Make Remittance Engine Of Economic Growth

The part of the earnings that the migrants send home to support their families is known as workers’ remittance. Remittance represents the largest source of foreign exchange for many developing countries. In many developing countries remittance has been providing a lifeline for the poor. According to the World Bank, India tops the list of countries that receive largest remittances from its citizens, followed by China, Mexico and the Philippines, while the rich countries led by United States are the main sources of remittance, followed by Saudi Arabia, Switzerland and Germany. Remittance augments recipient household’s resources, smooth consumption, provide working capital, and have multiplier effects on the economy through increased household spending. 

Evidence confirm that remittance has more direct impact on poverty-reduction. Depending on how remittance is used, remittances have impact on long-term growth potential. If it reduces domestic labour supply, it might lower growth. However, if remittance is channelled to productive investment and human capital development having long-term benefit, it may stimulate growth. Even if the remittance is spent on consumption, it may spur local economic activity through multiplier effect.  Similarly, remittance has an impact on financial development, since it enables low-income households to access formal financial services. Remittance serves as collateral for small business start-up capital for individuals previously excluded from the formal sector. 

Human costs

Remittance may also have negative impact on the economy if not used properly. Remittance, especially from skilled workers has been associated with brain drain. Countries receiving remittance incur costs if the emigrating workers are highly skilled, or if their departure creates labour shortages. The brain drain can impair a developing country’s capacity to harness modern agricultural and industrial technology.  Remittances can also create dependency by reducing recipients’ incentive to work. The shortage of skilled workers in the country may slow the economic growth of the country in the long term. Remittance may also have human costs, since migrants will have to remain separated from families. They must work extremely hard to save enough to send remittance. 

Many Nepali workers are suffering hardship and many Nepali girls have also been the victim of sexual abuse. Hence, some economists are of the opinion that remittance cannot be a substitute for a sustained, domestically engineered development effort. Unemployment, particularly that of youth and educated, is increasing rapidly in Nepal. Due to the extreme poverty and the lack of employment opportunities, and relatively very high real wages abroad Nepalis going abroad for employment has been increasing rapidly since last several years. Because of foreign employment, remittance has been giving relief to the troubled economy. Foreign employment has been able to bring large amount of remittance inflow to the country. The share of remittance inflow to GDP increased to 22.8 per cent in fiscal year 2079/80 which was 20.2 per cent in fiscal year 2078/79. 

Taking into account the larger amount of unrecorded flows through informal channels, some believe that remittance contributes more than 30 per cent of GDP. Likewise, remittance contributed about 67 per cent of total convertible foreign exchange earnings in fiscal year 2079/80. The remarkable fall in poverty is attributed mainly to the increasing inflow of remittance. Remittance has enabled family members at home to meet their basic necessities. However, the family members have been spending most of that money on consumption. This has resulted in an increase in imports, leading to further deterioration in balance of trade. It has also fuelled the increase in price level in recent years. 

The increase in imports has helped to increase government revenue and maintain balance of payment in favourable position. Foreign exchange reserves of the banking sector has remarkably increased. This has increased the deposits of commercial banks and other financial institutions. Despite this, it is a matter of concern that the country is exporting the active manpower that is essential to carry out development works in the country. It has lessened the need to increase domestic investment to boost employment opportunities within the country and to have sustained economic growth and poverty reduction.  

Utilisation of remittance

Thus, Nepal is experiencing both the costs and benefits of foreign employment. However, the country has no better alternative right now than allowing youths to go abroad due to the dearth of employment opportunities. In the absence of foreign employment, the country might not be able to bear the potential costs of unemployment that generally come in the forms of crime, robbery, kidnapping, prostitution, and above all, the social and political instability. The above mentioned facts indicate that sending most productive youths for foreign employment is not a policy choice but a compulsion on the part of the government. However, the government needs to take measures to use remittance productively. For this, the policy makers will have to make several policy decisions while devising plans for the utilisation of remittance. 

The government must try to increase remittance flows from the formal channels. For this, the government will have to make effort to reduce transaction costs by making remittance service providers fix low remittance fee. Since greater competition brings prices down, the entry of new market players can be facilitated. In order to use remittances more effectively, recipient households should be brought into the formal financial sector. Since the recipients’ propensity to consume is high, the policy makers should make effort to channel these saving into productive uses. Likewise, banks can promote investment from remittance by bundling financial services like savings products and entrepreneurial loans for households that receive remittance. The government can encourage the banks to use the flow of remittance as collateral for small business loans. 

(The author is a professor of business economics)