Recently World Bank researchers presented their analysis on the remittances market in Nepal. The presentations and a policy note are very informative. This blog post draws in information from their analysis.
Around two to five million Nepalese workers are working abroad. Officially recorded new migration increased dramatically during the last decade, from 36,000 in 1999/2000 to 229,000 in 2007/08. Unofficial estimates of stock of Nepali migrants range from 400,000 in Malaysia, 300,000 in Qatar, 60,000-70,000 in South Korea, and 2 to 5 million in India. 125,000-275,000 Nepali migrants are estimated to be working in United Arab Emirates (UAE), of which half are in construction, hospitality, tourism, and security. An estimated one-third of male population are working abroad.
It constituted 17 percent of GDP in 2008 ($2.3 billion). Remittances also have large multiplier effects on sectors such as construction, cement and furniture. Migration played a crucial role in reducing poverty between 1994 and 2004. The WB estimates it to contribute between one-fifth to one-half of the decline in poverty. Within South Asia, remittances as a share of GDP is highest in Nepal.
Remittances sent by Nepali migrants from India, which is the largest migration destination, are larger than the bilateral trade deficit with India and underpin the exchange rate peg with the Indian rupee. Remittances have helped finance the trade deficit and maintain a positive current account balance over the last decade.
The onset of the financial crisis in the second half of 2008 has led to a significant decline in construction, hospitality and other sectors in the Gulf countries in which a large number of South Asian migrants are employed. As a result, the growth of remittances to Nepal has decelerated significantly in recent months and remittances flows are expected to decline modestly in 2009.
The decline in remittances (WB researchers estimate remittances would decline by a two-and-a-half percent to four percent in 2008/09 in Nepal) due to global economic slowdown will depend on projected economic growth rates of destination countries, the kind of work Nepalese migrants do and demand for such work in destination economies, and how secure their jobs are through contracts. The growth rate in Gulf countries is expected to slowdown but the good news is that remittances flows out of GCC are not correlated with oil prices. As long as infrastructure investment continues, drawing in from their large reserves, demand for migrant, cheap labor is going to increase or at least not decline. It is reported that some Gulf countries are replacing Bangladeshi workers with Nepali workers for “various reasons”. Furthermore, new countries like Libya, Romania, and Poland have agreed to take in Nepali workers. This means that demand for Nepali labor in the international market is not going to decline drastically despite the global economic slowdown.
Nepal’s remittance market is competitive and the remittance infrastructure is well-developed, with money transfer operators and banks able to deliver remittances reliably even in remote areas. But there are market inefficiencies in destination countries that ought to be addressed by policy makers. Bilateral negotiations with the authorities in destination countries can improve access of migrants to remittance services. Within Nepal, there should be efforts to encourage banks and finance companies to link remittances to consumer loans, housing loans, and small business investments. Post offices in destination countries and Nepal can play an important role in providing cheap and convenient remittance services. Mobile phone companies can also provide fast, convenient and cheap remittance services within Nepal.
The destinations of migration will likely change over time. It has nearly saturated in East Asia.The destinations that will increase in importance are the Gulf and India since these countries will grow and will need new workers. The Gulf countries have abundant financial resources to continue the construction and tourism projects (hotels, resorts, and restaurants) and investments in infrastructure which have been temporarily suspended since the onset of the current crisis. For example, Abu Dhabi, one of the seven United Arab Emirates, is building Khalifa City, which will need 150,000 new workers from abroad. India has also been relatively less affected by the current crisis and will remain an important destination, especially for seasonal migration, and also a source of migrants. In the long-term, Poland and Romania and other new members of the EU and possibly Russia are also likely to need migrant workers from Nepal.
According to data reported by Nepal’s central bank in a recent survey, 20 private commercial banks, 3 state-owned banks, 12 micro-finance institutions, the postal service, 4 other financial institutions and 36 non-financial institutions (such as Western Union, Moneygram, Prabhu, International Money Exchange etc.) are authorized to receive and deliver remittances. These commercial and state-owned banks have together 574 branches in the country, while MFIs have over 320 branches, the post office has 75 district offices and the non-financial money transfer operators have over 2,500 branches.
Commercial banks, money transfer companies and the post office are allowed to receive inward remittances. Microfinance institutions cannot send or receive remittances, but are only allowed to distribute remittances, acting as sub-agents of the firms authorized to receive inward remittances. No mobile phone operator in Nepal is authorized to send or receive remittances.
Nepalese banks typically act as distributors of remittances for partner money transfer companies. Unlike the major banks in India, very few Nepali banks promote other financial products such as savings deposits, home loans, health and life insurance to remittance senders or recipients. This may reflect relatively low banking penetration, the prevailing high levels of inflation and the uncertain macroeconomic environment, which might make Nepali banks unwilling to extend credit to retail borrowers in general, including to non-resident Nepalese.
Bringing remittances into formal (banking) channels and mobilizing remittances for savings and investment remain key challenges for Nepal. There are only 1.8 branches per 100,000 people in Nepal in 2006, compared to 4.7 in India, while ATM access is 0.28 per 100,000 people. More than 70 percent of people do not access to commercial banks. More than two-third of recipients in rural areas received international remittances (including from India) through informal channels such as hand-carry or through friends and relatives, compared to 34 percent of recipients in urban areas.
Increasing remittances have been driving real wages in the country. Agricultural wages rose 25 percent in real terms and nonagricultural unskilled wages increased by 20 percent. Meanwhile, skilled wages tripled, out-migration reduced labor supply and aggregate demand increased. With increasing remittances, income has grown and so has inequality-- a potential research area because it is not clear yet if increase in consumption fuelled by consumption (not domestically earned income) has actually increased inequality. Some argue that due to higher aggregate demand of remittance-receiving households, remittances can be linked to inequality.
The consequences of reduced remittances in Nepal are:
- Some people could fall back into poverty again. If the decline in remittances is between two to four percent, it would cost between $50-100 million to mange the additional people that fall below the poverty line.
- Reduced foreign exchange flows, leading to decline in consumption and imports. A small impact on BOP situation.
- Potential soft landing of real estate bubble as investment in real property would decline.
- Banks that are taking excessive risks in real estate market and margin lending may be strained.
- Departures would decline, putting tremendous pressure on the already stagnant domestic job market. It could fuel social tension. Note that approximately 500,000 people enter labor force each year at a time when the public and private sector are not hiring in the same rate.
What could the government do to mitigate the impact of declining remittances in the country?
- Create business environment conducive to private investment (it is the most popular recommendation but hardly realized!)
- Accelerate existing public investment and maintenance work that are labor intensive (question mark on effective implementation-- if it were possible, then with those millions of aid dollars, something substantial would have already been achieved in this sector!)
- Increase labor-intensive public and maintenance work (this sector has never been capital-intensive-- otherwise the state of Nepal’s infrastructure would not have been so dismal!)
- Start fiscally sustainable, high priority public work programs for the vulnerable (big problem in identification and demand for such work in places where vulnerable people live!)
- The banking sector might feel a pinch, leaving the central bank to encourage consolidation of an over-crowded sector (good if competitiveness and efficiency of the banking sector is further improved!)