Econ-ity » Blog Archives

Tag Archives: remittance

Remittance: Where is the money going?

It is hardly news for us that Nepal is one of the largest recipients of remittance (relative to the Gross Domestic Product); inbound remittance is equivalent to 30% of Nepal’s GDP, and continues to grow by the year. Yet, not much of this money is being channeled to productive activities, and that, many argue is a worrisome event for Nepal. But why could that be happening? According to one of the recent updates published in national daily, much of this money is spent on loan repayment, daily consumption, education and health, and some bit is being saved. A closer look at these headings clearly reflects Nepal’s ground realities, and offers cues to why not much is going into productive sector.

25% on loan repayment
The primary reason behind so many young people migrating to foreign lands is a search for economic opportunities—opportunities that are not available for most of them in Nepal. This migration, however, does not come free of cost. Since most of these economic migrants come from poor families that also do not have much savings in the first place, they acquire loans in hundreds of thousands to get themselves into these foreign lands. Obviously then, the first priority for them is to repay their loans so that they can secure greater disposable transfers for their families as soon as they can.

24% on daily consumption
Around 25 percent of Nepalese are living below the poverty line. For most of these people, it is daily battle—meeting their basic needs. Therefore, when the level of income increases, a large portion of the disposable income is spent on daily consumption. People cannot be expected to make huge proportions of saving and invest it while they do not even have a decent arrangement regarding their basic needs of food, clothing and shelter. And that is what we see so many poor Nepalese people doing with growing remittances. When disposable income increases, it’s a basic human behavior to uplift living standard for better and healthy life.

10% on education and health
While a large portion of Nepal’s budget is spent on health and education sector, access of people to quality health and education services are not satisfactory to say the least. The number of free public schools is high but large numbers of students are now slowly moving to privately-run schools for quality education. This is a manifestation of the fact that parents believe that quality education is a pre-condition for their children’s secure future, and that they perceive private schools as better educators.
Similarly, public health services are not accessible to all. That is not to mean that private health services are, however, the same services that the government has committed to offer to the people for free are non-existent in a lot of places, and people have to spend a substantial chunk of their income on accessing these facilities.
Combined, these expenses reflect the inefficiency of state institutions, and poor quality of whatever little services are available to the people.

28% on savings
The above-three major headings and some others (including trade, cultural and religious activities, etc.) account for 72% of remittances, leaving behind only 28% for savings. This is the amount that could actually go to productive sectors in the form of investments. And that is where the catch is, for Nepal. If nothing else changes, most of this money will go into purchasing land and gold as these assets guarantee a certain amount of return (which substantially greater than investing in other economic sectors in Nepal). However, if the goal is to have this money channeled to productive sectors, then Nepal will have to rethink its policies such that there are respectable returns to be earned from the productive sectors as well. And this will come through building a conducive environment for doing business, meaning stable and market-friendly policies that allow people to start their businesses with ease, protect their private properties, guarantee contract enforcement, allow for easy exit from the market, and ensure rule of law.

Sujan Regmi

About Sujan Regmi

Sujan is working as Research Intern at Samriddhi Foundation.

Published by:

Striking a balance

Many dailies across the country published articles on the total number of bands in Nepal between April 2010 and April 2015, which stood at a whooping 1047 days. What were these 1047 days after all? They were certainly a reflection of limited opportunities to participate in the country’s politics and be heard. In this regard they were an outcome of sluggish institutionalization of democracy. However, what has now become alarming is that the effect has started perpetuating the cause, further slowing down political processes and thwarting our opportunity to find peaceful solutions through democratic institutions. In the meantime, it is causing the immediate threat of depriving a large number of people of their livelihood opportunities.

WILL WE BUILD A PROSPEROUS NEPAL BY WORKING JUST TWO MONTHS A YEAR? 

If we take the total days in five years, it comes to 1,825 days. When we deduct 52 Saturdays, take 37 official public holidays per year on an average and number of bandhas in the past five years, which is 1047, we would have 333 days left as proper working days in five years. This means only approximately two months per year! Add with ‘chiya’ (tea) breaks, scrolling one’s ‘Facebook newsfeeds’, Tweets, Youtube, Whatsapp and power naps, and of course 30 days of annual leave, we had less than a month dedicated to productive work on an average in the past five years.

What will happen to the big dreams of eradicating poverty and turning Nepal Switzerland in X number of years?

DO WE COMPENSATE THE MEAGRE WORK HOURS WITH PRODUCTIVITY?

According to the World Bank, the annual GDP of Nepal in 2014 was USD 19.6 Billion. If we are able to generate USD 19.6 Billion of GDP in this limited window of productive time, had we worked four months a year, we could have doubled our GDP as well. Despite all markets, offices and industries being closed during bandhs, we managed to get a figure of USD 19.6 Billion. If we managed to sustain a whole year by two month’s work, our productivity must be exemplary. May be our work culture isn’t unproductive after all. But empirically it shows otherwise. Labor productivity in Nepal is low, it ranked lowest in South Asia in 2010.

