Friday, July 1, 2011

Costs and benefits of remittances in Nepal

Remittances now account for almost 23 percent of Nepal’s GDP. About one-third of working male population is estimated to be outside the country remitting money back home, making remittances the largest foreign currency earner. Here is a discussion on how remittances performed during the global economic crisis. Here is more.

Remittances, US$ millions
Year Workers remittances Compensation of employees Migrants' transfer Total inward remittances flows
2003 744 27 - 771
2004 793 30 - 823
2005 1126 85 - 1212
2006 1373 80 - 1453
2007 1647 87 - 1734
2008 2581 146 - 2727
2009 2858 127 1 2986
2010 (e) - - - 3513

Below are findings from the latest WB report. I have not received the full report yet, but these points are extracted from presentation slides of the authors (here and here). (It is strange that the WB Nepal office did press conference about the study and then not release the full report immediately.)

  • It is estimated that there are 2.02 million migrants (stock total), of which 867000 (43.73%) are in India, 810000 in the Gulf, 245000 in Malaysia, 186000 in various other destinations, and 29000 in “unknown” destinations. [Others say, between 1993/94 and 2009/10, there were 569667 migrants in Malaysia, followed by 481748 in Qatar. Malaysia tops the destination for male migrants (569169) and Lebanon for female migrants (9389)].
  • Most women (58%) go through individual channel and face problems. About 78.9% male go through institutional channel. Overall, 77.6% go through institutional channel.
  • About 8.36% of migrants were female and 91.64% male.
  • A bulk (about half) of the remittances come from the Gulf, followed by India (19.2%) and Malaysia (10.5%).
  • Most of the migrants of the age groups 20-30. Almost all kinds of households migrate, but those with the lowest income bracket migrate the most.
  • Migrant destinations differ by their place of origin. A large number of migrants from Far-Western and Mid-Western (and Western) regions go to India; those from Western and and Eastern regions go to the Gulf; and those from Western and Eastern regions go to Malaysia.
  • About 48% of migrants originate from Terai, 45% from the Hills, and 7% from the Mountain.
  • Over 30 percent of household income in the Western region is accounted by remittances. In Syangja, Kaski, and Tanahu, it is 25.5%, 28.2% and 34% respectively. About 43.4 percent of household income in Argakhashi came from remittances. It was 7% in Jumla.
  • Jhapa (16.8), Morang (13.2), Chitawan (10), Nawalparasi (11.8), Solukhumbu (10.7) got remittances over NRs 10 billion. Agarkhashi and Jumla got 7.5 and 0.4 billion respectively.
  • In 2008, most of the returnees were from India, followed by the Gulf and Malaysia.
  • About 37% of the returnees would “very likely” go back abroad soon. About 34% would “very unlikely” go back soon.
  • Most returnees would return to either agriculture (48%) or stay inactive (20%--employment wise) or daily wage workers (10%). These are the ones who are “very likely” to migrate again.


  • Household level: Poverty reduction, decline in inequality, jobs to those who could not have otherwise obtained, more income and consumption, more leisure (males from remittance receiving households reduced labor supply by 15%), better education to children, better healthcare, improvement in housing condition, investment in real estate,
  • Macro level: Increase in foreign exchange and BOP stability but induce more imports, helps maintain pegged exchange rate with India, increase in disposable income and higher aggregate consumption


  • Household level: Family separation, exploitation by recruitment agencies, expensive remittance services
  • Macro level: Dutch Disease effect on manufacturing sector as there is loss of external competitiveness and people import more (increase in demand of nontradables increases prices and wages throughout the economy and later on loss of competitiveness of tradables, leading to decline in manufacturing activities), laxity in policy reforms, increase in wages, higher prices of real estate, and high cost of a decline in growth rate of remittances.

The WB report argues Dutch Disease effects are seen in the economy. It shows that while remittances are increasing, manufacturing (% of GDP) and exports (% of GDP) is declining. 

It says that there is a “vicious policy cycle”: more remittances leading to laxity of policymakers, then inadequate investment climate, then low private investment, then low growth, then limited job opportunities, then more migration, then more remittances, then … the cycle revolves.


  • . Reduce cost of remitting income: Enhance dialogue between governments of India, the Gulf state, and Malaysia and enforce mutual laws and guidelines for migrant recruitment; bilateral agreements with more countries; strengthen role of Nepali embassies; raise awareness among migrants; provide effective orientation/training programs; effective monitor of recruitment agencies; simplify and systematize the process;
  • Improve remittance services: Develop efficient electric transfer mechanism; introduce mobile phone banking and prepaid cards; improve legal regulatory frameworks; improve communication with destination country authorities; pre-departure orientation
  • Dealing with Dutch Disease: Can’t overturn the situation easily so enact prudent macroeconomic management (fiscal) and improve investment climate (to increase job opportunities at home); channeling remittances into productive sectors.

That said, a true picture of remittances use and abuse and the stock of migrants is still in estimation phase. The true picture will come out with the completion of Census 2011. Numbers on stock of migrant, destination, channeling of income through informal means, those in India and the total sum they sent, and more will be clear once the Census 2011 data are crunched.

Meanwhile, the approximation of the migrants stock and various estimates will be convincing once the entire report is published. The claim of full fledged Dutch Disease effect might be a little over stretched. I think there are symptoms but it is not in a full fledged mode. Remittances have definitely increased imports and consumption, pushing up demand. But, the increase in demand is mostly of durables, which are usually imported and not manufactured in Nepal. The erosion of manufacturing capacity has got more to do with adverse political and investment climate (which in turn has little to do with increasing remittances). There is low appropriability of private returns to investment. Supply side issues are contributing to increasing general prices, which then led to adjustment of wages in the annual budget. Anyway, I think the symptoms of Dutch Disease are definitely there, but it in itself in full effect is doubtful. I will have to see the full reasoning in the report when it comes out.

A little more on the Dutch Disease effect: As domestic income increases due to remittances, aggregate demand and spending goes up as well. This puts pressure on nontradables in the domestic market, leading to rise in demand and output. But, due to high demand wages also tend to increase in all the sectors, both tradable and nontradable. It will increase cost of production throughout the economy, leading to squeezing profits in the nonresource tradables sector (manufacturing), whose prices are pretty much fixed in the international market. This means customers will look for substitutes at cheaper price, thus reducing domestically produced nonresource tradables. This gradually erodes the existence of the whole sector itself. Note that price of nontradables are set in the domestic market, but the price of tradables are set in the international market. Meanwhile, since incomes are higher from migration, capital and labor are attracted to this sector from other sectors of the economy, reducing output and labor supply in the latter ones.

UPDATE (2011-07-08): Well, I just got a summary of the report (forthcoming). It clarifies that Dutch Disease symptoms are seen (not exactly Dutch Disease effect). Here are main points from the summary.