25Nov2022

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Tag: Remittances

OP-EDs and Columns

Trapped in migration and remittance

NISCHAL Dhungel, Non-Resident Fellow

The opinion piece originally appeared in The Kathmandu Post on 4 September 2022. Please read the original article here.

Nepal has faced tremendous hitches in the path of economic development. Keeping natural barriers (landlocked externally and challenging topography internally) aside, the nation has been undergoing a protracted era of political change over the past two decades, graduating from a monarchy to multiparty democracy, marred by armed war, ethnic unrest and frequent changes in power. Frequent changes in government, irrespective of a unitary or federal form of government, has directly hampered Nepal’s development path, compounded by poor policy decisions. Poor policy decisions have led to weak performance of the primary agricultural and industrial sectors, low public investment and capital accumulation, and low productivity growth.

Given this context, it is not surprising that foreign employment has become more pervasive, particularly in the years following Maoist conflict. The Department of Foreign Employment started issuing labour permits in the late 1990s. The number of labour permits issued peaked in 2013-14 at a high of 519,638. In 2020-21, the number of labour permits issued plunged to a 16-year low of 72,081 due to the Covid-19 outbreak and the ensuing restrictions on people’s freedom of movement. At present, formal overseas employment procedures have become cumbersome due to the bureaucracy that requires foreign employment agencies to produce authentic labour demand letters, get the demands attested from the Nepali embassies in target countries, and provide several other documents. Despite the cumbersome out-migration procedures, foreign employment has become a lucrative area to escape Nepal’s job market.

Remittance trap

Remittances in Nepal have surged at an unprecedented pace. Personal remittances received were less than 1 percent of GDP up until the late 1990s, lower than Bangladesh and India. This share dramatically increased during the first half of the 2000s, rising from 2 percent in 2000 to 22 percent in 2010 and 30 percent in 2015. Following the pandemic, it was anticipated that Nepal would experience a sharp fall in remittance inflows, impacting imports, the balance of payments, foreign exchange reserves, consumption, savings, loans and interest rates. However, according to the data released for fiscal 2020-21, Nepal performed better in remittance inflows.

Given the extraordinary increase in remittances, they are probably the main driver of the improvement in living standards seen in Nepal, directly (households receiving remittances) and indirectly (increased labour income of those that remained). Research published by Nepal Rastra Bank showed that compared to households that do not get remittances, households that receive remittances have a 2.3 percent lower chance of falling into poverty. With every 10 percent increase in remittance inflows to households, the likelihood of those households falling into poverty lowers by approximately 1.1 percent.

Large-scale migration is a symptom of underlying, long-standing issues rather than a sign of strength. One of the world’s most extensive and dense anti-poverty initiatives is likely to be found in Nepal. Unfortunately, more resources go into the process of delivering benefits to “the poor” rather than achieving impact (making “the poor” rich). Economists Yurendra Basnett, Chandan Sapkota and Sameer Khatiwada have rightly pointed out that much effort is also put into process innovation and complexity (how to get the goodies to “the poor”) while neglecting the apparent reality that a great job with a high salary would go a long way in reducing poverty in one of the chapters of the book entitled Politics of Change.

Large-scale migration and the resulting remittances have facilitated the expansion of low-productivity services. Still, they have also contributed to the low competitiveness (via appreciation of the real exchange rate). As a result, this cycle intensifies already-existing problems that Nepal has faced for a while, further impeding its competitiveness and limiting its economic potential. Because of all these factors, Nepal, home to some of the most hardworking and adventurous people in the world, may remain in a high migration and remittance trap for years to come.

Domestic employment

The pandemic provided the government with a fantastic opportunity to learn a lesson from the existing policy gap to keep the people who had returned to help with the need for the nation’s development. It is a monumental task to switch from foreign employment to domestic employment. Approximately 500,000 young people enter the workforce each year, and 80 percent of them manage to find work abroad. Due to a lack of investment that may have helped produce output, Nepal is now entirely dependent on imports. Ironically, Nepal imports even agricultural items, even though 66 percent of the country’s population is employed in agriculture. Agriculture, which accounts for two-thirds of the workforce and one-third of GDP, has to undergo reforms to increase productivity, reduce poverty and free up labour for new sources of economic growth.

