Asia Pacific Journal of Public Administration

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The impact of remittances on economic growth

in Nepal: an analysis of a significant basis of
development

Prakash Dahal

To cite this article: Prakash Dahal (2014) The impact of remittances on economic growth
in Nepal: an analysis of a significant basis of development, Asia Pacific Journal of Public
Administration, 36:4, 261-282, DOI: 10.1080/23276665.2014.975908

To link to this article: https://doi.org/10.1080/23276665.2014.975908

Published online: 30 Oct 2014.

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Asia Pacific Journal of Public Administration, 2014
Vol. 36, No. 4, 261–282, http://dx.doi.org/10.1080/23276665.2014.975908

The impact of remittances on economic growth in Nepal: an analysis

of a significant basis of development
Prakash Dahal*

Ministry of Federal Affairs and Local Development, Kathmandu, Nepal

(Received 28 April 2014; accepted 20 September 2014)

This study analyses the impact of remittances on economic growth in Nepal by

assessing the effects of remittances on financial development, productivity, interna-
tional trade, and human capital accumulation. Based on an analysis of relevant data,
it finds that increasing inflows of remittances in Nepal have a positive association
with financial development and human capital accumulation, but a negative associa-
tion with international trade. In terms of two factors of productivity – entrepreneur-
ship and manufacturing–which are potentially associated with inflows of
remittances, it finds a positive association (though not very significant) of remit-
tances with entrepreneurship, but a negative association with manufacturing. Overall,
this indicates a mixed (both positive and negative) impact of remittance inflows on
economic growth in Nepal.
Keywords: remittances; economic growth; financial development; productivity;
international trade; human capital accumulation; Nepal

Introduction1
The flows of remittances to developing countries are the second largest source of exter-
nal finance after foreign direct investment (FDI) (Ahamada & Coulibaly, 2013, p. 310).
They are “nearly three times the size of official development assistance and larger than
private debt and portfolio equity flows to developing countries” (World Bank, 2013a,
p. 2). In 2013, the officially recorded remittance flows to developing countries were
estimated to total $414 billion, being 6.3% higher than in 2012 (World Bank, 2013a,
p. 1). Over the period 1995 to 2012, remittance flows to developing countries increased
by more than sevenfold, from $56 billion in 1995 to $389 billion in 2012 (World Bank,
2013b). Hence, remittances, the amounts of which are continually increasing, are
becoming an important source of finance in developing countries. Accordingly, as the
central concern of developing countries is a high and sustainable economic growth, it
is meaningful to assess the value of remittances for developing countries in terms of
their impact on the economic growth of the recipient country.
The present study concerns Nepal, which is one of the least developed countries
with a small-size economy of $19.4 billion GDP (World Bank, 2013b). The Nepalese
economy is becoming more remittance-dependent as the inflows of remittances have
been continually growing over the last 15 years. In Nepal, the ratio of remittance
inflows as a percentage of GDP was only 1.3% in 1995, but reached 25% in 2012
(World Bank, 2013b), making it third highest in the remittance-recipient countries after

*Email: pd2035@gmail.com

© 2014 The University of Hong Kong

262 P. Dahal

Tajikistan and the Kyrgyz Republic as a percentage of GDP (World Bank, 2013a, p. 5).
In 2012 alone, more than 500,000 Nepalese workers were in foreign employment
through formal channels (DoFE, 2013), and altogether they remitted $4.85 billion. This
indicates the growing significance of remittances in the Nepalese economy.
The study addresses the relationships between remittance inflows and economic
growth, with a particular focus on the impacts of increasing remittance inflows on eco-
nomic growth in Nepal. It does this, first, by identifying the theoretical and empirical
linkages of remittances to some of the key determinant factors of economic growth –
financial development, productivity, international trade, and human capital accumulation
– based on an analysis of some leading studies. It then uses relevant data to assess the
effects of remittances on these factors as a means of exploring the impact of increasing
remittance inflows on economic growth in Nepal.
To-date, most studies have been concerned with analysing the impact of remittances
on economic growth in terms of only one or two factors of growth: for example, finan-
cial development (Agrawal, Demirguc-Kunt, & Perial, 2011; Le, 2011; Giuliano &
Ruiz-Arranz, 2009), education (Cooray, 2012; Zhunio, Vishwasrao, & Chiang, 2012;
Edwards & Ureta, 2003), capital accumulation and total factor productivity (Senbeta,
2013), manufacturing growth (Dzansi, 2013), and international trade (Vaaler, 2011).
This study, as a contribution to the relevant literature, provides a more comprehensive
analysis in considering the impact of remittances on economic growth by exploring
some major factors for growth that are potentially directly associated with remittances.
Similarly, most studies concerning Nepal have focused on assessing the impact of
remittances on poverty reduction (Panday & Williams, 2011; Wagle, 2012, Lokshin,
Bonch-Osmolovski, & Glinskaya, 2010), agricultural production (Bohra-Mishra, 2013;
Maharjan, Bauer, & Knerr, 2012), or the negative impacts of remittances such as trade
deficit (Bhatta, 2013) and the effects of real exchange rate appreciation, a decline in
production of tradable goods, and a shift to production of non-tradable goods (Sapkota,
2013). None of these studies have considered the impact on economic growth. Accord-
ingly, a contribution of the present study is that it assesses the impact of remittances on
the economic growth in Nepal in terms of four growth factors – financial development,
productivity, international trade, and human capital accumulation – that are potentially
affected by remittances.
The study is based on secondary data available from the Government of Nepal, the
World Bank, and the International Monetary Fund (IMF). It mainly covers the 15 year
period 1995/96 to 2010/11. It interprets macro-level data with the assistance of tables,
graphs and diagrams to explore the association of remittances with each of these four
factors of growth. As the interpretation of data is not based on any statistical tools, the
relationships shown between the factors are not absolute, but based on assumptions that
are developed from the existing literature.
The discussion hereafter is structured into three main sections. The first section syn-
thesises some of the leading studies on remittances and economic growth. It identifies
financial development, productivity, international trade, and human capital accumulation
as the four determinant factors for growth that are found to be associated with remit-
tances, and explores both positive and negative impacts of remittances on them based
on the findings of various studies. The second section, as the empirical analysis, uses
these four factors as a lens through which to address the impact of remittances on each
of the factors using relevant available data on Nepal. The third, concluding section
highlights key findings of the analysis, while also suggesting relevant future research.
 Asia Pacific Journal of Public Administration 263