IF NOT PRODUCTIVITY, ARE WE A GROUP OF VERY WISE CONSUMER THEN? 

If it is not the productivity argument, to explain our sustainability despite the general shutdowns, we could look from a consumption perspective. Is it because we have stable priorities, and know when and what to buy that we have sustained so far? Do we have the answer to all the questions economists spend years researching consumer preference, behavior and utility? We do not.

Even if we were the wisest bunch of customers, it is hard to think that two months of work can sustain us for a whole year.

SO, IS IT THE REMITTANCE THEN? 

So what could it be? Could this be due to the influx of remittance from abroad, which has added for financial sustenance both for the individuals and the government? According to the World Bank, the remittance received as percentage of GDP stood at 29 per cent in 2013. It seems that with the current rate of general shutdowns and dwindling productivity, had it not been for remittance, Nepal would have plunged further down into poverty.

When people in the country cannot work due to the bandhs, they are forced to send an active member of their families to work abroad. Secondly, the prevalence of bandhs is a reflection of weak enforcement of rule of law and property rights. Therefore, these general shutdowns have become a prime factor in pushing us in the vicious circle of poverty and weakening the economy.

IF NOT NOW, WHEN? 

With the alarming rate of 209 days of bandhs per year, it is astonishing how our economy breathes. Nothing adds up. Neither labor productivity justifies our performance, nor do the consuming habits reflect our sustenance. A portion of viable reason attributes to remittance, yet its channelization doesn’t.

One reason why the bandhs toll reached 1047 in the past five years is the apparent success rate of this protest method. But how long will we allow the interest of one organized group to succeed at the cost of an un-organized and peace-loving majority?

It has been estimated that one-day of bandh brings loss of about Rs. 1.8 billion, which means in the past five years, these general shutdowns have robbed people off 1,884 billion rupees. This is really alarming for a nation where people are leaving in hordes looking for economic opportunities in other parts of the world.

Will a ‘new’ federal Nepal be able to set a stage for institutionalizing political processes and democracy in such a way that being heard does not necessarily mean pushing fellow citizens towards a more impoverished life and robbing them of their fundamental rights?

This article was originally published in Perspectives, The Himalayan Times on the 13th of September, 2015. The article was co-authored by Sarita Sapkota and Abyaya Neopane. For the original version of the article, please click here 

Abyaya Neopane

About Abyaya Neopane

Abyaya Neopane is an independent researcher. He comes from an Economics background.

Published by:

Misdirected goal (?)

In a bid to curb rising unemployment, and international migration of rural youth to seek economic opportunities elsewhere, Nepal Rastra Bank (Central bank of Nepal) has recently issued a ‘Working Procedure on Interest Subsidy for Agriculture Loans to the Youth.’ As the name suggests, through this document, the government and Nepal Rastra Bank (NRB) are aiming to revive the Nepalese economy through agriculture. The plan is to encourage the youth to work in Nepal itself, make them feel like the country values them and is constantly working to providing better economic opportunities to them in Nepal, and develop the agriculture sector of Nepal; a nationalist policy I’d say. While the intentions are highly commendable, there are a few things that the authorities seem to have overlooked.

More farmers does not mean a prosperous Nepal

fragmented farming in NepalFirstly, the goal of the state has been misdirected. The new move by the state aims to bring in more and more people into agriculture. As 66% of the total population currently depends on agriculture, the sector’s total contribution to Gross Domestic Product (GDP) is only 33%. Furthermore 85% of these people who practice agriculture are in the sector purely for subsistence. Despite the fact that there are around 4 million Nepalese youth toiling in the foreign land, this figure has not really changed. The productivity of the sector has not declined with respect to the number of people exiting the sector. During a consultation meeting of the Agriculture and Water Resource Committee at Singhadurbar, Honorable Hari Prasad Parajuli, the Minister of Agriculture Development himself clarified that given this background, Nepal won’t lose even a kilogram of food grain that lands in the market due to the fact the Nepalese people are going abroad for foreign employment, neither will Nepal gain a kilogram even if some of these people come back. This is the reality of our agriculture. Yes, agriculture will allow people to earn a living, but the kind of agriculture we practice today – farming in fragmented plots of land to feed one’s own family – will not offer better economic opportunities to the poor.

Remittance on the other hand

On the other hand, the scores of youth that have been forced to seek economic opportunities in foreign lands due to unfavorable enterprising environment in Nepal seem to have given some respite to poor Nepalese populace. In the last twenty years (mid-90s being the period when Nepal began to see an increase in outward migration of Nepalese people due to the civil war), remittance has grown 111 folds, from $50 million in 1994 to $5,551 million in 2013. This has contributed largely to reducing poverty in Nepal, raising the quality of life of rural Nepalese and enhancing their access to education, health education and services, and technology. If the state really wants these migrant workers to come back, then the economic gain that they get upon their return has to be greater than the one they are currently getting in foreign lands. But this aspect has not been addressed by the state plan.

