Should the river run dry

  • Remittance is a significant contributor to the economy but its instability makes it unviable to fuel sustained growth
- Bhubanesh Pant

Mar 2, 2018-The significance of remittances to national economies is well known, and there is little debate over the value of these flows that have the proven capacity to protect people from income shocks and lifecycle risks. Remittances augment household incomes and are thus an effective anti-poverty force in developing countries--paying for basic needs and education, enhancing their ability to withstand risks pertaining to unemployment or illness, and building their resilience to external events including climate change or natural disaster. When there is a dearth of well-functioning credit markets, these flows can also provide migrants and their families with the financial resources to invest in enterprises.

Remittances are more stable than foreign direct investment, private debt, equity flows and other external flows. To the extent that migrants are inspired by altruism as well as solidarity motives and dispatch more money home during periods of economic distress, remittances may actually seem countercyclical.

Out-migrants don’t invest enough

Still, the potential of these flows for development is greater than their existing impact. Currently, remittance transfers are just partially integrated with financial services since a number of remittance senders and recipients do not have bank accounts. Connecting remittance families to banks and other financial institutions gives them the potential to access loans, build credit histories, securely save for the future, and insure themselves. In many low income countries, a paucity of products and services designed to particularly respond to migrant demands, encourage savings and incentivise entrepreneurial activities is impeding the potential that remittances have for asset building and investment.

Similarly, from the migrants’ perspective, poor infrastructure, corruption, distrust in government institutions, the lack of appropriate public policies (schooling, health care, and land reform, among others) and market failures dissuade them from undertaking the risk of investing their money in their countries of origin and lower their incentive to return. Hence, migration impacts appear to be quite context-sensitive and based on the specific development context: migration and remittances may enable people to move away from, just as much as to invest in, domestic economic activities.

Moreover, studies have also divulged a negative link between development and remittances including the fact that large volume of remittance inflows would result in currency appreciation as well as exacerbate inequalities by distorting local income levels. The effect of remittances on inflation and local prices, particularly for land, property and construction are also worrisome. Further, it has been illustrated that these financial flows may encourage dependency and undermines motivations to work in the home country--curtailing the local workforce.

Tough challenge to formalise transfers

In Nepal’s case, remittances have been providing a vital lifeline for many of the country’s most vulnerable and poor households, both by contributing to basic needs including food, health care, education and housing, and by helping to cope with external shocks and fluctuations in income. These inflows have operated as a form of household insurance against loss of income and other financial adversities and also helped in reducing the overall incidence of poverty, as well as maintaining a healthy balance of payments. Similarly, the compensatory response of remittances was an important mechanism for disaster relief in the aftermath of the devastating earthquake in April 2015.

One of the principal developmental challenges for Nepal’s policy makers is to inspire senders and recipients of remittances to undertake their money transfer operations via formal financial institutions so that remittances could become formal savings and deposits in financial institutions and, in turn have a multiplier impact.  Currently, however, the informal channels seem to be more efficient and normally tend to fulfil the special requirements of the migrant and his or her family. Discouraging the informal channels while encouraging migrants to send remittances through official channels can bolster the country’s foreign currency reserves, strengthen the financial system, and increase the credit available to nurture the local economy even more.

While remittances appear to have largely benefited the macro-economy, it has also allowed the government to evade the crucial task of labour policy reform for generating employment opportunities, which would have improved the performance of the domestic economy. The impact of migration has been clearly witnessed in the rural sector that has suffered largely on account of employment losses.

Again in Nepal’s case, the full promise of technology is yet to be realised, largely due to the lack of infrastructure in a number of receiving areas. Mobile phone networks, internet-based tools and digital money in various forms present a potentially transformative force for sending and receiving remittances, reducing costs and saving time, and can also become a gateway to financial inclusion.

Though the government introduced some policies to increase remittance flows and to channel them to productive uses, such measures have not been very fruitful.  For the developmental potential of remittances to be fully realised, a collaborative effort involving the government, migrant groups, the local community, and non-governmental organisations is a must for exploring ways of encouraging the flow and creating an atmosphere for more sustainable investment of remittances.

Despite the growth in significance of remittance as a source of development finance in Nepal, its instability and risks, such as vulnerability to sudden external shocks and distortions in economic priorities, connote that remittances should not be seen as a substitute for a sustained, domestically engineered development effort. Even the World Bank’s Nepal Development Update 2016 had earlier warned that Nepal’s overdependence on remittance to maintain its foreign exchange earnings is quite a risky strategy as the country is susceptible to external shocks. Hence, a key challenge for our policymakers is to find alternatives and develop ways to reduce this dependency, so that the country can cope with the situation if such inflows start to decline, adversely impacting the balance of payments (BoP) position and ultimately the overall economy.  And this is already beginning to take shape as BoP data for the first half of 2017/18 divulge that workers’ remittances fell by 0.5 percent to Rs34.54 billion in contrast to an upsurge by 5.7 percent in the corresponding period of 2016/17. As a result, the current account registered a deficit of Rs75.71 billion with the overall BoP also remaining at a deficit of Rs6.6 billion in the first half of 2017/18.  Hence, to alleviate the economic and social risks flowing from these developments, the government must begin to acknowledge the gravity of this issue and respond proactively.

Pant is with Nepal Rastra Bank; views expressed are personal

Published: 02-03-2018 08:22

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