Relationships between remittances and economic growth

In keeping with Rodrik’s (2003) comprehensive assessment of the determinants of eco-
nomic growth, the literature on remittances and economic growth shows a positive rela-
tionship of remittances with financial development (Agrawal, Demirguc-Kunt, & Perial,
2011; Giuliano & Ruiz-Arranz, 2009; Senbeta, 2013), productivity (World Bank, 2006;
Dzansi, 2013), international trade as a basis of economic integration (Vaaler, 2011;
World Bank, 2006), and human capital accumulation (Cooray, 2012; Zhunio,
Vishwasrao, & Chiang, 2012; Levitt & Lamba-Nieves, 2011). Accordingly, the
discussion here and in the empirical section is confined to these four factors.

Financial development
Financial development is considered as involving the development of the banking sec-
tor, an increase in savings and investment, and relief from small credit or working capi-
tal constraints. Various studies show that remittances have a positive impact on these
matters, thereby promoting financial development which contributes to the economic
growth of a country.
Agrawal, Demirguc-Kunt and Perial (2011, p. 260), by analysing data of 109 remit-
tance-recipient countries for the period 1975-2007, show a positive impact of remit-
tances on bank deposits and credits. They found that when the share of remittances to
GDP increases by 1%, the ratio of deposits and credit to GDP increases by a 0.35-
0.37% and 0.29%, respectively. This suggests that inflows of remittances can help
banking sector development which, as Senbeta (2013, p. 573) argues, contributes to
economic growth by ensuring an efficient allocation of resources.
Giuliano and Ruiz-Arranz (2009) analysed data from over 100 remittance-receiving
economies for the period 1975-2002 and found that inflows of remittances provided an
alternative source for financing investment and helped overcome small credit or work-
ing capital constraints for the countries which have a less developed financial system.
Senbeta (2013), studying various 50 developing countries for the period 1970-2004,
shows a significantly positive impact of remittances on investment. Similarly, Lartey
(2013, p. 1054) studied the relationship between remittances, investment and growth in
36 sub-Saharan African countries for the period 1990-2008 and found that a 1%
increase in the ratio of remittances to GDP increased investment by 0.03% to 0.04%.
Le (2011) argues that remittances are not only “income transfer flows” (involving
the transfer of money with an altruistic motivation for consumption and compensating
low income of family members), but are also “capital flows” (comprising the transfer
of money for investment and business purposees with a self-interest). The World Bank
(2006, p. xiii) states that migrant remittances provide the source of savings and capital
investment for the recipient households. Furthermore, remittances can “improve country
creditworthiness”, “help countries raise external financing” through “remittances securi-
tization”, and “relieve credit constraints” (World Bank, 2006, pp. 100–104).

Productivity
Promotion of entrepreneurship, knowledge and skill transfer, and manufacturing growth
are considered as key factors affecting productivity. The literature shows a positive rela-
tionship between remittances and these factors. The World Bank (2006, pp. 124–126)
recognises that remittances encourage entrepreneurship at the household level by pro-
viding start-up capital for small business. It also recognises that returning workers can
264 P. Dahal

use the knowledge and skills they learn abroad either by running their own small
enterprises or by contributing to productivity promotion in the domestic industries that
employ them (World Bank, 2006, p. 70). This suggests that inflows of remittances can
promote entrepreneurship and a transfer of knowledge and skills which can help foster
economic growth of the recipient country.
Manufacturing growth is fundamental to higher productivity and growth. Dzansi
(2013) shows a significantly positive impact of remittance inflows in manufacturing
growth of recipient countries. Using data from 40 remittance-based economies for the
period 1990-2004, he shows that a 1.0 standard deviation increase in remittance inflows
increases the manufacturing growth of a country by 1.2 percentage points (Dzansi,
2013, p. 99). This finding suggests that inflows of remittances can help grow manufac-
turing in the recipient countries, with the manufacturing growth contributing to their
overall economic growth.

International trade
Some studies have shown that inflows of remittances help the economic integration of
a country. They have defined economic integration as a country’s integration into global
markets through international trade, which facilitates the economic growth of a country.
Vaaler (2011, p. 1139) shows a positive relationship between remittances and a
country’s integration into the global economy. He uses data from 61 developing coun-
tries for the period 2002-2007 and runs a regression analysis which shows that a 1
standard deviation increase in remittances increases economic internationalisation (mea-
sured as a country’s total volume of exports and imports divided by GDP) by 9.81%.
The World Bank (2006, p. 70) appreciates that, besides sending remittances, “a
large diaspora can expand market access for origin countries”. They can do this by
facilitating “access to capital, information, and contacts for firms in countries of
origin”.

Human capital accumulation

Human capital accumulation is defined as an improvement in education, health, values
and behaviour of individuals, which are positively associated with the economic growth
of a country by developing productive human capital. Cooray (2012), analysing the
impact of remittances on economic growth in the six South Asian countries for the per-
iod 1970-2008, shows that remittances make a significantly positive contribution to
education by increasing the school enrolment ratio of the recipient countries. More spe-
cifically, Zhunio, Vishwasrao and Chiang (2012, p. 4614–15) show that remittances
contribute to increasing the levels of education and health of recipient households.
Using data of 69 remittances-based developing economies for the period 1987-2006,
they show that a 1% increase in remittance per capita increases the rates of primary
school completion and secondary school enrolment by 0.09% and 0.12%, respectively.
They further show that a 1% increase in remittances per capita increases life expec-
tancy by 0.03% and reduces the infant mortality rate by 0.15%.
Boccagni and Decimo (2013, p. 7) record that “as they send money, migrants
simultaneously send immaterial goods that distinctively impact on social and cultural
discourses, meaning and practices”. Similarly, Levitt and Lamba-Nieves (2011) argue
that migrants do not only send money but also transfer ideas, norms and behaviour in
the form of social remittances which help scale-up local, regional and national level
 Asia Pacific Journal of Public Administration 265

change in the recipient countries. This suggests that inflows of remittances can foster
valuable ideas, norms and behaviour of significance to the promotion of an industrious
culture as an important factor in the economic growth of a country.

