remittances in nepal
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Remittances in Nepal: Boon or Bane? (August 2013) The Journal of Development Studies. DOI: 10.1080/00220388.2013.812196TRANSCRIPT
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Remittances in Nepal
Chandan Sapkota
South Asia Seminar Series (SASS), 18 September 2013
1 18/09/2013
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)
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•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)
47
31 29
27
23 22 21 21
18 18 17 16 16 14
13
0
5
10
15
20
25
30
35
40
45
50
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Migration of Nepalese Workers
• May 1815 agreement opened up the avenues for employment overseas
• Push factors – Lack of job opportunities – Unfavorable investment climate – More influential since 2000
• Pull factors – Relatively high wages – High demand for labor in low to
medium skilled sectors • Manufacturing • Construction • Hotel/catering
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0
1
2
3
4
5
6
7
8
1941 1952-54 1961 1981 1991 2001 2011
Absentee population (% of total population)
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Average Daily Number of Migrants is Increasing
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6
560
1243
0
200
400
600
800
1000
1200
1400
Age distribution of remitters: •15-29 years: 34.2% •30-44 years: 37.8%
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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
• Average cost of migration: o India: NRs5,250
o Malaysia: NRs109,700
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294,094
354,716
384,665
453,543
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
FY2010 FY2011 FY2012 FY2013
Malaysia
Qatar
Saudi Arabia
UAE
Others
Kuwait
South Korea
Bahrain
Oman
Japan
Afghanistan
Lebanon
Israel
Total
Migration destination
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Remittances in Nepal
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Migration and Remittances
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0
5
10
15
20
25
30
-
50
100
150
200
250
300
350
400
450
500
Rem
itta
nce
s (%
of
GD
P)
Nu
mb
er o
f m
igra
nt
wo
rker
s (i
n t
ho
usa
nd
)
Migrants (thousand) Remittances (% of GDP)
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Remittance Inflows > ODA and FDI
-5
0
5
10
15
20
25
19
74
/75
19
76
/77
19
78
/79
19
80
/81
19
82
/83
19
84
/85
19
86
/87
19
88
/89
19
90
/91
19
92
/93
19
94
/95
19
96
/97
19
98
/99
20
00
/01
20
02
/03
20
04
/05
20
06
/07
20
08
/09
20
10
/11
Sh
are
of
GD
P
Remittances Aid FDI
• Substantial inflows (% of GDP) since FY2001
FY1996
– ODA: 4.6% – FDI: 0.2% – Remittances: 1.7%
FY2001 – ODA: 4.3% – FDI: 0.01% – Remittances: 10.7%
FY2013
– ODA: 4.2% – FDI: 0.5% – Remittances: 25.5%
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Sources of Remittance
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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
Per capita remittances for all Nepal (NRs)
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23
32
56
0
10
20
30
40
50
60
1995/96 2003/04 2010/11
625
2,100
9,245
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
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.
• HHs in the poorest quintile received more remittance from India.
• But, almost 80% is used for consumption purpose.
• 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
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• 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
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0
50
100
150
200
250
300
350
400
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
To
tal f
ore
x re
serv
e (R
s b
illi
on
)
Shar
e o
f to
tal f
ore
x re
serv
e
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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Financed Ballooning Imports
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-30
-20
-10
0
10
20
30
40
19
74
/75
19
75
/76
19
76
/77
19
77
/78
19
78
/79
19
79
/80
19
80
/81
19
81
/82
19
82
/83
19
83
/84
19
84
/85
19
85
/86
19
86
/87
19
87
/88
19
88
/89
19
89
/90
19
90
/91
19
91
/92
19
92
/93
19
93
/94
19
94
/95
19
95
/96
19
96
/97
19
97
/98
19
98
/99
19
99
/00
20
00
/01
20
01
/02
20
02
/03
20
03
/04
20
04
/05
20
05
/06
20
06
/07
20
07
/08
20
08
/09
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/10
20
10
/11
Shar
e o
f G
DP
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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Helped Maintain External Sector Stability
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As goes remittances (growth), so goes CAB and BOP!
0
10
20
30
40
50
60
-4
-2
0
2
4
6
8
10
FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013
Gro
wth
of
rem
itta
nce
in
flo
ws
CA
B, B
OP
(%
GD
P)
CAB (% of GDP) BOP (% of GDP) Remittances growth
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Increased Revenue Mobilization
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0
5
10
15
20
25
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11
Re
mit
tan
ces
(% o
f G
DP
)
Sh
are
of
tota
l ta
x r
ev
en
ue
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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Induced Dutch Disease Effects REER appreciation T/NT production
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0
2E-06
4E-06
6E-06
8E-06
1E-05
1.2E-05
1.4E-05
1.6E-05
1.8E-05
0
5
10
15
20
25
RE
ER
Rem
itta
nce
(%
of
GD
P)
Remittances (% of GDP) REER
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
0
5
10
15
20
25
T/N
T p
rod
uct
ion
Rem
itta
nce
(%
of
GD
P)
Remittances (% of GDP)
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.
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.
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Fostered Policy Laxity Government effectiveness Regulatory quality
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0
5
10
15
20
25
30
35
40
-0.9
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
Ra
nk
Sco
re
Percentile Rank (0-100) Governance Score (-2.5 to +2.5)
0
5
10
15
20
25
30
35
40
45
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
2000 2002 2003 2004 2005 2006 2007 2008 2009 2010
Ra
nk
Sco
re
Regulatory quality
Percentile Rank (0-100) Governance Score (-2.5 to +2.5)
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: Don’t 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
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Absentee population + migration destination tend to influence remittance inflows to districts.
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HH Preference for Migration Destination
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Migrants from poor HHs (mostly FWDR and MWDR) prefer India.
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Real Effective Exchange Rate (REER)
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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.