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

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