Contesting arguments
There are some contesting arguments about remittances hindering rather than promoting
economic growth by increasing inflation, reducing export competitiveness through real
exchange rate appreciation, decreasing labour supply, creating a brain drain, promoting
corruption, and affecting human and social aspects of migrant workers. Narayan, Nara-
yan and Mishra (2011, p. 915) record that inflows of remittances increase inflation by
appreciating the real exchange rate, increasing money supply, and creating a balance of
payment surplus. Acosta (2009, p. 114) argues that inflows of remittances decrease
labour supply and increase production costs of non-tradable sectors, resulting in the ris-
ing price of non-tradable goods which “creates an expansion of the non-tradable sector
at the expense of the tradable sector”. Faini (2007) notes that skilled migrants are likely
to spend more time in the host country and remit less to their home country which cre-
ates a brain drain for only a small amount of remittances.
According to Abdih, Chami and Dagher (2012), remittances as a non-taxable pri-
vate income transfer to households from abroad erode the institutional quality of the
recipient country by promoting corruption. They argue that remittances provide govern-
ments with an opportunity to divert resources from the recipient households for their
own purposes and reduce incentives for maintaining their accountability, which make
corruption easier and more widespread (Abdih, Chami, & Dagher, 2012, pp. 664–65).
Boccagni and Decimo (2013, p. 6) argue that “factors such as weak or conflicting
family ties, pervasive dynamics of social control, as well as ostentatious forms of con-
sumptions, do constrain and undermine the developmental potential of economic remit-
tances”. Akesson (2011, p. 339) believes that migrant workers fail to “maintain and
reinforce family relations” as the money they send home fails to meet the expectations
of their family members, which can “lead to the dissolutions of family ties”.
Taken together, these arguments suggest that inflows of remittances can have some
serious negative impacts. If such impacts are not identified and addressed in time, they
can hinder rather than promote the economic growth of recipient countries.

Summary of the positive and negative impacts

The positive and negative impacts of remittances on financial development, productiv-
ity, international trade, and human capital accumulation addressed above are summa-
rised in Table 1.

The impact of remittances on economic growth in Nepal

The section considers available secondary data for a period of 15 years, from 1995/96
to 2010/11, and reinterprets them in terms of four factors in the context of Nepal. The
sources of data are primarily the Government of Nepal and international organisations
such as the World Bank and the IMF. Instead of using statistical tools, a descriptive
method is used with the help of graphs and diagrams to interpret the data. As the inter-
pretation of the data is not based on statistical tools, the relationships shown between
the factors addressed are not absolute. They are based on assumptions developed from
the literature considered above.
266 P. Dahal

Table 1. Positive and negative impacts of remittances on economic growth.

Impacts of remittances
Determinants of
economic growth Positive impacts Negative impacts
Financial  Increases bank deposits and  Increases inflation through
development credits exchange rate appreciation,
 Provides alternative sources increased money supply, and
for financing investment/ surplus balance of payments
increases saving and
investment
 Relieves small credit or
working capital constraints

Productivity  Promotes entrepreneurship  Decreases labour supply

 Transfers knowledge and resulting in lack of both
skills skilled and unskilled human
 Increases manufacturing resources
growth  Promotes corruption

International trade  Promotes international trade  Decreases export

and economic openness
 Diaspora help expand market
access through facilitating
access to capital, information
and contacts
competitiveness through
exchange rate appreciation
 Discourages tradable sector
because of the high price of
non-tradable goods due to
the decreased labour supply

Human capital  Increases household  Creates brain drain

accumulation investment in education and  Affects human and social
health aspects of migrant workers
 Fosters good values and and their family at home
behaviour/culture

Current situation of remittance inflows in Nepal

Nepal is a small land-locked country in between China and India, with 147,181 square
kilometres of land and 26.4 million people (CBS, 2011). After a decade-long violent
domestic conflict (1995-2005), it is currently undergoing a political transition from an
earlier Monarchy-based unitary state to a Federal Democratic Republic. The conflict of
the past and lengthening political transition at present have disrupted the development
process in Nepal, resulting in low economic growth and high unemployment. The situa-
tion has forced most of the more than 450,000 youth who enter into the labour market
every year (NPC, 2013, p. 91) to go abroad for employment and send money back
home to support their families.
The report of the National Population and Housing Census of 2011 shows that
some 7% (1.92 million) of the total Nepalese population is living out of the country
(CBS, 2011a). More than 500,000 migrant workers left the country with labour permits
during 2012 (DoFE, 2013), which means every day about 1,500 people leave the coun-
try for foreign employment. This figure does not include the workers who go to India,
for which there is a lack of official data as Nepali citizens do not require permits to
work in India. Excluding India, the most popular destinations for Nepalese migrant
 Asia Pacific Journal of Public Administration 267