The Bankers’ Dillema

The other problem with the NRB guideline is how it fails to see the impact of a policy like this on the bankers. The guideline fails to recognize the fact that the money that commercial banks hold is actually savings of the general public itself and the profits belong to the shareholders. The bankers are accountable and answerable to these stakeholders if their money is channeled into making risky investments. Banking is a business and it is guided by the prospect of making profits. If a project looks lucrative to the banks, it will finance the project. If not, not even the one being undertaken by the poorest Nepali will be financed by the bank in the pretext of helping the poor. Besides, the administrative cost of availing services to great number of small scale farmers (esp. when these farmers fail to produce properties that can be entertained by the banks as collateral) is far greater than availing services to their corporate clients. If the state fails to acknowledge this fact, then this plan is bound to fail like other similar programs where the bankers opt to pay the fines instead of complying with the state policies.

Therefore, under the current scenario, what the state really needs to do is ease the process of holding formal entitlements of the land, buildings and small enterprises that people have owned and run for years. What the state needs to do is acknowledge people’s property, secure their property rights and convert their ‘dead capital’ into ‘live capital’ such that these can be used as collateral in the banks to acquire loans to enterprise (not just farming but everything) and create wealth, instead of subsidizing an inefficient farming practice in the name of nationalism.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

Published by:

Why I won’t spend my remittance on you

nepali migrant workersPoliticians and opinion leaders, often vociferously comment over the utilization of remittance in consumption and the fact of it not being channeled to productive sectors. Claims are, the country is facing decline of manufacturing and competitiveness, rising wage rates, shortage of labourers in the domestic markets, increasing imports, higher disposable income and conspicuous consumption – in short, signs of Dutch Disease. Living Standards Survey adds, 78.9% of this remittance goes into consumption while capital formation amounts to only 2.9%. The Economic Survey of Nepal 2013/14 reads, “… its utilization in productive sector has been a major concern.”

If we look at the ground realities, on the other hand, it can be clearly understood why things have been going the way they are. And what is more, it is perfectly rational on the consumers’ side that they are consuming and not contributing to capital formation.

Here are some of the reasons why:

– Lots of Nepalese people still face problems like hunger and lack of access to education, health, drinking water, entertainment and more. Irrespective of the poverty rates (which has been brought down by a considerable measure, thanks to remittance), a large chunk of Nepalese populace still has poor standards of living in addition to lack of access to opportunities that can lift them out of their kind of lifestyle (if not for foreign-employment). Therefore, many youngsters acquire loans from friends, family and other networks and head for the foreign land in search of job opportunities. When one has to worry about the fulfillment of his basic needs and repayment of loans he has acquired just to be able to go abroad, it does not require knowledge of rocket science to tell that the person will spend on his basic necessities and loan repayment and not worry about macro-economic indicators of the country.

– The next major sector where the remittance money is spent is on health and education. Although these are not direct forms of capital accumulation, one cannot simply discount the fact that current investment in good education will create an educated future generation that can contribute to the country’s economic growth in the long run. An investment in education today holds the key to prosperity in the future.

– After health and education, what follows is, what is commonly known as “conspicuous consumption” – spending in buying luxury items, cars and land. Considering the fact that saving in banks gives a negative real return in saving (due to higher inflation as compared to the interest rates offered by the banks), it makes more sense to spend the money today and realize its full value than to save money and see its worth decline day by day. Given that the land and vehicle prices generally go up in our country, such spending offers prospect of better returns in future than the returns from saving in financial institutions.

Therefore, if we look at things from an individual’s or a family’s perspective, it is sensible that the remittance money is goes on basic consumption and not on capital accumulation. Individuals have the best knowledge of what their necessities are – better than any opinion leader or any planner – and they make rational choices based on their needs.

Thus, if one expects that remittance money should be channeled to productive sector, instead of making investment in buying a car or a house or even land in one of the cities of the country for that matter, relevant changes need to be made in the policy environment of Nepal. There are no alternative avenues to save at the moment. Doing business is difficult thing in Nepal. Doing Business Report 2014 (World Bank) puts Nepal in 105th position out of 189 countries. If this were easy, people would enterprise in Nepal itself which would create job opportunities for many, leading to mobilization of the youth, creating wealth and reducing the income and social inequalities in Nepal.

Another possible mechanism to channel this money could be that the government issue lucrative bonds (meaning positive real returns) for specific infrastructure projects like hydropower or roads. There have been initiatives of this sort in the past but these have failed utterly in the absence of right marketing and penetration ability. Nepal receives remittance that equals the fiscal budget of the nation. This shows that if there is prospect of return, people have money that could be channeled to capital accumulation. But the current case in Nepal is one of lack of sufficient homework in the part of the state.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

Published by: