Migrant Nepalis often send money to their family, friends, and other beneficiaries, like local schools or charities. This ‘remittance’ amounts to roughly a quarter of Nepal’s annual GDP and is crucial in sustaining the country’s economy. Economists and politicians must analyse its effects on consumption and investment patterns.
Remittances have become a lifeline for Nepal. Estimated at 11 billion dollars in 2023, their volume surpasses the combined inflow of official development assistance and foreign direct investment. This structural income stream must be managed, and strategies must be developed to foster long-term economic development.
Funds for the folks back home
Remittance is defined as ‘the financial inflow arising from the cross-border movement of a country’s nationals via the transfer of money and goods sent by migrant workers to their country of origin’. These funds have become a vital source of income for many households in Nepal and contribute significantly to the country’s Gross National Product (GNP) and foreign exchange reserves.
The migration trend from Nepal, particularly to the Middle East (Saudi Arabia, Qatar, and the United Arab Emirates) and Southeast Asia (Malaysia), dramatically increased during the armed conflict period in Nepal. This trend persisted for a decade, even after the signing of the Comprehensive Peace Agreement in 2006. In later years, migrants also flocked to Europe and other parts of the world, like South America.
The consistent rise in remittances emphasises Nepal’s growing reliance on migrant labour to sustain its economy. In previous years, remittance income grew steadily, by 16.5 per cent in the last fiscal year and 23.2 per cent the year before, in line with the growing exodus of migrant workers.
“Growing remittance earnings mean no job prospects at home. But the money sent by migrant workers has boosted foreign exchange reserves to an all-time high”.
Nara Bahadur Thapa
Sustain the economy
Remittances, primarily transferred in US dollars, are essential for Nepal to import commodities and sustain the economy. If remittances were to stop, Nepal’s foreign exchange reserves would decline instantly, jeopardising its ability to meet import demands, which far exceed its export capacity. Exports only account for 9 per cent of imports, one of the country’s most significant economic concerns.
Nara Bahadur Thapa, a former executive director at Nepal Rastra Bank, points out: “Growing remittance earnings mean no job prospects at home. But the money sent by migrant workers has boosted foreign exchange reserves to an all-time high”.
Despite the substantial inflow of remittances, a survey by the Foreign Employment Board revealed that 92 per cent of remittances are spent on individual and domestic consumption. Only 8 per cent are saved or invested in businesses. This trend suggests that remittances are primarily used for immediate needs rather than long-term economic development.
Reliance on remittances, rather than employing the youth workforce domestically, particularly in the manufacturing sector, negatively impacts export performance and stimulates imports.
Dutch disease
Nepal’s gross foreign exchange reserves increased by 32.6 per cent to 14,9 billion dollars in the last fiscal year, a historic high. However, experts warn that such a trend in a least-developed country indicates a lack of investment in productive sectors, which could hinder sustainable economic growth.
Research conducted by Nepal Rastra Bank, analysing data from 1993 to 2018, indicated that the role of remittances might be detrimental to export performance. The findings suggest that reliance on remittances, rather than employing the youth workforce domestically, particularly in the manufacturing sector, negatively impacts export performance and stimulates imports—a phenomenon often referred to as the ‘Dutch disease’
Connect with entrepreneurship
In response to these concerns, Nepal Rastra Bank has mandated that Nepali migrant workers bring the money earned abroad within 35 days of returning home. The central bank issued a notice stating that funds in foreign banks should be transferred to Nepal within this timeframe. This policy ensures that remittances are channelled into the national economy promptly.
There is an urgent need to connect remittances with entrepreneurship rather than just feeding imports. Nepal is highly vulnerable to recession and economic depression, as a slight change in remittances can lead to nationwide altercations. Remittance management strategies should be aligned with export strategies to ensure that the inflow of funds contributes to long-term economic development rather than creating a cycle of dependency.
Sudipa Mahato is a junior editor with Nepal Connect.
Globally, remittance flows are directed towards low- and middle-income countries. Over 200 million migrants contribute to the livelihoods of over 800 million family members through remittances. By 2030, migrants in low and middle-income countries are projected to send over USD 5 trillion home, predominantly benefiting rural areas where 80 per cent of the world’s poor reside amidst food shortages and climate change impacts.
The costs of a remittance transaction include a fee charged by the sending agent, typically paid by the sender, and a currency-conversion fee for delivery of local currency to the beneficiary in another country.
In 2022, 90 per cent of Nepali adults utilised various formal financial products, including digital platforms, which reduced remittance costs to 3.7 per cent. This reduction brings Nepal closer to achieving the Sustainable Development Goal (SDG) target of less than 3 per cent, demonstrating progress in making remittance transfers more affordable and accessible.