workers are Malaysia, Saudi Arabia and Qatar, in addition to other countries including
the United Kingdom, Australia, Japan and South Korea (CBS, 2011, p. 83). Some 56%
of the total number of Nepalese households are remittance-recipients who on average
annually receive NRs. 80,436 (about US$935), which is 31% of their total household
income (CBS, 2011, p. 80).
In Nepal, the number of the migrant workers and the amount of the remittance
inflows have increased significantly, especially since 1999/2000 when the violent domes-
tic conflict became more severe: see Figure 1. The number of migrant workers in 1997/
98 was only 7,700, after which to rose to 55,000 in 1999/2000, 105,000 in 2001/02, and
more than 500,000 in 2011/12 (DoFE, 2013). Correspondingly, the ratio of remittance
inflows to GDP increased from 1.3% in 1995 to 25% in 2012 (World Bank, 2013a). In
2012, Nepal became third to top among remittance-recipient countries as a percentage to
GDP (World Bank, 2013a, p.12), with the real amounts of remittances being larger than
the data indicate as they exclude remittance inflows from India and through informal
channels (Jones & Basnett, 2013, p. 4).
The percentage of households receiving remittances and the average amount of
remittances per recipient household both increased steadily over the 15 years to 2011:
see Figure 2. The percentage of households receiving remittances increased from 23%
in 1995 to 56% in 2011 (CBS, 2011, p. 71). During the same period, the average
amount of remittances per recipient household increased from NRs15,160 in 1995 to
NRs80,436 in 2011 (CBS, 2011, p. 71).
The inflows of remittances to Nepal are more than five times higher than the total
inflows of official development aid (ODA) and foreign direct investment (FDI)
together: see Figure 3. During the 15 years to 2011, the FDI inflows were almost stable
around 0.5% as a percentage to GDP, while the percentage of ODA to GDP decreased
from 9.7% in 1995 to 4.7% in 2011 (World Bank, 2013b). By contrast, the percentage
of remittance inflows to GDP increased from 1.3% in 1995 to 25% in 2012 (World
Bank, 2013a). The inflows of remittances increased not only as a percentage of a con-
stant amount of GDP, but also in accordance with a five times increase in GDP from
$4.4 billion in 1995 to $19.4 billion in 2012 (World Bank, 2013b).

600 30

500 25 Number of
migrant workers
400 20 in thousands
(left axis)
300 15

200 10 Inflow of
remittances to
100 5 % of GDP (right
axis)
0 0

Figure 1. Number of migrant workers and ratio of remittance inflows to percentage of GDP,
1995/96-2011/12.
Sources: adapted from World Bank (2013b), MoFE (2013).
268 P. Dahal

60 90
80 Average amount of
50
70 remittances per
household (NRs
40 60 '000) (right axis)
50
30
40 Percentage of
20 30 households
receiving
20 remittances (left
10
10 axis)
0 0
1995/96 2003/04 2010/11

Figure 2. Percentage of recipient households and per capita remittances, 1995/96-2010/11.

Source: adapted from CBS (2011).

25

20 FDI net
inflows
15
Net ODA
received
10
Remittance
5 inflows

0
1995 1997 1999 2001 2003 2005 2007 2009 2011

Figure 3. Ratio of remittances, ODA and FDI to percentage of GDP, 1995-2011.

Source: adapted from World Bank (2013b).

Remittances and financial development

Agrawal, Demirguc-Kunt and Perial (2011) found that an increase in the inflows of
remittances increases the ratio of bank deposits and credit as a percentage of GDP. Data
on Nepal are consistent with this finding: see Figure 4. The ratio of remittances to

70
60
50 Remittances
% of GDP

40
Bank deposits
30
20 Bank credit
10
0
1995 1997 1999 2001 2003 2005 2007 2009 2011

Figure 4. Ratio of remittances and bank deposits and credit to percentage of GDP, 1995-2011.
Sources: adapted from NRB (2012), World Bank (2013b).
 Asia Pacific Journal of Public Administration 269

GDP in Nepal increased from 1.3% in 1995 to 22.3% in 2011 (World Bank, 2013a).
During the same period, the ratio of bank deposits to GDP increased from 24.9% to
58.7% and the ratio of bank credits to GDP increased from 19.6% to 50% (World
Bank, 2012a). There was a 21 percentage point increase in the ratio of remittances to
GDP. Similarly, the ratio of bank deposits and credit to GDP increased by 33.8 percent-
age points and 30.4 percentage points, respectively. Thus, during the 15 years, when
the inflows of remittances increased by 1 percentage point, the ratio of the bank depos-
its and credit to GDP increased by 1.6 percentage points and 1.4 percentage points,
respectively. This suggests that there was a positive association of remittances with
both bank deposits and credit in Nepal.
A number of studies have found that remittances increase savings and investment
in the recipient country (Giuliano & Ruiz-Arranz, 2009; Senbeta, 2013; Lartey, 2013).
By contrast, in the case of Nepal, income from remittances is mostly spent on con-
sumption. Of the total remittances received by households, 79% are spent on daily con-
sumption, whereas only 2.4% are used for capital formation and only 0.6% for savings
(CBS, 2011, p. 86). Despite these figures, data show that inflows of remittances make
an important contribution to the gross national savings (GNS) in Nepal: see Figure 5.
During the 10 years to 2011, the share of the GDS to GNS decreased from 44% in
2000/01 to 21% in 2011, whereas the share of remittances increased from 40% to 61%
and the share of grants (a part of ODA that is not to be paid back) remained almost
constant, around 10% (Kharel, 2011, p. 10). This suggests that, in Nepal, the increasing
inflows of remittances have made a significant contribution to GNS.
Similarly, the growing inflows of remittances in Nepal have played an important
role in financing investment by making up the increasing gap between GDS and total
investment: see Figure 6. During the 15 years to 2011, the ratio of GNS to GDP
increased by 10.6 percentage points, from 21.4% in 1995 to 32% in 2011 (World Bank,
2013a). Over the same period, the overall ratio of the total investment to GDP also
increased by 9.5 percentage points, from 23.5% in 1995 to 33% in 2011 (though during
the first five years, it decreased slightly rather than increasing) (IMF, 2013). Also, the
ratio of GDS to GDP decreased by 7.1 percentage points, from 15.7% in 1995 to 8.6%
in 2010/11 (World Bank, 2013a), creating a continuously increasing gap between the
domestic savings and investment. This gap was made up by the inflows of remittances

70

60

50
GNS %

40
Remittances
30
GDS
20
Grants
10

Figure 5. Share of remittances, GDS and grants to GNS, 2000/01-2010/11.