For Nepal, unleashing massive hydropower investments would be a game changer. It would not only result in considerable increases in productivity and new investments, but it also has the potential to raise wages dramatically, reverse migration and boost competition in downstream industries. According to the National Planning Commission and UNICEF report Demographic Changes of Nepal: Trends and Policy Implications, Nepal will have an ageing population by 2028 and an elderly population by 2054. Therefore, Nepal has a very limited window of opportunity to capitalise on the demographic window. It is necessary to invest in the skills of Nepali youth to fully realise the demographic dividend. For Nepal to continue on a more robust and sustainable growth path, more human capital must be put to productive use.

History also shows us that Nepal has implemented significant reforms in the past and is capable of doing so again. The broad-based reforms that Nepal implemented between 1986 and 1996 positively impacted the economy. The share of commerce in GDP and exports, as well as the share of manufacturing, virtually doubled, increasing the economy’s openness and diversification. The political shift to democratically elected administrations, which also gave the populace a new purpose, served as the foundation for these reforms. Today, they serve as a sobering reminder that Nepal can undergo significant and complex reforms. To escape the out-migration and remittance trap, a clear set of plans and policies to increase domestic employment should be the top priority of the federal, provincial and local governments. Without rethinking our development model, the country cannot prosper or graduate to a middle-income country.

NIPoRe DatavizNIPoRe Updates

NDV0011 – Migrant Remittance Inflows for South Asia, Southeast Asia Plus China

THE ISSUE

According to the September 2019 briefing Document for the World Bank Board, there were more than 164 million documented international migrant workers in 2018 of whom 68 million were women. Over the years, money sent back home by these migrant workers have been benefiting receiving countries via investments, trade, and transfer of skills and technology. In 2019, remittance flows to low and middle-income countries (LMICs) are projected to reach UD$ 550 billion which is more than three times the total development aid flow to these LMICs.

Remittances have been benefiting migrant workers’ countries of origin in numerous ways. In one of his TED Talks, in 2014, Economist Dilip Ratna has highlighted some of the most crucial aspects of remittance. Moreover, the UN DESA has identified some key facts on why remittances matter for the global economy. Similarly, on the occasion of the International Day of Family Remittance, IFAD has highlighted ten ways in which remittances have been transforming the global economy in meaningful ways. Furthermore, the World Economic Forum notes that remittances are crucial for many of the LMICs and discusses the cases of India and the Philippines. In 2018, remittances accounted for almost three percent and ten percent of GDPs for India and the Philippines respectively.

OUR OBSERVATIONS

For our analysis, we have taken into account remittance inflows data (only) to South and Southeast Asian economies plus China. We have used the World Bank data for our analysis and analyzed data for the years 2000, 2005, 2010, 2015, and 2016 – 2019. Except for Nepal, where remittance inflows for the year 2019 are projected to account for about thirty percent of country’s GDP, no other economies in South and Southeast Asia plus China have a double-digit figure for remittances as the share of GDP for 2019.

Data Source: World Bank (2019)

South Asia

With some exceptions for a few years, overall, remittance inflows to South Asian economies are on an increasing trend. For Afghanistan, we don’t have data for the years 2000 and 2005. In 2010, the economy received a total of US$ 346 million in remittance. For 2018, this remittance inflow figures have increased by about three times and Afghanistan received US$ 920 million in remittances. However, in 2019, remittance flows to this South Asian economy has been projected to decline by about US$ 36 million. On the other hand, Bangladesh had received about US$ 2 billion in remittances in 2000. With a slight decline in 2016, the country had received more than US$ 15 billion in remittances in 2018 and this figure is projected to increase by US$ 2 billion and become more than US$ 17.5 billion in 2019.

