Making most of remittances: Vision and strategies - Mayumi Ozaki | Asian Development Bank

Making most of remittances: Vision and strategies - Mayumi Ozaki

Op-Ed / Opinion | 20 October 2016

Remittances are the bedrock of Nepal’s economy. They’ve quadrupled since 2010 thanks to 2 million Nepalis who work abroad, generating nearly one-third of the gross domestic product.

The net positives of this boom sector are undeniable. Remittances have reduced absolute poverty, providing households with extra money to spend on education, health and property.

Remittances are indispensable

They have kept the balance of payments in surplus for most of the last decade and the exchange rate stable despite turbulent political and economic conditions. For most young people, migrating to find work is a necessity.

There are few well-paid farm jobs, and even in the cities work is scarce due to the damage caused by the 2015 earthquake as well as ongoing political tensions.

"Remittances are an important pillar of Nepal’s economy, but long-term dependence on them should be avoided as it could curb the growth of local industries."

Remittances, then, are indispensable for Nepal at its present stage of development. But there are costs as well.

The health and welfare of those who work abroad often suffer, while the funds they send home aren’t used productively to build the kind of economy that could one day make remittances unnecessary.

It is high time for policy makers to develop a clear vision and strategies on worker migration and remittances. Measures to reduce the migration’s social cost and maximize the economic impact of remittances would help to speed the country’s development.

Safety and welfare of labor migration

The human toll exacted by remittances can’t be ignored and tackling it should be the first priority. According to the Ministry of Labour and Employment, 4,322 migrant deaths were reported in 24 destination countries during the fiscal years 2008 to 2015.

The causes of deaths include cardiac arrest, murder, suicide, traffic and workplace accidents, as well as natural and unidentified causes.

This figure does not include Nepali workers’ deaths in India, as the visa-free work status of Nepalis there makes it difficult to obtain accurate data.

While the figure may seem small compared to the huge numbers of overseas workers—over 2.6 million Nepali workers left the country for Malaysia, Qatar, South Korea and other countries during the same period—it can be concluded that the death rate among Nepali workers is high given that only healthy workers are considered for employment.

Better regulations and governance of labor migration would help to improve the safety and welfare of migrant workers. The government’s recent “free-visa, free-ticket” policy obligating employers at destination countries to pay for visa processing and flights for Nepali workers is a welcome move.

But supervision of recruitment agencies could be further improved to prohibit exploitation of migrant workers.

Enhancing protection for migrant workers

Enforceable bilateral labor agreements with host countries would enhance protections for Nepali migrant workers, and better information for workers about health and other risks at destination countries would equip them with the knowledge needed to avoid problems.

Remittances can help Nepal generate sustained economic growth and create the gainful domestic jobs needed to make worker migration a thing of the past. But at present their economic potential is under-exploited.

Generally, migrant worker households use remittances to pay debts and household expenses like food, rent, education and health, or to buy property. A relatively small portion stays in the formal financial system, limiting the opportunities for savings growth and future investment.

Remittances which leak out of the financial system are a missed opportunity for the economy to grow and for individuals to maximize their wealth.

Securing remittance flows in the country

These opportunities could be seized through the introduction of remittance-linked bank savings, bonds, and other investment instruments which could generate a pool of funds to channel into priority development projects such as roads, airports and power plants.

Nepal only has to look across its southern border to see how financial instruments can multiply the gains from remittances. The Government of India’s diaspora bonds—specifically targeted at migrants—raised $32 billion over three issues in 1991, 1998, and 2000.

Banks in remittance receiving countries have started to securitize future remittance flows to raise money.

"Remittances have reduced absolute poverty, providing households with extra money to spend on education, health and property."

JSC Kazkommerts bank in Kazakhstan raised $200 million by pledging future flows of incoming remittances as security, using the proceeds to lend to small and medium sized enterprises.

Another option for Nepal is for banks to introduce remittance-linked savings accounts in which a portion of remittances is locked into an account with higher returns until the workers return home.

This has proven successful in Sri Lanka, where the Hatton National Bank’s Adhishtana remittance-linked account gives clients incentive to send their money back home and leave it there to grow.

Financial instruments can provide stability

Such financial instruments can help provide financial security to migrant workers and their families.

And with remittances climbing 300% from 2010 to NRs 617 billion in 2015, there will likely be more than enough funds to use creatively for the broader economic good.

Remittances are an important pillar of Nepal’s economy, but long-term dependence on them should be avoided as it could curb the growth of local industries.

Smart policy choices on remittances will maximize their benefits now, while preparing for the day they are no longer needed.

Mayumi Ozaki is a specialist at ADB’s South Asia Department.