Source: adapted from Kharel (2011, p. 10).
270 P. Dahal

40
35
30 Remittances

% of GDP
25 Total investment
20
GNS
15
10 GDS
5
0
1995 1997 1999 2001 2003 2005 2007 2009 2011

Figure 6. Ratio of GNS, total investment and remittances to percentage of GDP, 1995-2011.
Sources: adapted from IMF (2013), World Bank (2013b).

which, over the period, increased by 21 percentage points, from 1.3% in 1995 to
23.3% in 2011 (World Bank, 2013a).These figures suggest that the increasing inflows
of remittances have made an important contribution to increasing both savings and
investment in Nepal.
The literature also mentions that remittances assist in the financial development of
the recipient country by relieving households from small credit or working capital con-
straints in operating micro-businesses (Giuliano & Ruiz-Arranz, 2009; World Bank,
2006). In the case of Nepal, however, relevant data show no significant association
between remittance inflows and such relief. The data show that, during the 15 years to
2011, there was only a negligible increase in the percentage of households having non-
farm micro-enterprises, despite the significant increase in the percentage of households
receiving remittances: see Figure 7.
During the 15 years, the number of households receiving remittances increased by
33 percentage points, from 23% in 1995/96 to 56% in 2010/11 (CBS, 2011, p. 80).
Over the same period, the number of households involved in non-farm enterprises
increased only by 11 percentage points, from 24% in 1995/96 to 35% in 2010/11
(CBS, 2011, p. 71). Hence, the trend of household involvement in non-farm enterprises

60

50 % of households
receiving
40 remittances

30
% of households
20 with enterprises

10

0
1995/96 2003/04 2010/11

Figure 7. Percentage of households receiving remittances and having non-farm enterprises,

1995/96-2010/11.
Source: adapted from CBS (2011).
 Asia Pacific Journal of Public Administration 271

has not been similar to the trend of the inflows of remittances. While 56% of house-
holds received remittances in 2011, the percentage of households involved in non-farm
enterprise activities (mainly manufacturing, trade and services) was only 35% (CBS,
2011, p. 71).
A greater percentage of rural households receive remittances than do urban house-
holds; but a lower percentage of them are involved in non-farm enterprises. The per-
centages of rural and urban households who received remittances in 2011 were 71%
and 29%, respectively (CBS, 2011, p. 84). However, the percentages of the rural and
urban households with non-farm enterprises were 31% and 42%, respectively (CBS,
2011, p. 72).
Similarly, the percentages of households who received remittances among the poor-
est 20% and the richest 20% were 48% and 75%, respectively (CBS, 2011, p. 81).
However, only 24% of households from the poorest 20% had non-farm enterprises in
contrast to 42% of households from the richest 20% having non-farm enterprises (CBS,
2011, p. 72).
A reasonable assumption is that the higher the percentage of households receiving
remittances the larger the possibilities for them to start-up non-farm enterprises as a
result of being able to overcome working capital or small credit constraints. In the case
of Nepal, however, there is no significant association between inflows of remittances
and relief of working capital or small-credit constraints.

Remittances and productivity

Inflows of remittances can promote productivity by fostering entrepreneurship through
the transfer of knowledge, skills and capital (World Bank, 2006), while promoting man-
ufacturing growth in the recipient country (Dzansi, 2013). Relevant data on Nepal show
a positive association (though not a very significant association) of inflows of remit-
tances with entrepreneurship, but a negative association with manufacturing growth.
The association of remittances with entrepreneurship is apparent in the trend of remit-
tance inflows and the share of non-farm income in the total income of households and
also the share of self-employment in non-agriculture sectors.
It is assumed that the higher the percentage of households receiving remittances the
higher will be their investment in non-farm activities, resulting in more self-employ-
ment in non-agriculture sectors and a higher share of non-farm income in the total
income of the households. This assumption is supported by relevant data which show
that, in Nepal, households’ non-farm income and self-employment in non-farm sectors
has increased when there has been an increase in the average amount of per household
remittances: see Figure 8.
During the 15 years to 2011, the average amount of remittances that each house-
hold received increased from NRs15,000 in 1995/96 to NRs80,000 in 2010/11 (CBS,
2011, p. 80). Over the same period, the share of self-employment in the non-agriculture
sector increased from 7.7% to 12.7% (CBS, 2011, p. 52) and the share of non-farm
income (that does not include the income from remittance inflows) in the total income
of the households increased from 22% to 37% (CBS, 2011, p. 43). While the average
amount of remittances received by the households increased by 5.4 times, the share of
self-employment in non-farm sectors and the share of non-farm income in the total
income of the households increased by 5 percentage points and 15 percentage points,
respectively. Thus, as remittance inflows increased, there was an increase in the house-
hold income from non-farm activities and in the rate of self-employment in non-farm
272 P. Dahal

40 90

35 80 Non-farm
70 income (%) (left
30 axis)
60
25
50 Self-employment in
20 non-farm secter (%)
40 (left axis)
15
30
Per household
10 20 remittances (NRs
5 '000) (right axis)
10
0 0
1995/96 2003/04 2010/11

Figure 8. Per household remittances, non-farm income, and self-employment in non-farm

sectors, 1995/96-2010/11.
Source: adapted from CBS (2011).

sectors. This suggests that, in the case of Nepal, there is a positive association of the
inflows of remittances with entrepreneurship.
Dzansi (2013) assesses the impact of remittance inflows on manufacturing by com-
paring the ratio of remittances and manufacturing growth as a percentage of GDP, and
finds a positive association between them. For Nepal, however, data show a decreasing
trend of the ratio of manufacturing to the percentage of GDP, in contrast to the increas-
ing trend of the ratio of remittance inflows: see Figure 9.
During the 15 years to 2011, the ratio of remittance inflows to GDP increased from
1.3% in 1995 to 22.3% in 2011 while the ratio of manufacturing to the percentage of
GDP decreased from 9.5% in 1995 to 6.4% in 2010/11 (World Bank, 2013a). This
means that the ratio of manufacturing to GDP decreased by 4 percentage points, while
the ratio of the inflows of remittances to GDP increased by 21 percentage points. The
decreased manufacturing growth led to a decline in the number of jobs in the manufac-
turing sector, and eventually decreased the employment opportunities in the manufac-
turing sector. The share of employment in the manufacturing sector decreased by 4
percentage points, from 21% in 1995/96 to 17% in 2010/11 (CBS, 2011, p. 62). These

25

20 Ratio of
remittances to
GDP (%)
GDP %

15

10
Ratio of
manufacturing
5 to GDP (%)

0
1995 1997 1999 2001 2003 2005 2007 2009 2011

Figure 9. Ratio of remittances and manufacturing to percentage of GDP, 1995-2011.