From the available data, it seems Bangladesh and Maldives receive small amount of remittances. Though there has not been a substantial increase in the latter’s remittance inflows between 2000 and 2018, the former has improved a lot in terms of the amount of remittances it receives each year. For Bhutan there are no data for the years 2000 and 2005 and in 2010, the country had received about US$ 8 million in remittances. By 2018, this figure has increased by more than seven times and reached about US$ 58 million. For 2019, Bhutan is expected to further improve in this area. On the other hand, Maldives had received about US$ 2 million in remittances in 2000, same as in 2005, and the country had witnessed an inflow of US$ 3 million remittances into the economy. For the years 2016-2018, it had received US$ 4 million each year and is projected to remain constant for 2019.

In the case of South Asia, India has been the largest recipient of remittances for all years considered for this analysis. In 2000, it had received a total of about US$ 13 billion in remittances. The economy saw a decline in the figure in 2016 but it continues to improve the remittance inflows in recent years. In 2018, India had received more than US$ 78 billion in remittances – more than six times the amount it had received in 2000.

Nepal is the only economy in South Asia that has witnessed remittance inflows by more than eighty times between 2000 and 2018. In 2000, Nepal had received about US$ 112 million in remittance and this figure rose to more than US$ 8 billion in 2018. In 2019, Nepal’s remittance receipts are projected to improve further and become more than US$ 8.6 billion.

Pakistan, on the other hand, have increased the remittance receipts by more than twenty times between 2000 and 2018, i.e., in 2000, the economy had received more than US$ 1 billion in remittance and it has become more than US$ 21 billion in 2018. In 2019, the receipts are projected to further improve and reach almost US$ 22 billion. Finally, Sri Lanka too has been receiving more remittances in recent years. In 2000, it had received a little more than US$ 1 billion in remittances and this amount became more than US$ 7 billion in 2018. In 2019, the amount is projected to increase further and add more than US$ 200 million than the previous year.

Southeast Asia

Brunei and Singapore primarily serve as the key destinations for international migrant workers. As a result, these two economies in Southeast Asia serve as the remittance outflows hubs.

In Southeast Asia; Indonesia, Myanmar, the Philippines, and Vietnam have improved a lot in terms of remittances recipient countries. Between 2000 and 2018, these economies have observed considerable rise in the amount of money that they receive as remittances. For example, Indonesia received about US$ 1 billion remittances in 2000 and in 2018 this amount has become more than US$ 11 billion, an increase by more than eleven times. Similarly, Myanmar had received only US$ 342 million remittances in 2000 and by 2018 it has increased by more than 28 times and reached about US$ 3 billion. For the Philippines, between 2000 and 2018, remittance inflows have increased by almost five times, i.e., remittance inflows increased to about US$ 34 billion in 2018 from about US$ 7 billion in 2000. For Vietnam, between 2000 and 2018, the amount has increased by more than twelve times. In 2000, it had received more than US$ 1.3 billion and in 2018 the amount became US$ 16 billion.

Like Nepal (one of the two landlocked economies in the region) in the case of South Asia, Lao PDR (also a landlocked economy) is the most benefited economy in terms of remittance recipient economy between 2000 and 2018. In 2000, the country had received just US$ 1 million in remittance but it 2018 the amount has become US$ 239 million, i.e., an increase by about 239 times.

Cambodia, Malaysia and Thailand have also seen an upward trend in remittance inflows during 2000 – 2018 period. While Cambodia saw growth in amount by more than eleven times – an increase from US$ 121 million in 2000 to about US$ 1.5 billion in 2018, Malaysia has seen an increase in remittance inflows by about five times between 2000 and 2018 – from about US$ 342 million in 2000 to about US$ 1.7 billion in 2018. Similarly, Thailand has increased the inflows amount by more than four times – an increase from about US$ 1.7 billion in 2000 to about US$ 7.5 billion in 2018.

In 2019, except for Thailand, other seven Southeast Asian economies are projected to further improve remittance inflows into their economies.

China

Like Nepal and Lao PDR, China Mainland is also one of the few economies in the region to increase remittance inflows by a large margin. Between 2000 and 2018, the Mainland has witnessed a growth in remittance inflows by more than 88 times. In 2000, it had received about US$ 758 million but this amount became about US$ 67.5 billion in 2018. However, the trends for Hong Kong SAR and Macao SAR are not encouraging.

