Remittance risks

  • Due to declining remittance and a depleted workforce, Nepal’s economy is nearing zero productivity
Instead of liberalising capital account convertibility so as to accommodate the unavoidable demands of extra spending when abroad, public servants have made it a norm to coalesce with ‘informal’ agents to have their ends met illegally

Jan 23, 2018-The perils of the infamous ‘Dutch Disease’ syndrome on the Nepali economy, due to its overdependence on migrant workers’ remittance receipts, are gradually being exposed. Nepal Rastra Bank (NRB) in its review last week said, “The country’s overall balance of payments has turned into a deficit of Rs9.27 billion in the first five months of fiscal year (FY) 2017/18. While the proximate cause has been the widening current account deficit of Rs41.95 billion, the underlying drivers of deficit have been the elevated level of imports and the decline in the migrant workers’ remittances.”  The remittance receipts have decreased by almost one percent, against the rise of 6 percent in the same period last year. Such a sharp decline in remittances puts the country in serious risk of macroeconomic instability, particularly in the medium and long terms, as it is the only resource to offset the ever-ballooning and apparently unsustainable level of trade deficit. As a near term respite, however, existing foreign exchange reserves are enough to finance imports for almost a year.

Reduced inflows

The decline in remittance inflow was obvious mainly in the aftermath of Saudi Arabia-Qatar diplomatic imbroglio that began last June. These are the two Gulf countries with highest concentration of Nepali migrant workers—who are now losing their jobs in en masse. Nepal is now often forced to evacuate them, instead. Unlike in the previous years, demand of the workers in the entire Mediterranean Gulf has markedly declined. In addition, the government’s callous halt to send workers, even with due work permits, has only contributed to exacerbate the situation.

Understandably, Nepal in effect can do very little to alter these foreign situations for the better. But, for long, it also miserably failed to undertake measures within its capacity to mitigate and distribute the risks arising from such unforeseen but often lurking volatilities. Blatant imperviousness of political leadership to initiate policies to create gainful employment opportunities at home is the root to almost all present economic malaises the country faces now. First, the incessant exodus of the working-age population has caused labour scarcity in traditional sectors like agriculture and indigenous industries; thus has reduced productivity. Second, the outmigration of the young—males in majority—is causing a number of demographic and social problems, fuelling the culture of migration and killing the concept of farm work where Nepal has had a fair comparative advantage. Third, it is causing a huge labour market distortion in terms of wages and inviting substantially increased number of Indian migrant workers, mainly in construction and other semi-skilled work. Fourth, this has not only virtually stalled further industrialisation, but has also forced several existing industries to close their operations due to the unavailability of manpower. Fifth, the remittance receipts are fuelling consumption that is almost entirely met by imports. This, in turn, has alarmingly stoked up the country’s trade deficit. And sixth, as an aggregate effect, Nepal’s economy is nearing zero productivity, becoming totally import-dependent and ratcheting to inevitable collapse. Therefore, the seasonal stories such as that of balance of payments and current account deficits, liquidity crisis and dwindling manufacturing outputs are only the visible tips of potentially mammoth icebergs underneath.

Held up

There are other reasons that have held up the earnings of Nepalis abroad from flowing in. Informally, potential remitters cite three major reasons. One, there is apprehension about private property rights once the communist alliance takes over. It is feared that the rules on foreign exchange willed be tightened since economic indicators are set to go worse from bad. Therefore, potential remitters contend, they don’t want to fall in a trap where they cannot take some amount back when they need it, once it is sent to Nepal. Two, except for the speculative property market, there are hardly any investment opportunities are available for them in Nepal. And third, there are hundi or informal agents active in their working localities who offer more lucrative rates than the formal channels, so that many opt for this informal option. As such, these transactions do not figure out in government accounts.

This is exactly where the government has failed to assuage the Nepali diaspora, with its reasonable policy predictability, to send money back home—more importantly using formal banking channels. Ironically enough, institutions like the Non-resident Nepali (NRN) Association, which are expected to be instrumental in encouraging Nepali workers to use formal channels to remit, are dominated or influenced by the alleged ‘hundi-kings’; invariably present in any country where a noticeable number of Nepalis work.

Everyone acts illegally

In Nepal, in regard to the (mis)use of foreign exchange facilities, everyone acts illegally and nobody questions about it. This includes the high ranking officers in law enforcing and regulatory agencies, bureaucracy and civil society. The most striking example is: about forty thousand students, principally the offspring’s of these well-positioned public servants, go aboard for higher studies every year. They can transfer only college fees legally, and an almost equal amount of foreign exchange towards the students’ living and petty expenses is ‘managed’ through illegal channels. Instead of liberalising capital account convertibility so as to accommodate these practically unavoidable demands, the public servants have made a norm to coalesce with these ‘informal’ agents to have their ends met illegally. This practice ultimately compromises the state’s ability to curb these illegal operations by bringing these operators into book. The situation is proverbially ironic: ‘every thief knows the other but never lets public to know it.’

On top of all this, it is public knowledge that a huge amount of foreign currency is siphoned out of the country. Apart from hundi, ‘shuffling’ is a new method applied to retain foreign earnings in the originating country itself. A person who requires money in a third country identifies a potential remitter, asks the remitter to hold the amount there, and asks his agent in Nepal to pay an equivalent amount in Nepali currency to the person assigned by the potential remitter. The actual transfer doesn’t enter Nepal but the transaction occurs. This has hugely distortive repercussions both on fiscal balance and financial discipline here.

Nobody is raising alarm to these precarious trends as the economy veers to the verge of a dangerous cliff. The political class seems to be in deep slumber.

Wagle, a founding editor of the economic daily Arthik Abhiyan, is an eco-political analyst

Published: 23-01-2018 08:01

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