The Impact of Remittance in Nepalese Economy

A Seminar Paper
By
Krisha Parajuli
Roll no: 97
TU Regd. No.: 7-2-3-1151-2022

Bachelors in Business Administration(BBA)

Second Semester
Macroeconomics

Submitted to:
Faculty of Management
Mahendra Morang Adarsha Multiple Campus, Biratnagar
Tribhuvan University

December, 2023
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Table of contents

1. Acknowledgement……………………………………………….......……………………
iii
2. Declaration……………………………………………………...……………...…………iv
3. Recommendations………………………………………...…....................………………iv
4. Abstract……………………………………………………………...……………………vi
5. Introduction(Background)……………………………………...……………………….1-2
6. Statement of problems………………………………………………..…………..…….3-5
7. Objective of study…………………………………………………………..…………….6
8. Methodology……………………...………………………………………………………7
9. Description and Analysis…………………………………………………...…………..8-9
10. Result and Analysis……………………………………………...…………………...10-12
11. Discussion, Conclusion and Recommendation…………………………….…...…….13-
15
12. References………………………………………………………………………………..16
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Acknowledgement

I would like to express my sincere gratitude to Prof. Ganesh Dahal , Macroeconomics

instructor at Mahendra Morang Adarsha Multiple Campus, for his guidance and support in
the preparation of this seminar paper. I also extend my thanks to the faculty members of
Mahendra Morang Adarsha Multiple Campus for providing a conducive learning
environment and the necessary resources for carrying out this Seminar paper. I would like to
thank my family and friends for their constant encouragement and support throughout this
paper.
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Declaration

I, Hereby declare that the seminar paper submitted to. ……………….is a record of an original
work done by me. I also declare that this seminar paper is not submitted to any other universities.
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Recommendation

It is certified that the seminar paper submitted by Krisha Parajuli ( Student of Mahendra Morang
Adarsha Multiple Campus ) is prepared under our Supervision as per format requirements laid by
the faculty of management. The report has been approved as it satisfies the academic
requirements. Therefore. We recommend the seminar paper for evaluation process.

___________________ _________________
( Signature with Date ) ( Signature with Date )
Faculty Recommendation Expert Recommendation
Prof ……………………
prof………………………
Macroeconomics Instructor
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Abstract

Remittance is the major source of income in the context of Nepal. This research paper assesses
the recent status of remittance and its contribution to GDP and economic growth. Remittance has
been contributing in both micro and macro level that is basic need to country development
Poverty and the unemployment has been the core problem and remittance helps to minimize it.
Also, remittance maintained the foreign exchange reserve and the balance of payment. However,
Maximum numbers of Nepalese are migrating to gulf countries to fulfill the basic needs and for
increase in living standard. Major destination for foreign employment is Malaysia, Qatar and
UAE because of ease of getting visa. Remittance has been playing positive impact on economic
growth of Nepal. Due to COVID-19 pandemic the remittance has been negatively impacting in
the GDP of Nepal. The ratio of remittance is declining from 7.1% to 2.8% which is hugely
affecting in country development.
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 1

Introduction

Background of the study

A remittance can be defined as the transfer of money from abroad to the domestic country by the
domestic worker who are working abroad. A remittance is a non-commercial transfer of funds
made by a foreign worker, a member of the diaspora, or a person with familial ties to another
country for the purpose of supporting a household back home. One of the biggest sources of
funding for poor nations is remittances from migrants, which competes with foreign aid.
Remittances from workers make up a large portion of global capital flows, particularly in the
case of nations that export labor (Al-Assaf, Ghazi, and Al-Malki, Abdullah M., 2014). (BPM6).

The Covid-19 has had a significant influence on Nepal's inbound remittance, causing it to fall by
4.8% in the FY 21/22 and depleting the country's foreign reserve. Remittances could be injected
into the economy to address this. Because of this, the recent 4.8% rise in remittances to Nepal—
which reached NPR 1.007 trillion (USD 8.33 billion) in the last months of the FY 2021–2022
compared to NPR 961.05 billion (USD 7.51 billion) in the same time of the FY 2020–21—is
positive and has helped the Nepalese economy (Maharjan).