Source: adapted from World Bank (2013b).
 Asia Pacific Journal of Public Administration 273

figures suggest that, contrary to the finding of Dzansi (2013), there has been a negative
association of remittance inflows with manufacturing growth in Nepal.

Remittances and international trade

Vaaler (2011, pp. 1129–31) found that remittance inflows help a country’s integration
into the global economy by promoting international trade. He assumes that a higher
volume of total exports and imports indicates a greater integration of a country into the
global economy. In order to assess the impact of remittance inflows on the economic
integration of a country, he compared the ratio of the total volume of exports and
imports and remittance inflows as a percentage of GDP and found a positive relation-
ship between them.
Differing from Vaaler’s (2011) finding, the data on Nepal show a negative associa-
tion between remittance inflows and international trade as a basis of the economic inte-
gration of the country into the global economy: see Figure 10. During the 15 years to
2011, the ratio of international trade to GDP decreased from 59.5% in 1995 to 41.7%
in 2011 while the ratio of remittance inflows to GDP increased from 1.3% in 1995 to
22.3% in 2011 (World Bank, 2013a). That is, the ratio of international trade to GDP
decreased by 17.8 percentage points, while the ratio of remittance inflows to GDP
increased by 21 percentage points. This suggests that, in the case of Nepal, there has
been a negative association between inflows of remittances and the economic integra-
tion of the country.
Some studies also argue that remittances help promote international trade by mobil-
ising the diaspora to facilitate capital inflows, exchange information, and develop con-
tacts and networks (World Bank, 2006, p. 70). In the case of Nepal, however, there is
no evidence of diaspora having contributed to the promotion of the country’s interna-
tional trade, as international trade has been a decreasing trend (see Figure 10) and for-
eign direct investment has been very low and almost constant at around 0.5% of GDP
(see Figure 3).

Remittances and human capital accumulation

Studies have found that inflows of remittances promote human capital accumulation by
improving education (Zhunio, Vishwasrao, & Chiang 2012; Cooray, 2012), health

70
60
Remittance
50 inflows (% of
GDP %

40 GDP)

30
Sum of exports
20 and imports (%
of GDP)
10
0
1995 1997 1999 2001 2003 2005 2007 2009 2011

Figure 10. Ratio of remittances and international trade to percentage of GDP, 1995-2011.
Source: adapted from World Bank (2013b).
274 P. Dahal

(Zhunio, Vishwasrao, & Chiang 2012), and values and behaviour (Boccagni & Decimo,
2013; Levitt & Lamba-Nieves, 2011) of the recipient households. Given that values
and behaviour are subjective and difficult to quantify, the present discussion is confined
to an analysis of the impact of remittances on education and health in Nepal.
A range of studies, including Zhunio, Vishwasrao and Chiang (2012), Cooray
(2012), Mansour, Chaaban and Litchfield, (2011), Nakamuro (2010), and Edwards and
Ureta (2003), have shown that remittances help increase children’s schooling by fund-
ing a longer period of education for them. Most of the studies use primary level com-
pletion rates and secondary level gross enrolment rates (GER) as indicators to measure
the impact of remittances on education.
Nepal has three levels of school education: primary level (grades 1-5), lower sec-
ondary level (grades 6-8), and secondary level (grades 9-10). Because primary level
education (including textbooks) is free for all in Nepal, inflows of remittances have less
to do with primary level completion rates. Therefore, the focus here is on lower sec-
ondary and secondary level GER in assessing the impact of remittance inflows on edu-
cation in Nepal.
The recent Nepal Living Standard Survey report records that remittance-recipient
households spend about 4% of their total remittance income on education (CBS, 2011,
p. 86). Consistent with the above-mentioned studies, it is reasonable to assume that the
remittance-recipient households’ 4% spending on education has helped increase the
enrolment rates in lower secondary and secondary levels by funding a longer period of
education for their children.
As data for lower secondary and secondary level school enrolment rates before
2004 are not available, the data used are only for 2004 to 2011. The data show a posi-
tive association of remittance inflows with lower secondary and secondary level enrol-
ment rates in Nepal: see Figure 11.
While the per capita remittances increased from NRs2100 in 2003/04 to NRs9,245
in 2010/11 (CBS, 2011, p. 80), the lower secondary level GER increased from 80.3%
in 2004 to 100% in 2011 (DoE, 2012, p. 32). Over the same period, the secondary
level GER increased from 50.4% to 72.1% (DoF, 2012, p. 59). Thus, both lower sec-
ondary and secondary level GERs increased by more than 20 percentage points, while
the per capita remittances increased by more than four times. These figures suggest that
inflows of remittances in Nepal have been positively associated with the lower second-
ary and secondary level school enrolment rates.

120 10000
9000 Secondary level GER
100
8000 (left axis)
80 7000
GER (%)

6000
Lower secondary
60 5000
level GER (left axis)
4000
40
3000
Per capita remittances
20 2000
(right axis)
1000
0 0
2004 2005 2006 2007 2008 2009 2010 2011

Figure 11. Per capita remittances and lower secondary and secondary level GER, 2004-2011.
Sources: adapted from CBS (2011), DoE (2012).
 Asia Pacific Journal of Public Administration 275