For Hong Kong, the growth in amount has been minimal between 2000 and 2018, i.e., a growth by just about three times. However, for Macao, though the amount for 2019 are projected to improve, this Chinese Special Administrative Region has seen declining inflows trend between 2000 and 2018, i.e.m decline from about US$ 53 million in 2005 to just US$ 25 million in 2018.

Note: For the current dataviz, we have taken into consideration remittance inflows into analyzed economies only.

Research Commentaries

NRC0003 – Libra and the Future of Nepal’s Financial System

Libra and the Future of Nepal’s Financial System

Jaya Jung Mahat

Synopsis

Last month, after years of rumors and user speculations, Facebook finally announced the company’s plan to launch Libra – a new cryptocurrency – early next year. Though we are yet to understand Libra’s detailed arrangement, economists and policymakers have already begun discussing the potential impacts that this new digital currency may bring to the existing global financial system and on few selected major economies. This commentary discusses potential impacts of Libra on Nepal’s financial system. It focuses on four major areas that Libra is likely to have considerable effects on – transfer of remittances, impacts on the “unbanked” population, disruption of existing payment gateways and most importantly questions regarding government regulation of cryptocurrencies.

Introduction

Last month, on June 18, Facebook, along with 27 founding members coming from six distinct sectors announced their plans to launch a new cryptocurrency to be called Libra early next year. Unlike traditional currencies, Libra will not be backed by central banks. However, contrasting other existing cryptocurrencies, Libra will be supported by a reserve of assets and currency’s value will be determined by a currency basket to be finalized by the Libra Associations members. This announcement has prompted a heated debate among economists, central bankers, policy makers and the techpreneurs about the future of cryptocurrency and how Libra will affect the overall global financial system.

This is What We Know About Libra

While making the announcement, Libra Association has also released a 12-page long White Paper highlighting key aspects of this to-be launched new currency. As per the document, Libra aims to be one of the simple global financial currencies and establish a global financial infrastructure that enables the Association to empower billions of people. It is built on a secure blockchain system that also allows Libra to scale up if needed. Moreover, the currency is backed by a reserve of assets that will ultimately define the value of this currency. Also, an independent non-profit association based in Switzerland will govern the Libra ecosystem.

As trust is a key factor for overall success of this new currency, the Libra Association has tried its best to have as many founding members as possible from sectors that have close links with the global financial system. Following are the founding members of the Association (in alphabetical order) and the latter aims to add about 72 more members before going public early next year:

  • Blockchain: Anchorage, Bison Trails, Coinbase, Inc., and Xapo Holdings Limited
  • Nonprofit, multilateral organizations and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, and Women’s World Banking
  • Payments: Mastercard, Mercado Pago, PayPal, PayU (Naspers’ fintech arm), Stripe, and Visa
  • Technology and marketplaces: Booking Holdings, eBay, Facebook/Calibra, Farfetch, Lyft, Spotify AB, and Uber Technologies, Inc.
  • Telecommunications: Iliad and Vodafone Group
  • Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, and Union Square Ventures

On the operational side, Libra will be based on Libra Blockchain that is constructed by taking into consideration three core requirements of a modern digital global currency: scalability, security and flexibility. In terms of a currency reserve, Libra will be fully backup up by the Libra Reserve that will further be supported by a competitive network of exchanges buying and selling the currency coins.

Ongoing Debates

As soon as the news of Libra came into public, there has been hot debates among economists, policymakers, central bankers and the techpreneurs regarding the safe regulation of this new currency, people’s trust on this system and how it will affect existing global financial system.

Though there are some good aspects of Facebook, based on the platform’s past controversies, many critics have cast their doubts over Libra’s hidden goal. Writing for the Project Syndicate, Columbia Law Professor Katharina Pistor has asked global stakeholders to halt Libra before it gets launched next year.