Remittances to the group of nations with low and moderate incomes hit a new high in 2017.
(World Bank, 2017). Remittances are a crucial source of capital for underdeveloped nations like
Nepal. Compared to other developing countries, remittances are much higher in low- and
middle-income countries (DoFE, 2014)

Given the importance of remittances to the Nepalese economy, the government has offered an
incentive of an additional 1% in interest on bank accounts depending on remittances. Also, the
government increased the daily threshold for money transfers from outside Nepal from Rs 1
million to Rs 1.5 million and permitted non-resident Nepalese to open foreign currency savings
accounts in Nepal (Rajesh Khanal, 2022).

The United Arab Emirates, Kuwait, and Saudi Arabia each get 400,000 Nepalese emigrants each
year. Every fourth Nepali has emigrated to Qatar since 2010. For low-skilled migrants from
South Asia, Malaysia and Thailand are quickly becoming popular destinations in East Asia.
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Since the previous twenty years, remittances have played a crucial role in the socioeconomic
development of Nepal. An increasingly important external source of funding for developing
nations. Remittances and employment abroad are related. The number of remittances is rising in
parallel with the rise in labor migration.
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Statement of the Problems

Most Nepali workers lack sufficient skills for performing job . Due this reason they find
themselves not able to in their home town and country so they try to go abroad for working.
Nepali workers are underpaid because they lack education and experience. They have to do risky
jobs abroad. Sometime they may not be hired incase when they are fully depending on agents
contract with the company. As a result, there are many things that stop money from entering
Nepal. The migratory syndrome, often known as brain drain, is detrimental to Nepal's economy.
The nation exports a large number of potential workers, which lowers the labor force required to
grow the national economy. The expansion of the economy will be hampered by this.

Remittances and economic growth have a negative relationship since they lessen the motivation
of migrating family members to work (Chami et al., 2003). Remittances can shrink the labor pool
and foster a dependency mentality that stunts economic development. It can weaken the
competitiveness of the receiving countries in international markets by raising the prices of non-
tradable commodities, increasing their consumption, appreciating the real exchange rate, and
lowering exports. By growing anti-immigrant attitudes and stronger enforcement tactics in host
nations, such as the US and many in Europe and the Gulf Area, remittances can be reduced along
with international migration (Amuedo-Dorantes, 2014).

Migration has a negative impact on agricultural output, and despite having higher household
incomes, remittance-receiving households have not shown advances in agricultural production.
To encourage remittance-receiving agricultural households to invest in capital goods and inputs
to increase agricultural productivity so that it more than makes up for the losses resulting from
labor migration is a major development challenge for a highly remittance-dependent agrarian
economy like Nepal (Tuladhar, Sapkokta and Adhikari, 2014). Remittance decreases the GDP
per capita growth in Nepal.

As per the annual data ending mid-July 2022, an increasing number of Nepali workers sought
labor approvals for Saudi Arabia, Qatar, and United Arab Emirates (UAE) among many others.
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Top 10 labor destinations of Nepali migrant workers in the last three FYs (institutional and
individual – new and legalized)

Source: Department of Foreign Employment

As Nepalese enter the external labor market, imports of goods are increasing and exports are
declining, resulting in huge trade deficits year after year. Remittances are used to import luxury
goods or to invest in unproductive sectors, such as arable land plots. This has resulted in
uncontrolled urbanization, problems in the distribution of services, increased internal migration
and higher consumption costs. In addition, social isolation, mental stress and sufferings are no
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less challenging. Even more painful is the tragic scenario of our migrant compatriots who end up
in the statistics of 3 deaths per day on average.

Therefore, remittance income per se cannot be a permanent solution to the sluggish economic
growth of the nation (OLI).

While studying about the remittances some research question has be raised as below:
a) What is the nature and extent of remittance ?

b) What is the impact of remittance in Nepal?

