Panic or Productive Consumption

Nepal earns a lot through remittances. Nepal earns almost three times more through remittances than it does through foreign aid and two and a half times more than through total exports. Remittances also comprise a significant source of public revenue

Aug. 1, 2016, 5:45 p.m. Published in Magazine Issue: Vol 10, No.1,July 29,2016,(Shrawn,14,2073)

A World Bank report – ‘Nepal Development Update’ – shows a prolonged reduction in the departure of migrant workers and we all are well aware of what this indicates. Reduction in the number of migrant workers means reduction in remittances. I cannot help but sense panic when these words are uttered – ‘reduction in remittances.’ Should we really panic at the fact that Nepalese people are actually staying home and working? Should we panic over the possibility of the country utilizing the manpower of its skilled citizens, especially as the country gradually transitions towards early recovery and reconstruction?

However, the impact of reduction in remittances on a country’s economy is huge – one can argue and the World Bank report supports the claim very strongly. Nepal earns a lot through remittances. Nepal earns almost three times more through remittances than it does through foreign aid and two and a half times more than through total exports. Remittances also comprise a significant source of public revenue. Remittances are especially helpful because they have been very crucial in the reduction of poverty rates of the country and its adverse effects on the nation’s human capital. The money from abroad has helped many Nepali families not live hand-to-mouth. Many families have been able to live a comfortable life, have been able to eat nutritious food, send their children to good schools, and very importantly, increase their savings.

Nevertheless, how can one ignore that remittances largely support consumption? Nepal’s increasing dependence on remittances has made its economy ‘consumption-centric.’ People’s purchasing capacity has drastically increased, leading to high inflation as people are willing and able to pay high prices for goods and services that satisfy their wants and their needs. The demand for imported goods and services has also increased, leading to increased revenue for the government through taxes levied on imported goods. It seems as if the productive sections of the population are working elsewhere, leaving the people, not to forget, the government of the country, to consume more and produce less.

Increase in remittance, especially over the last decade, has coincided with decline in productivity and decline in export. The agriculture sector, which is by far the most productive sector of the nation, has not experienced any significant growth either. Increase in remittance has not led to any increase in the country’s gross domestic product. In fact, while remittance to the country has increased over the past years, the gross domestic product has decreased.

Therefore, remittances have greatly benefitted the people of the country; however, how can we say it has similarly benefitted the economy? I come back to my original question – knowing the kind of effect it has on the country’s economy, should we panic if remittance flow into the country decreases?  The answer depends upon the extent to which we can entrust our government with formulating and implementing policies that are favourable for a competitive and productive environment. Given that money received from abroad has led to decline in poverty, has improved people’s living standards, reduction in the amount received through foreign aid, and sound balance of payments, without the government undertaking taking direct initiatives in bringing these positive changes, has led to what authors call ‘policy complacency.’ Remittances have, unfortunately, fostered a breeding ground for corruption and lack of initiative on the part of the government to improve the job market, production, trade, export, and the highly prevalent unemployment in the country. I cannot speak for everyone, but yes, I cannot help but worry a little.

The World Bank report does not expect a rapid drop in remittances. However, even a slight drop should be a wake-up call for the people of Nepal and the government alike. What exactly are we using such a huge amount of money that comes into the country for? Households, especially agricultural households, should consider utilizing the money should consider investing in areas that will lead to improved agricultural productivity. The government of Nepal, on the other hand, can creatively and innovatively come up with ways to improve the investment climate. Given the comfortable cushion that remittance serves as currently, the government can do so much in a less stressful situation.

Now would also be a time for the government to improve the job market of the country and reduce the massive brain and skill drain the country is currently undergoing. We should make the best of the scenario where skilled Nepalese people are actually interested in coming back to Nepal and utilizing their skills, knowledge, and experience in a place where, unlike contrary belief, I see a lot of potential. Panic over reduction in remittances is expected and natural; however, what are we accomplishing in this situation is what counts eventually. 

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