 30% 20% 10% 0% 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 0 5 10 15

Customs

Consumption

Land-house

Income

Remittance (%GDP)

Revenue performance hinged to remittances-fueled consumption demand of imported goods. Very weak relation to GDP growth. Consumption tax + customs duty = 72% of total tax revenue
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Remittances (% of GDP)

Induced Dutch Disease Effects


REER appreciation
Remittance (% of GDP)
1.6E-05 20 15 10 5 0

T/NT production
Remittance (% of GDP)
1.8E-05 25 20 15 10 5 0 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00

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1.4E-05 1.2E-05 1E-05 8E-06 6E-06 4E-06 2E-06 0

Remittances (% of GDP) Remittances (% of GDP) REER

Tradable/Non-tradable

Spending effect High remittance inflows = high HH income and expenditure > output and productivity capacities. (+ve income elasticity) Rise in wages in T and NT sectors = loss of competitiveness. T/NT shrinks.
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Resource movement effect Labor and capital attracted to high income sectors, i.e. overseas migration Further creates shortage of workers and puts pressures on wages in both T and NT sectors.
21

T/NT production

REER

Fostered Policy Laxity


Government effectiveness
0 -0.1 -0.2 -0.3 Score -0.4 -0.5 40 35 30 25 Rank 20 15 10 5 0 Score 0 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 -0.7 -0.8 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 Percentile Rank (0-100) Governance Score (-2.5 to +2.5) Percentile Rank (0-100) Governance Score (-2.5 to +2.5)

Regulatory quality
45

Regulatory quality

40 35 30 Rank 25 20 15 10 5 0

-0.6
-0.7 -0.8 -0.9

Vicious policy cycle: High remittance inflows, low pressure to improve policy weaknesses, inadequate investment climate reforms, low investment, low job opportunities, high overseas migration,
High remittance inflows lower governance performance.
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Conclusion

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Supported Progress in Growth and Development

Supported GDP growth (esp through services sector growth) Supported achievement of development objectives, including some MDGs High revenue mobilization Financed imports Maintained external sector stability Increased GNS Boosted forex reserves
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But Not For Boosting Productive Capacities and Investment


Fueled high consumption of imported goods. Volatility of inflows has affected CAB. Very low capital formation. Induced Dutch disease effects (REER appreciates and T/NT production shrinks). Fostered policy laxity.
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Learn to Live With Persistent Inflows!


Short-term option: Dont go against the tide. Learn to live with persistent high inflows.
Too costly to sterilize its impact each year.

Medium and long term option:


Incentivize migrants to invest in productive sectors. Offer incentives to channel remittances to finance long term development needs with a goal to boost productivity.
Infrastructure (energy, roads, ICT, irrigation), agribusiness, education, healthcare Can readily absorb technology

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Productive Use of Remittances

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Productive Use of Remittances

Use of remittance depends on economic, social and legal environment. Improvement of investment climate is necessary. Enhancing financial market efficiency. Diaspora bonds (successful launch in Israel and India) Matching funds (3x1 matching fund in Mexico and El Salvador) Promoting remittances as collateral for private loans Encouraging productive investments Purchasing agricultural equipment Building house/business Purchasing land Improving farm mechanization Subsidization by government Education and business loans for family members of migrants (remittance as collateral) Tax breaks on imported capital goods Financial literacy
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Thank You!

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Absentee Population and Remittances by District

Absentee population + migration destination tend to influence remittance inflows to districts.


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HH Preference for Migration Destination

Migrants from poor HHs (mostly FWDR and MWDR) prefer India.
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Real Effective Exchange Rate (REER)

A decrease (increase) in REER indicates real appreciation (real depreciation) of Nepali currency. Remittances have more appreciative effect than other variables such as foreign aid.

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