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Objectives of the study

The objective of my research paper is to find out about the things listed below:

 To study the nature and extent remittance in Nepalese economy.

 To study the impact of remittance in Nepal.
 7

Methodology

This paper is based on Secondary data collected from different national and international
institutions. Majority of data used in the study are obtained from Economic survey of Ministry of
Finance, CMEs annual tables of Nepal Rastra Bank, Remittance data from World bank,
Migration and Remittance by World Bank group. Descriptive statistics, trend and correlation
were used in the study.

This paper is based on secondary data

collected from different
national and international institutions.
Majority of data used in the
study are obtained from Economic survey
of Ministry of Finance,
CMEs annual tables of Nepal Rastra Bank,
Remittance data from
World Bank, Migrati
Data Sources

Secondary data is adopted to fulfill the research requirement. For this research it’s complicated
to collect primary data in recent scenario. Secondary data is more effective and fulfill the
 8

objectives. Different sources for are Government annual publication report, Authentic source that
is under government authority, Economic survey of Nepal, Ministry of finance, NRB annual
report, World Bank and many other legal sources.

Data Collection Methods

As a researcher, data is collected from the financial data of remittance inflow based on the
previous literature and empirical evidence. Recent 5year data are taken for the hypothesis. It will
provide the information related to the objectives as well to prove the objective. The other reports
are collected from the World Bank, NRB, Ministry of finance, other authentic sources and
website if necessary.

Description and Analysis

Literature Review

We have received several studies pertaining to emigration, its eco-consequences either they are
in the form of books or articles. That means study about the matter by finding the books, articles
newspaper, and thesis, report etc. that are published in the past. This chapter helps to take
adequate feedback to broader the information base and inputs to the study. Since there are not so
much adequate study materials related with this topic published in Nepal.

Review on National and International Context

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Remittances play a significant role in the national and international context of Nepal. The review
on the impact of remittances on both levels are as follows:

National Context : According to Maharjan, Nasala, Remittances contribute to Nepal's

economic stability by providing a steady source of foreign currency inflows. This helps stabilize
the exchange rate, improve the balance of payments, and build foreign exchange reserves.
Remittances significantly contribute to Nepal's GDP growth. They boost consumption, stimulate
various sectors of the economy, and drive overall economic expansion.

According to Tuladhar, Raju; Sapkota, Chandan; Adhikari, Naveen (2014), Remittances have
been instrumental in reducing poverty levels in Nepal. They provide income to recipient
households, improve living standards, and contribute to poverty alleviation efforts. Remittance
funds are often used to invest in small businesses and entrepreneurial ventures. This promotes
economic diversification, job creation, and local development.

International Context: Nepal is a significant player in the global remittance market. It receives
a substantial amount of remittances from Nepali migrant workers employed in various countries,
particularly in the Middle East, Malaysia, and Gulf countries.

Al-Assaf, Ghazi and Al-Malki, Abdullah M., (2014) studies that the international context of
remittances in Nepal is closely tied to labor migration. A large number of Nepali workers
migrate abroad in search of better employment opportunities. Remittances sent by these workers
are crucial for their families' welfare and the country's economy.The international context
influences Nepal's policies and regulations related to remittances. The government focuses on
ensuring the safety and welfare of Nepali workers abroad, facilitating remittance inflows, and
promoting financial inclusion through formal channels.
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Chami, R, Fullenkamp, C., & Jahjah, S. . (2003) studies about the International factors such as
exchange rates, global economic conditions, and geopolitical events can affect the remittance
inflows to Nepal. Fluctuations in exchange rates can impact the value of remittances received by
households. It’s worth mentioning that while remittances bring significant benefits, there are also
challenges associated with the national and international context. These include concerns about
the welfare and rights of Nepali migrant workers, the potential for overreliance on remittances,
and the need for sustainable economic development beyond remittance inflows.

Nepal recognizes the importance of remittances and has taken steps to promote safe migration,
enhance financial literacy, and encourage investment of remittance funds in productive sectors.
However, ongoing efforts are required to maximize the positive impacts of remittances and
address the associated challenges for the overall development of the country.