In testing the reliability of this assessment, micro level data can be used from the
Western Development Region (as one of five development regions of Nepal) which has
the highest percentage of households receiving remittances and the highest average per
capita remittance income. At the national level, 56% of households received remit-
tances in 2010, with the average per capita remittances being NRs9,245 (CBS, 2011,
p. 80). In the Western Development Region, 67% (being 11 percentage points higher
than the national level) households received remittances in 2010, with the average per
capita remittance income in the region being NRs14,480 (which was 57% higher than
the national level) (CBS, 2011, p. 81).
The data for this region confirm the positive association of remittance inflows with
both the lower secondary and secondary level school enrolment rates: see Figure 12. In
2003/04, 40% of households were receiving remittances and the per capita remittance
in this region was NRs3,817 (CBS, 2004, p. 77). In 2010/11, the households receiving
remittances reached 66% (an increase of 27 percentage point), and the per capita remit-
tances reached NRs14,480 (an increase of almost 4 times (CBS, 2011, p. 81). Over the
same period, the lower secondary level GER increased by 10 percentage points, from
90% in 2003/04 to 100% in 2011, and the secondary level GER increased by 19 per-
centage points, from 59% in 2003/04 to 78% in 2010/11 (DoE, 2012, p. Annex 89).
This supports the trend shown by the national level data and more confidently indicates
that inflows of remittances have had a positive association with education of the recipi-
ent households in Nepal.
Zhunio, Vishwasrao and Chiang (2012) compared the remittances per capita with
life expectancy at birth and a reduction of under-5 child mortality rates to assess the
impact of remittances on health of selected recipient countries, and found a positive
relationship between them. Other studies, including Lu (2012) and Zezza, Carletto,
Davis and Winters (2011), have shown that remittances help households promote their
health by improving the quantity (adequacy) and quality (nutrients) of the food they
consume.
In Nepal, since 79% of the total remittance income of households is spent on daily
consumption, it is reasonable to assume that remittances have contributed to improving
both the adequacy and the nutrients of the food consumed by the recipient households,
resulting in an improvement in both the life expectancy at birth and under-5 child mor-
tality rate in the country. This assumption is supported by relevant data which show a

120 18,000
Lower
16,000
100 secondary level
14,000 GER (left axis)
80 12,000
Secondary
10,000 level GER (left
60
8,000 axis)
40 6,000
Per capita
4,000 remittances
20
2,000 (right axis)

0 0
2004 2005 2006 2007 2008 2009 2010 2011

Figure 12. Per capita remittances and lower secondary and secondary level GER (Western
Development Region), 2004-2011.
Sources: adapted from CBS (2011), DoE (2012).
276 P. Dahal

70 10000
68 9000
Life expectancy
8000 at birth, total
66
7000 (years) (left axis)
64 6000
62 5000 Per capita
60 4000 remittances
3000 (NRS) (right
58
2000 axis)
56 1000
54 0
1995/96 2003/04 2010/11

Figure 13. Per capita remittances and life expectancy at birth, 1995/96-2010/11.
Sources: adapted from World Bank (2013b), CBS (2011).

positive association of remittance inflows with life expectancy at birth and a reduction
in the under-5 mortality rate. The life expectancy at birth in Nepal has been increasing
consistent with the increase in per capita remittances: see Figure 13.
During the 15 years to 2011, the per capita remittances in Nepal increased by more
than 14 times, from NRs625 in 1995/96 to NRS9,245 in 2010/11 (CBS, 2011, p. 80).
Over this period, the life expectancy at birth increased by 9 years, from 59 years in
1995 to 68 years in 2011 (World Bank, 2013a). This trend suggests that there has been
a positive association between inflows of remittances and life expectancy at birth in
Nepal.
Over the 15 years, there was a significant decrease in the under-5 child mortality
rate per 1,000 live births: see Figure 14. The under-5 child mortality rate decreased by
65.8 per 1,000 (nearly by two-thirds), from 109.3 in 1995 to 43.5 in 2011 (World
Bank, 2013a), while in the same period the remittances per capita increased by more
than 14 times. This suggests a positive association of remittance inflows with the reduc-
tion of the under-5 child mortality rate in Nepal.
Also relevant is the relationship between the households receiving remittances and
the consumption of adequate food and healthcare services by them. The available data
show a positive association between them: see Figure 15. When the percentage of
households receiving remittances increased from 23% in 1995/96 to 56% in 2010/11
(CBS, 2011, p. 80), the percentage of households consuming adequate food and health-
care services increased, respectively, from 49% and 41% in 1995/96 to 84% and 82%

120 10000

100 8000 Per capita

remittances (NRs)
80
6000 (right axis)
60
4000
40 Under-5 mortality
rate (per 1000 live
20 2000
births (left axis)

0 0
1995/96 2003/04 2010/11

Figure 14. Per capita remittances and under-5 child mortality rate, 1995/96-2010/11.
Sources: adapted from World Bank (2013b), CBS (2011).
 Asia Pacific Journal of Public Administration 277

Figure 15. Remittances and consumption of adequate food and healthcare services, 1995/
96-2010/11.
Source: adapted from CBS (2011).

in 2010/11 (CBS, 2011, p. 101). Thus, the percentage of households consuming ade-
quate food and health care services increased, respectively, by 35 and 41 percentage
points, while the percentage of households receiving remittances increased by 33 per-
centage points. This suggests that there has been a positive association of remittance
inflows with the consumption of adequate food and healthcare services, which supports
an improvement in the health of the recipient households.

Negative impacts of remittances

In line with relevant literature, available data suggest that Nepal has also experienced a
number of negative impacts of remittances. In terms of economic growth, the major
negative impacts of remittances of immediate interest have been an increase in infla-
tion, a rise in labour wage rates, and human and social costs. These have been in addi-
tion to the impacts on manufacturing and international trade already addressed above.
Consistent with the argument of Narayan, Narayan and Mishra (2011, p. 915), large
inflows of remittances in Nepal since 2001 appear to have had a positive association
with inflation in the sense that the higher the inflow of remittances the higher the rate
of inflation. Thus, corresponding to the rapid increase in the inflow of remittances after
2001, there was also a rise in inflation: see Figure 16. The inflation rate of 2.4% in

25

20
Inflow of
remittances (%
15 of GDP)

10 Inflation (CPI)
average (%)
5

0
1995 1997 1999 2001 2003 2005 2007 2009 2011

Figure 16. Ratio of remittance inflows to GDP and the inflation rate, 1995-2011.
Sources: adapted from World Bank (2013b), IMF (2013).
278 P. Dahal

2001 increased constantly over the next eight years to 12.6% in 2009 (IMF, 2013),
while at the same time the ratio of remittance inflows to the percentage of GDP
increased from 2.4% to 23.1%. There was a slight decrease in inflation between 2009
and 2011, which was matched by a small decrease in remittance inflows.
Some studies have shown that inflows of remittances reduce the trade competitive-
ness of a country by raising production costs by increasing real exchange rates
(Narayan, Narayan and Mishra, 2011) and labour wage rates (Acosta, 2009). Data for
Nepal are consistent with the findings of these studies in that they show a reverse trend
of the ratio of remittance inflows and exports to the percentage of GDP: see Figure 17.
Thus, during the 15 years to 2011, the ratio of total exports as a percentage of GDP
decreased by 16 percentage points, from 25% in 1995 to 9% in 2011, while the ratio
of remittance inflows increased by 21 percentage points, from 1.3% in 1995 to 22.3%
in 2011 (World Bank, 2013a). Possible interconnected explanations for this are that
increased inflows of remittances promoted consumption, that higher consumption raised
domestic prices as a result of rising demand, that higher domestic prices resulted in real
exchange rate appreciation, and that real exchange rate appreciation reduced export
competitiveness by raising production costs (Sapkota, 2013, p. 9).
Relevant data for Nepal also show a positive association between remittance inflows
and labour wage rates subsequent to 2003/04 when wage rate index data became avail-
able: see Figure 18. In order to make remittance inflows and the wage rate index com-
parable, both the amounts of remittances received and the wage rate of the base year
(2004/05) are assumed to be 100 and the amounts increased thereafter are calculated
based on the amounts of the base year. The calculations show that, during the period
2004/05-2010/11, the wage rate index increased by 116% (NRB, 2013), while the
inflow of remittances increased by 247% (World Bank, 2013a).
Migrant workers are separated from family, kinship and other ties (Jones & Basnett,
2013, p. 18) which can not only have adverse effects on their family life, but also make
them vulnerable to exploitation and abuse in work places (Kharel, 2011, p. 17). In the
case of Nepal, many Nepalese workers abroad have faced, and continue to face, such
problems. A recent study (Jones & Basnett, 2013, p. 11) records that Nepalese workers
abroad have poor living conditions (for example, more than 20 people sharing one
room), receive less pay than promised and less for the same work than counterparts
from other countries, work excessively long hours, frequently incur injuries from and
beyond industrial accidents (around 2,400 Nepalese workers die abroad each year), and
experience exploitation, physical abuse and sexual violence (mainly female domestic
workers).

30

25
Inflow of
20
remittances
15 (% of GDP)

10
Exports (%
5 of GDP)

0
1995 1997 1999 2001 2003 2005 2007 2009 2011

Figure 17. Ratio of remittance inflows and exports to percentage of GDP, 1995-2011.
Source: adapted from World Bank (2013b).
 Asia Pacific Journal of Public Administration 279

2010/11

2009/10
Increase in
2008/09 remittance
inflows
2007/08
Increase in
2006/07
wage rate
index
2005/06

2004/05

0 100 200 300 400

Figure 18. Remittance inflows and wage rate index, base year 2004/05=100, 2004/05-2010/11.
Sources: adapted from World Bank (2013b), NRB (2013).

In Nepal, there is evidence that migration for foreign employment has increased the
rates of divorce, marital conflict between couples, and psychological trauma in children
(Kharel & Gautam, 2011). There is also evidence of a significant increase in the rate of
polygamy, desertion and divorce without consent by the left behind husbands of
women labor migrants (Bhadra, 2013, p. 27). Such evidence indicates that migration
for employment and the return of remittances has, in many cases, resulted in the col-
lapse of family relations.
Nepalese migrant workers experience safety, security, violence and other forms of
human rights violations. Bhadra (2013, p. 33) records that, in a sample study, 11% of
women migrant workers were found to have been raped, and 3% of them had had
forced pregnancies from their employer or some other person. Amnesty International
(2011) maintains that domestic recruitment agencies as well as employer companies
abroad deceive almost every migrant worker at least in one respect regarding recruit-
ment costs, working conditions, and pay and benefits. Many of them work in condi-
tions of forced labour, with their identity documents (passports and visas) being seized
and held by employers and their not being allowed to move outside (Amnesty Interna-
tional, 2011, p. 63). The number of accidental deaths at workplaces and suicide cases
because of various mental stresses and psychological effects are also increasing. During
2010 alone, there were over 800 deaths in Malaysia, Saudi Arabia, Qatar and the
United Arab Emirates, of which 160 were suicides (The Himalayan, 2011). These data
highlight that, in the case of Nepal, labour migration and remittances have not only
had economic benefits but also some severe human and social costs as well.

Concluding comments
The purpose of this article has been to explore the impact of remittances on economic
growth in Nepal by analysing how remittances have affected the country’s financial
development, productivity, international trade, and human capital accumulation. The
assessment of these factors through an interpretation of available secondary data shows
that remittances have had a positive association with financial development and human
capital accumulation, but a negative association with manufacturing growth (productiv-
ity) and international trade. In relation to financial development, remittances have been
positively associated with bank deposits and credit and also with savings and
investment, though not with relief from working capital constraints. In terms of human
280 P. Dahal

capital accumulation, remittances have had a positive association with lower secondary
level and secondary level school enrolment rates, life expectancy at birth, and a reduc-
tion in the under-5 child mortality rate. Regarding productivity, there has been a nega-
tive association of remittances with manufacturing growth, though remittances have
had a slightly positive association with entrepreneurship. There has been a negative
association of remittances with international trade because the total volume of exports
and imports in Nepal have decreased as the inflows of remittances have increased.
Taken together, these findings suggest that remittance inflows in Nepal have had a
mixed (both positive and negative) effect on economic growth. The emphasis has been
on trends and patterns based on the interpretation of macro-level secondary data rather
than on investigating absolute causality between the variables. An important question
for future research is: Why have remittances had a positive or negative association with
particular factors of economic growth in Nepal?

Note
1. This article is a condensed and revised version of a research project which I submitted to the
Crawford School of Public Policy, Australian National University, in 2013 as part of a
Master of Public Policy.

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