Worker remittance inflows have been paramount to Nepal’s ongoing economic development. Contributing 32% of the Gross Domestic Product (GDP) in the fiscal year 2015-16 as per Nepal Rastra Bank (NRB) data, the country is heavily dependent on this form of disposable income in order to sustain growth, reduce poverty, and maintain a surplus in its balance of payments. However, the country currently appears to be faced with a slowdown in the growth rate of remittance income, as revealed by the chart below, resulting in almost stagnant remittance income inflows in recent years. While the year on year growth rate of remittances was 25% in 2013-14, it dropped to 13.6% in 2014-15 as per NRB data. There was a positive influx of these inflows at the time of the Nepal earthquake in April of 2015, but even then the year on year growth rate fell to 7.7% in 2015-16.
Exhibit 1 – Remittance Income and Remittance Income Growth, Nepal.
2010/11 – 2016/17
The section below explores key causative factors that have led to and will continue to lead to weakening outmigration and remittance growth slowdown.
- Oil Price Slide and Resultant Layoffs in Gulf Cooperation Council (GCC) Countries: GCC countries that are highly dependent on oil and gas export revenue have had to weather the negative impact of sliding oil prices. Consequently, there have been layoffs in order to compensate and adjust to these low prices. With GCC countries employing the maximum number of migrant workers from Nepal, contraction in remittance flows from these countries is likely.
- Consequence of Free Visa Free Ticket Scheme: To curb the exploitation of migrant workers and reduce the cost of migration, the Nepal government introduced the “Free visa Free Ticket” scheme in June 2015. Under this scheme the foreign employer was responsible for bearing the visa and air travel expenses on behalf of the workers. In case of refusal, the recruitment agencies were only permitted to charge a maximum of $95.3 (Rs 10,000) for their services. Consequently, foreign employers are looking into other markets for recruitment of workers, refusing to accept the terms relating to the scheme.
- Malaysian Ban on Foreign Worker Recruitment: The Malaysian government suspended the recruitment of foreign workers into the country in February 2016 in order to provide opportunities for its citizens. Despite the ban being lifted in May 2016 for some industries such as manufacturing, plantation, construction and furniture making, due to labor shortages, the impact of the overarching ban is evident given the slowdown of migration to Malaysia and resultant contraction in remittances to Nepal. From being an employer of 40% of Nepal’s migrant workers in 2014-15, Malaysia only employed 15% of the country’s migrant workers in 2015-16.
- Reducing Demand for Workers Post Qatar World Cup 2022: Qatar is in the midst of preparing itself to host the 2022 FIFA World Cup. With nearly $500 million per week on major infrastructure projects, $500m per week, the numbers of employment opportunities have spiked. However, closer to 2022, as the construction activities begin to wrap up, the demand for workers is expected to fall drastically. Consequently, Qatar, employing almost 31% of its migrant workers from Nepal, might not be able to support as many workers post the World Cup, resulting in a slowdown in remittances from Qatar. Moreover, the current e diplomatic isolation of Qatar appears to be encouraging workers to branch out to other countries for employment.
The slowdown in migration and contraction in remittance growth will have damaging ramifications on Nepal’s economy. The negative outcomes of this reduction in remittance growth will first manifest itself through a fall in consumption, given that remittances are used to purchase both local and imported goods. Lesser government revenues, resultant of a dip in imports and contraction in import duties, would constrain the financing of government projects, thus hindering the growth of the country. Additionally, an increasing number of families are expected to be pushed below the poverty line, as these inflows are their key source of income. Slower remittance growth also stands to negatively impact the country’s foreign exchange reserves and lead to a current account deficit. Furthermore, remittance growth slowdown will also have a negative bearing on the country’s GDP growth.
The country’s banking sector already appears to be facing a liquidity crisis, and remittance woes will only exacerbate the situation. To tighten liquidity in the market, NRB set the Credit to Core capital cum Deposit (CCD) ratio at 80:20. Additionally, it is possible that more incentives are offered in order to reduce the cost of money transfers through both formal and informal channels. Whatever be the course of action, prioritization of this matter is the need of the hour so as to mitigate the domino effect stemming from a reduction in remittance inflows.