Result and Analysis

Remittance Inflows to GDP

Remittance inflows to GDP (%) in Nepal was reported at 24.25 % in 2020, according to the
World Bank collection of development indicators, compiled from officially recognized sources.
Nepal – Remittance inflows to GDP – actual values, historical data, forecasts and projections
were sourced from the World Bank on October of 2023.

Fig: Remittance Inflows to GDP

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Source: World Bank, trading economics.co

According to the above figure, the remittance inflows to GDP in Nepal was 23.15% in 2009
which decreased to 21.09% in 2010, which was again decreased to 19.75% in year 2011 which is
recorded to be the lowest, which increased to 22% in year 2012. The remittance increased to
25.25% in year 2013 which again increased to 26% in year 2014 which is followed by 27.70% in
2015 that is recorded to be the highest remittance inflow. The remittance started to decrease in
2016 which was 26.95% again decreased to 23.98% in 2017. The GDP increased to 25% in year
2018 and decreased to 24.13% in 2019 and again increased to 24.25% in 2020.

Annual Remittance Inflows to Nepal in four consecutive FYs (in NRP billion)
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Fig: Remittance in NRP billions

1050

1000

950

900

850

800
2018/19 2019/20 2020/21 2021/22

Fiscal Year

The Annual Remittance Inflows to Nepal in four consecutive FYs based on the above diagram is:

1) 2018/19: Approximately NRP 879 billion

2) 2019/20: Approximately NRP 875 billion
3) 2020/21: Approximately NRP 961 billion
4) 2021/22: Approximately NRP 1007 billion

According to the figure, the annual remittance inflows to Nepal was approximately NRP 879
billion in FY 2018/19, whereas in FY 2019/20 the annual remittance was NRP 875 billion which
was the lowest among four consecutive FYs. In FY 2020/21 the annual remittance inflows to
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Nepal was approximately NRP 961 billion which gradually increased to approximately NRP
1007 billion in FY 2021/22 that is recorded to be the highest among four consecutive FYs.

This paper is based on secondary data

collected from different
national and international institutions.
Majority of data used in the
study are obtained from Economic survey
of Ministry of Finance,
CMEs annual tables of Nepal Rastra Bank,
Remittance data from
World Bank, Migrati
This paper is based on secondary data
collected from different
national and international institutions.
Majority of data used in the
study are obtained from Economic survey
of Ministry of Finance,
CMEs annual tables of Nepal Rastra Bank,
Remittance data from
World Bank, Migrati
 14

This paper is based on secondary data

collected from different
national and international institutions.
Majority of data used in the
study are obtained from Economic survey
of Ministry of Finance,
CMEs annual tables of Nepal Rastra Bank,
Remittance data from
World Bank, Migrati
 15

Discussion, Recommendation and Conclusion

Discussion and conclusion

Remittance has been always the major source of income in the context of Nepal. Unemployment
has been major problem since very long. Migrant worker are the key contributors to minimize
the problem of unemployment. More than 1600 youths are moving toward abroad every day for
international labor. The gulf country like Malaysia, Qatar, Dubai, Saudi Arabia are main target
for foreign employment. The reason to move toward this country is lack of skill, literacy and
poverty. Basic necessity is important to survive and every youth want to increase their standard
of living and flexible life. Poverty is major problem of the country and remittance help to reduce
poverty as well which is biggest challenge for nation. Ratio of remittance to GDP in year
2018/019 is 29% according to Ministry of Finance which is 582.2 billion in rupees. Remittance
is key factors to increase the nation GDP. Remittance and the GDP play positive impact for the
economic development.

This research papers have incorporated the impacts of remittance on Nepalese economy. The
papers explain how the remittance has positive and negative impacts on the economic growth of
the country. The labor migration has granted job opportunities for the unskilled and
professionally untrained human resources mostly in Gulf countries. Yet having jobs does not
bring advantages only. There are people who don’t get the wages adequately and who don’t even
get the job. There are advantages along with disadvantages. As for developing agrarian country
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like Nepal, the remittance has posed a negative impact on the agricultural outputs. People are
importing goods and services with the help of remittance but not investing on tools that help in
agriculture. There is more import than export creating trade deficit in the economy.

