The country has witnessed negative growth of remittance in the first three months of the ongoing fiscal 2019-20 by 4.6% in dollar terms. It is almost 5% negative growth compared to the corresponding period of the previous fiscal. The country has received Rs 230 billion from remittance in the first three months, whereas inflow was witnessed at Rs 242 billion in the same period last year, according to Nepal Rastra Bank.
Remittance, which is a major source of foreign exchange earnings, could decline further as outflow of migrant workers to the major labour destination, Malaysia, heavily dropped last year. Suman Pokharel, President of the Nepal Remitters Association and CEO of IME Remit has said that remittance growth picked up in the first three months of this fiscal as Nepalis working abroad sent money home during the festivals mainly in Dashain.
Remittance has been lubricating the economy since early 2000 as outflow of migrant workers started to rise consistently. As the country is largely dependent on remittance for maintaining its foreign exchange reserves and Balance of Payment, decline in remittance poses near-term risk for the economy. The country had faced similar challenges in fiscal years 2009-10 and 2010-11 following the global financial crisis. Decline in remittance hit every segment of the economy from financial to trading sectors and even small enterprises.
Why this de-acceleration?
Decline in the number of migrant workers is the major reason behind the slowing down of remittance. In the last fiscal 2018/19, there was 32.6% decline in outflow of migrant workers. As per statistics released by the Department of Foreign Employment (DoFE), a total of 243,868 people had left the country to seek job opportunities in foreign countries. Such numbers were 362,023 in fiscal 2017/18 and 398,978 in 2016/17.
Number of migrant workers has dropped steeply since 2016/17. Between 16/17 – 17/18, the numbers has dropped by 9.3%. A major setback is decline in number of migrant workers to Malaysia. The DoFE report shows 90.4% decline in outflow of migrant workers to the major labour destination Malaysia in 2018/19 in comparison to 2017/18.
Malaysia was the major labour destination of Nepali migrant workers in the past. But since the formation of KP Oli government, erstwhile Minister for the Labour, Employment and Social Security, Gokarna Bista had put a stance to halt labour supply to Malaysia until the vendors involved in visa processing and health checkups who were allegedly cheating the workers be changed. Though former Minister Bista had signed an agreement with his Malaysian counterpart to make transparency in fees and recruitment of labour to Malaysia, the process to change vendors was prolonged. As a result, aspirant migrant workers to Malaysia were not allowed to go to Malaysia. Bista did not compromise and Malaysia dilly dallied in changing vendors.
Drop in remittances could affect the BoP situation which has been gradually improving after a huge deficit in the last fiscal. The government might have to further curb imports but this will affect growth and government revenue. There will be a slowdown in every sector of the economy, according to Economist Keshav Acharya, “Contraction in wholesale and retail trade will affect the financial sector as their non-performing loans might rise, industrial sector will face lack of demand of their products and there will be job cuts.”
He said that Nepal’s over dependence on remittance to make the foreign exchange reserve robust is highly risky. Remittance is temporary – any disturbance in gulf nations which are the major labour destinations – could easily affect the inflow of remittances, according to Acharya, “The country has experienced the bitter truth after the global financial crisis of 2008-09 as remittance plunged sharply at that time. The oil exporting economies were hit hard due to fall in the oil prices as financial crisis loomed.”
Remittance for Nepal is often described as Dutch Syndrome. Nepal is largely dependent on remittance to strengthen foreign exchange reserves like the Netherlands was entirely reliant on oil and gas during the 1970s.
Urgent Call for Diversification of Forex Earnings
According to the World Bank’s recent report, 10% drop in remittance could hit the country’s growth by three percentage points. World Bank has said that Nepal’s over- dependence on remittance as a single tool to strengthen foreign exchange reserves is an inherently risky strategy as it is vulnerable to external shocks. It has urged to diversify the foreign exchange earnings through tourism, foreign direct investment (FDI) and through boosting exports.
If the country does not take steps to diversify forex earnings, it can face adverse impact if slowdown in remittances continues, according to Economist Chandan Sapkota. He said that the country should focus on attracting FDI in production and infrastructure development to expand the production base of the country and generate employment in the country. “If Nepalis working in Gulf countries lose their job due to any uncertainty in Gulf economies, they will come back,” he said, “If we cannot create job opportunities, they will remain unemployed except the few who start their own enterprise.” Currently, over four million Nepalis are working abroad and most of them are working in Gulf and Malaysia.
Looking at the global capital flow, FDI comes in first position. Flow of FDI witnessed USD 1300 billion in 2018, remittances worth USD 600 and Official Development Assistance (ODA) worth USD 130 billion. However, in the case of Nepal, remittance comes in the first position with USD 7.79 billion, which is equivalent to 25% of the country’s Gross Domestic Product, ODA comes second with USD 1.15 billion and FDI with USD 113 million in 2018-19. To change this pattern of capital flow, the country must work to build competitive investment climate in the country to welcome foreign investors.