TERM PAPER ON REMITTANCE AND ITS IMPACT ON NEPALESE

ECONOMY

Submitted to:
Prof. Dr. Ram Prasad Gyanwaly
Macroeconomics

Submitted by:
Prakash Upadhyaya Poudel
Roll no: 68

September, 2020
 TABLE OF CONTENT

1. Background of the study..................................................................................3

2. Objective of the study......................................................................................4

3. Significance of the study..................................................................................4

4. Methodology....................................................................................................4

5. Review of Literature........................................................................................5

6. Analysis and interpretation..............................................................................6

7. Finding and Conclusion...................................................................................9

References...............................................................................................................12
1. Background of the study

Most of the developing countries seem to be highly dependent on remittance as it has an

important role in economic growth. Remittance often denotes the process of transferring money
by individuals from migration destination to their home country or their place of origin. It is
regarded as a vital source of foreign income for developing countries like Nepal as it can also be
taken as substitute for foreign direct investment. Nepal has a long history of International labor
migration and with the entrance of globalization and liberalization most of the youth seem to
choose migrant option In search of better employment opportunities.

It covers large portion of financial flows to Nepal and is recognized as an important source in
labor exporting countries to maintain foreign exchange reserve and to correct Balance of
Payments. Remittances include cash and non-cash items that flow through legal channels, such
as via electronic wire or through informal channel, such as money or goods carried across
borders. Moreover, the inflow of foreign remittances can make effective contribute to develop
the financing capacities of the financial system. Apart from providing financial liquidity to the
system, remittance has provided the much needed impetus to development activities.
Remittances contribute substantially to maintain macroeconomic stability. It permits the
households to increase their consumption level, enables better health care, nutrition, housing and
education.

Remittance implies household income from foreign inflow mainly from momentary or
permanent migration of people to those economies. According to World Bank remittance enables
households to increase their level of consumption, ensure better health facilities, nutrition,
education and other facilities. This study is undertaken to verify that higher the remittance
inflows, foreign aid, capital information, import and broad money supply, better would be the
economic growth of the nation. This study is undertaken to assess the current remittance status
and its impact on Nepalese Economy.
2. Objective of the study

 To analyze the current status of remittance in Nepal.

 To examine the positive and negative impact of Remittance in Nepalese Economy.
 To identify the influence of remittance on GDP of nation.

3. Significance of the study

Remittance has become a burning issue in Nepalese Economy. It plays a significant role on
smoothing developmental activities throughout the nation. To assess the impact of remittance it
is essential to identify the necessary factor that helps to boost up remittance flow inside the
nation. So this study has tried to assess the exact status of remittance in Nepal and its
contribution in GDP of the country. For this purpose this research is based on the data collected
from Nepal Rastra Bank, Ministry of Finance and different articles. This study may be helpful in
formulating applicable policies by governmental authorities in order to boost up economic
growth of Nepal. Along with these the study also provide idea on what can be the possible
positive and negative impact of remittance in Nepalese economy and what government should do
in future.

4. Methodology

Research Methodology is the collection and implementation of various steps carried out to do a
research work. Kothari (1984) states: Research methodology refers to the various sequential
steps (along with a rationale of each such step) to be adopted by a researcher in studying a
problem with certain objects in view.

Due to current situation Nepal is still facing the problem of Lockdown so that all kind of
research are based on secondary sources of data collection. This study is also based on secondary
data collected from different national and international organizations, journals and articles.
Majority of information are collected form economic survey of Ministry of Finance and CMEs
annual table of Nepal Rastra Bank. Historical as well as descriptive research design were used in
the study. This study has used the time series data to complete the research and data were taken
from the year 2009/10-2018/19.

5. Review of Literature

Economic growth is the major indicator of development throughout the world so many scholars
put their contribution to explain about economic growth theoretically and empirically. Many
researchers explained about the contributor of growth. Labor migrating is growing business in
the world and that become a major contributor for growth and development especially in
developing countries. This has become a major global phenomenon and United Nation
introduced Global Forum on Migration and Development (GFMD) and Global Compact on
Migration (GCM) to highlight the role of migration and remittance on development. Now a day
there is huge discourse about the contribution of labor migration to growth. Manufacturing trade
is another major variable which contribute economic growth, this is taken as the key factor for
development. It is argued that the positive effects of international trade on economic growth
were first pointed out by Adam Smith (Afonso, 2001).

Many international (WTO) and regional (SAEAN, EU, SAARC, etc) and bilateral initiatives
were introduced to promote trade and to achieve higher growth. It is believed that more trade
would be helpful for more earning. Out of those literatures only few are taken as reference to this
study. With the growing in openness and friendship in the world, migration is increasing
regularly. Now a day this is taken as the one of the largest industry in the world (Czaika & Hass,
2014).

Remittance becomes a great matter of discussion whether it is doing well for economic growth?
There we can find both arguments and empirical findings about it. Remittances have become a
very popular issue in international literature of finance in these decades because their volume and
their potential to reduce poverty and stimulate economic growth in developing countries.
Remittances have a positive impact on growth and this impact increases at high levels of
remittances relative to GDP (Mayer & shera, 2017).The positive relation between remittance and
growth is for both absolute and relative GDP (Goschin, 2014).
The quality and variety of product in international trade has very important meaning, counties
exporting higher quality with a variety of product in international trade grows more rapidly
(Burdon, Mouel & Visil, 2012).

6. Analysis and interpretation

As we know that international migration has become one of the major sources for earning
foreign currency and it has played pivotal role in minimizing the unemployment problem in
Nepal. Remittance also known as earning of migrant labor has entered Nepalese market a very
long time ago. The Labor Act 1985 came as boon for those who were interested to go to abroad
for employment facility as the act opened avenues for private sector. The trend of international
migration grew when Foreign Employment Act 1985 came into enforcement and given a
provision of distributing passport from related district administration offices and high demand of
labor in foreign labor market, especially in Gulf countries. Following detail shows short snap-
shot about the fact of remittance in Nepal.

Number of Nepalese Migrating Abroad

The trend of Nepalese workers migrating to foreign countries especially to neighboring country
is very old. Because of friendly relationship with other nation there is free flow of labor force
among and in some of the countries there is no authentic record of the number of migrants. In the
fiscal year 2009/10 the number of workers going abroad as job seekers was just 294094 and it
increased to 512887 in 2014/15. The number of migrant workers had reached up to 362023 in the
year 2017/18. According to ministry of finance, number of persons issued permits for foreign
employment up to fiscal year 2018/19 has reached 243868. This shows that there was a drop in
the number of Nepali workers going abroad for foreign employment during the fiscal year
2018/19.

Destinations of Nepalese Migrant workers

Outflow of Nepalese labor force from the nation includes not only unskilled labor force but also
includes skilled, efficient and trained manpower like doctors, engineers and other professionals
who can contribute significantly to overall progress of the nation. From above table it can be
deduced that the maximum number of migrants 54039 have gone to Qatar followed by 40865 to
UAE and 27419 to Saudi Arabia. Till the first eight month of 2019, the total number of Nepalese
who have migrated to foreign nations for employment opportunity has reached 156093. Such a
huge number of labor migration has taken place because of the various push factors like lack of
employment opportunity in the nation, lack of political stability in the nation and lack of feeling
of security and because of various pull factor like easy availability of high job opportunity in
those host nations where high construction work is in increasing trend.

Remittance and Its growth in Nepal

Remittance is an important source of foreign exchange for most of the developing and
underdeveloped nations. But actual data of remittance cannot be obtained as remittance obtained
through informal channel is significant in those nations. So, it is the obligation of researcher to
accept official data of remittance and the remittance entered through informal channel can only
be guessed. In the past 10 years, remittance inflow has seen a gradual increase. In the FY
2018/19 alone, Nepal saw a remittance inflow of around NPR 879.3 million (USD 7.8 million).

Contribution of remittance to the national GDP

In Nepal’s case, remittance has been significantly contributing to the national GDP. In FY
2018/19, remittance’s contribution was noted to be around 25.4%.Even though remittance
proportionately has a larger share in the GDP, its contribution to the national development might
not be the same. The main reason behind this is because remittances are usually spent in
unproductive areas for household consumptions. Thus, the government should come up with
policies that help channel such remittances into the productive sector, such as into
entrepreneurship and business. The contribution of remittance to the national GDP peaked in FY
2015/16, when it was 29.6% to the national GDP. The table illustrate that rate of GDP falls in
2018/19 comparing with that of 2015/16 but it is still in increasing ratio if compared with that of
2017/18.

Positive and Negative Impact of Remittance

Positive Impact:

1. Remittances increased the well-being of receiving households: By smoothing

consumption and improving living standard.
2. It facilitated the accumulation of human capital: By making possible improved sanitary
conditions, healthier life styles, proper healthcare, and greater educational attainment.
3. Remittances eased the credit constraints of unbanked households in poor rural areas,
facilitate asset accumulation and business investments, promote financial literacy, and

Negative Impact:

1. Remittances reduced labor supply and create a culture of dependency that inhibits
economic growth.
2. Increased the consumption of non-tradable goods, raise their prices, appreciate the real
exchange rate, and decrease exports, thus damaging the receiving country’s
competitiveness in world markets.
3. Remittances can be curtailed, along with international migration, by escalating anti-
immigrant sentiment and tougher enforcement practices in host countries, including the
US and many in Europe and the Gulf region.

7. Finding and Conclusion

 Findings

As other countries Nepal's economy is also reliant on remittance. The major findings from
the above analysis and interpretations are:

1. The enforcement of Labor Act 1985 and Foreign Employment Act 1985 have opened the
gateway for people to migrate in foreign countries in search of Employment
opportunities.
2. From table 6.1 it is concluded that the reason for the growth in remittance is because
more and more people migrate abroad for employment. During fiscal year 2013/14 there
was a huge increase in the number of Nepali workers going abroad for foreign
employment but the number decreased in 2018/19.
3. Table 6.2 shows that not only unskilled people but also skilled, efficient and trained
manpower like doctors, engineers and other professionals who can contribute
significantly to overall progress of the nation were migrated in search of better facilities.
It can be deduced that the maximum number of people went to Qatar and very few
choose Lebanon.
4. Table 6.3 shows that remittance inflow has been gradually increasing. In the FY 2018/19
alone, Nepal saw a remittance inflow of around NPR 879.3 million (USD 7.8 million).
5. From the table 6.4 we can conclude that remittance has been significantly contributing to
GDP of nation. The contribution of remittance to the national GDP peaked in FY
2015/16, when it was 29.6% to the national GDP.
6. Similarly, Remittance has played several positive roles in Nepalese economy like
reduction of poverty and unemployment, enhanced the investing potentiality, maintaining
foreign exchange reserve and correcting balance of payments whereas the negative roles
like problem of labour shortage as maximum people went abroad, dependency of people
on remittance make them unproductive and saving level falls down cannot be denied.

 Conclusion

In the worldwide economy, remittances represent one of the major international flows of
financial resources. Sometimes the flows of remittances can exceed the flows of foreign
direct investment (FDI). The dropdown in number of people migrating abroad has become a
credited towards government’s tightening of the foreign employment sector. The tightening
came amidst efforts to reduce the malpractices in the sector. The halt in sending migrant
workers to Malaysia was also a major reason for the decrease in the number during the FY
2018/19. With increasing globalization and liberalization, trend of foreign employment is
increasing resulting in rapid growth of remittance received by Nepal.
Due to large number of active youths working abroad, there is problem of labor shortage for
agriculture and other works in Nepal. It also has resulted dependency of families on
remittance income. It was also viewed that the remittance spent is mostly in unproductive
areas. As we know 18.7% of total population is listed under poverty line and the line goes on
improving year by year. But still people were not being able to maintain certain level of
living standard. In this situation foreign employment and remittance has been the only way to
reduce their poverty. It has also contributed in improving education and health status of those
people. One of the study showed that the remittance workers send to their family is
maximum used in consumption or in unproductive ways. This reduced the habit of saving for
future. The increasing migration of youth toward foreign country has increased remittance
inflow but decreased the country's domestic production level. Remittance is important source
of foreign currency in Nepal. So, government should formulate and implement policies
which tap and utilize remittance received in Nepal into productive and investment sectors.
Government should provide appropriate investment climate to invest remittance income.
Formulation and implementation of appropriate remittance policy can help in boosting up
Nepalese economy.
 References

https://nepaleconomicforum.org/neftake/while-nepals-remittance-keeps-increasing-it-mostly-
gets-spent-on-unproductive-areas/#:~:text=In%20the%20FY%202018%2F19,period%20of
%20the%20previous%20year.

https://mof.gov.np/en/

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Czaik, M., & Hass, H.D. (2014). The globalization of migration: has the world become more
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