Furthermore, economists Joseph E. Stiglitz and Kausik Basu have raised the issues of online crimes; including those related to compromising user privacy and money laundering; and inflation respectively. Also, the former Deputy Governor of the Reserve Bank of Australia, Stephen Grenville, panics the possibility of Libra causing more severe future capital-market volatility.

To add more, Financial Times’ chief economics commentator – Martin Wolf – fears that Libra may give birth to the existence of a single bank dominated global financial system. In the same line, cryptocurrency critic David Gerard argues that Libra is based on ideological concepts that hardly work in the real world.

Amid all these skepticisms, there are few individual critics and selected institutions that view Libra a desired disruption and they believe it will help global financial system more inclusive and less costly. The Banker, a London-based financial affairs magazine, has published an editorial saying that Libra, despite few shortcomings, will bring in more businesses for all stakeholders involved in the financial sector. Similarly, other critics praise Libra for it’s potential to reinvent the traditional costly ways of cross-border transfer of remittances worldwide and in particular, for Africa, the new currency may help the region to bring in more people into the formal financial system and also reduce the costs of remittance transfers into the region.

Libra and Nepal’s Financial System

Considering growing penetration rates of mobile phones (134.31%) and internet (61.83%), I believe there should be enough debates on Libra and all possible ways it may disrupt Nepal’s existing financial system before last month’s announcement becomes a reality in 2020. However, I do not see that much of debates happening lately – be it among the Nepal Government stakeholders and/or among the key private-sector players, including major banks and financial institutions (BFIs), investors and the techpreneurs.

To stir needed debates in this regard, from what is available so far, I can think of Libra affecting Nepal’s financial sectors in the following four areas:

  1. Transfer of Remittances: According to the most recent Migration and Development Brief, Nepal, with $8.1 billion remittances inflows into the country in 2018, ranks 19th worldwide and fourth in South Asia in terms of the amount of remittances it has received in that year alone. In regards to the remittances and percentage of GDP (28%), Nepal ranks in fifth place worldwide after Tonga, Kyrgyz Republic, Tajikistan and Haiti. As Libra plans to minimize the costs relating to the cross-border transfer of remittances, concerned stakeholders in Nepal should analyze how this new invention may affect one of the key pillars of Nepali economy.
  2. Impacts on the “Unbanked” Population: As per Nepal’s Central Bank, as of mid-May 2019, the country has 176 BFIs – 28 commercial banks, 32 development banks, 24 finance companies, 91 Microfinance institutions and one infrastructure development bank. Altogether, they have 8,319 branches across the country. Despite these developments, a large percentage of Nepali population remains unbanked. A 2014 report has highlighted disappointing facts related to Nepalis’ access to finance. As per the report, 18% of Nepali adults are fully excluded from existing formal and informal financial products and services. Moreover, 21% of local adults use informal channels while managing their finances. In the light of these evidence, key government and private stakeholders should organize frequent and intensive debates on the possible impacts Libra might bring to “unbanked” Nepalis and economy’s BFIs. While doing so, these stakeholders should also plan their actions to minimize potential risks from Libra when it goes into implementation in 2020.
  3. Disruption of Payment Gateways: To enhance people’s easy access to available financial products and services, in recent years, Nepali techpreneurs have come up with intermediary payment gateways. In addition to such services developed and owned by BFIs; E-sewa, iPay and Khalti are three of the most promising such platforms owned by Nepal’s techpreneurs. As Libra’s current plans are expected to disrupt payment gateways around the globe, Nepali techpreneurs working in this sector should also be cautious enough to minimize the damage that Libra may cause to their platforms.
  4. Regulation of Cryptocurrency: As of now, the International Monetary Fund (IMF) is yet to make an institutional position on Libra. However, the Fund has clearly stated its position on cryptocurrency earlier stating it would support government set-up cryptocurrencies. Bitcoins and similar cryptocurrencies are currently banned in Nepal. As the global financial system keeps on evolving and the IMF, the key regulator of global financial system, also encouraging central banks to adapt to changing circumstances, the concerned authorities in Nepal should also think of timely updating country’s existing financial system to catch up with the rapidly evolving global financial system.
Reference
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