Remittances have a significant impact on the Nepalese economy. Here are some of the key
effects of remittances on Nepal:

1. Economic Growth:
Remittances contribute to the country's overall economic growth. The inflow of
remittances injects foreign currency into the economy, which boosts consumption and
investment, leading to increased production and economic expansion.

2. Balance of Payments:
Remittances play a vital role in improving Nepal's balance of payments situation. The
funds received from abroad help offset the trade deficit and contribute to stabilizing the
country's external accounts.

3. Poverty Reduction:
Remittances have a positive impact on reducing poverty in Nepal. They provide a vital
source of income for recipient households, improving their standard of living, and lifting
them out of poverty. Remittances are often used for basic needs, education, healthcare,
and housing.
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4. Consumption and Investment:

Remittances increase household income, leading to higher consumption levels. This
increased consumption stimulates domestic demand, driving business activity and
supporting various sectors of the economy. Remittances also contribute to investment in
sectors such as real estate and small businesses.

5. Financial Inclusion:
Remittances have helped increase financial inclusion in Nepal. Many individuals who
receive remittances open bank accounts to facilitate the receipt of funds, leading to
greater financial access and formal financial services utilization.

6. Exchange Rate Stability:

The inflow of remittances strengthens the Nepalese currency (Nepalese Rupee) against
other currencies. This helps maintain exchange rate stability, which has positive
implications for trade, investment, and macroeconomic stability.

7. Skill Development and Knowledge Transfer:

Nepalese workers who migrate abroad often acquire new skills and knowledge. When
they return to Nepal, they bring back these skills, which can contribute to human capital
development and knowledge transfer in various sectors of the economy.

However, it's important to note that Nepal's heavy reliance on remittances also poses some
challenges. These challenges include potential overdependence on remittances, brain drain due to
skilled workers migrating abroad, and the risk of economic vulnerability if remittance inflows
decline significantly.
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Overall, remittances have played a crucial role in Nepal's economy, contributing to economic
growth, poverty reduction, and improved living standards for many Nepalese households.

12. References

Al-Assaf, Ghazi and Al-Malki, Abdullah M., (2014), Modelling the Macroeconomic
Determinants of Workers’ Remittances: The Case of Jordan, International Journal of Economics
and Financial Issues, Vol. 4, issue 3, p. 514-526.

"Balance of Payments and International Investment Position Manual

(BPM6)" (PDF). International Monetary Fund. p. 272. Retrieved 2021-04-10.

Maharjan, Nasala. “Overcoming Challenges and Strengthening Policies on Remittance.”

Overcoming Challenges and Strengthening Policies on Remittance – Nepal Economic Forum, 30
Aug. 2022, nepaleconomicforum.org/overcoming-challenges-and-strengthening-policies-on-
remittance.

World Bank (2014). The World Bank Migration and Development Brief. 23, Migration and
Remittances Team, Development Prospects Group, Retrieved from:

http://sitesources.worldbank.org/INTPROSPECTS/Resources
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DoFE(Department of Foreign Employment)(2014): Labour Migration for Employment: A Status

Report for Nepal – 2013/14. Department of Foreign Employment, Kathmandu.

Chami, R, Fullenkamp, C., & Jahjah, S. . (2003). Are Immigrant Remittance Flows a Source of
Capital for Development? IMF Working Paper No. 03/189. Washington, D.C.: International
Monetary Fund

Amuedo-Dorantes, C. (2014). The good and the bad in remittance flows. IZA World of Labour.
https://doi.org/10.15185/izawol.97

Tuladhar, Raju; Sapkota, Chandan; Adhikari, Naveen. 2014. Effects of Migration and
Remittance Income on Nepal’s Agriculture Yield. © Asian Development Bank.
http://hdl.handle.net/11540/1287. License: CC BY 3.0 IGO.