Nepal is a country which is closely related to remittances and migration. As a nation, Nepal is highly reliant on the cashflow generated through remittance and thus serves as a lifeline to the Nepalese economy, with 1/3 of the household income being from remittance contributing to 23% national GDP in 2019. These huge cash inflows have changed how the average Nepalis consume and invest. However, the burning question remains; Can Nepal keep on relying on these remittances to support its economy or is there a much-needed shift in the perspective of income? Using various sources of secondary data according to Nepal Living Standards Survey (NLSS III 2010/11) and Household Risk and Vulnerability Survey of 2018 and various other researches, this article investigates the role of remittances in household spending, digital financial services and investment behavior of Nepalese and their economy.
Remittances and Household Expenditure
Remittances do not merely get into wallets in Nepal. The NLSSIII survey of 5,987 households showed that an increase in remittance income, 10 per cent, raised food consumption by 0.9 per cent and annual education expenditure by 8 per cent. Meanwhile, alcohol and tobacco expenditures decreased by as much as 6-percent. These alterations are observed in matriarchal and patriarchal families, not only a certain group of people but the entire society.
Remittances are also an investment in health and economy besides providing an income. They assist in the prioritization of the basic consumption, and enhance the development of human capital, particularly to mothers. The remittance money has also not demonstrated much effect on the luxuries and investor activities like clothing, rituals, health and agriculture, a fact that was unexpected. Rather the funds are channeled to education and basic necessities.
This change in spending is correlated with the 2018 allowance of the World Bank Household Risk and Vulnerability Survey, which reports that 38 per cent of rural households get remittances. Even higher rates of remittances are given to all female headed households than the male headed. Remittance receipts are associated with 2.3 percent lower chances of a household being poor and an additional 10 percent rise in remittance receipts lowers the chances of poverty by 1.1 percent.
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Digital Banking Adoption
The rise of remittances has indirectly supported digital banking. Families who consider remittances as one of their income sources are increasingly relying on the convenience and safety of digital banking services. Moreover, over 80 percent of families that receive remittances via digital sources have been determined to utilize this service more frequently, which implies a greater degree of confidence in technology. Specifically, easy access to bank accounts, small loans, and fund transfer facilities has motivated many households to use more of the financial products and services, rather than hoarding money in accounts. This has resulted in a system with greater financial inclusion, both in the present and for the future.
Remittances and Investment Decisions
Of the many influencing factors on the use of digital banking, remittance can be considered the leading one. Remittance does have its positive side, but in the case of non-farm businesses, its effects have seemed to be weaker since manufacturing and export-based businesses require long-term planning and are much riskier. On average, Nepalese families use approximately 4% of the total remittance on education, resulting in an increase in the number of admissions in schools up to grade 10, as well as better child healthcare and life expectancy overall. However, this dependency on remittance does not demonstrate long-term financial portfolio diversification.
The Remittance Paradox
In spite of the advantages, Nepal is experiencing the remittance paradox: though inflows are causing an improvement in household welfare, they can negatively affect long-term economic growth. A time-series study (1976-2019) indicates that remittances produce no significant short-term effect on GDP per capita, and the long-term effect may be negative and a Vector Error Correction Model provides an estimate of the coefficient of remittance inflows on GDP growth at -0.2. It means that excess dependence on remittances can lead to discouragement of local entrepreneurship, inflation of real exchange rate and weakening of exports. Remittances in brief can be described as a two-sided sword, critical to the welfare of the household but not enough to build a sustainable nation.
Lessons from Abroad: Estonia as a Model
Taking Estonia as an example, even though this country in Europe has a small economy, it does not rely on remittances as its main source of income but rather uses a unique approach of investing in digital infrastructure and developing skilled human resources. Remittances are still a part of the Estonian economy, but most of it has been invested efficiently to boost technological advancements, which are also exported. At present, Estonia has a highly developed digital economy along with technological advancements. This is where Nepal can learn to slowly become independent of remittances by influencing the overall economy and foreign currency reserves through investing remittance inflows in long-term productive sectors and fostering skilled human resources.
The Future
To achieve sustainable growth in Nepal, there is a need to change the usage of remittances towards consumption and investment funding. Although the nation has achieved and is still achieving a lot in driving the trend of digital banking and financial inclusion, its true potential lies in channeling these inflows into formal savings, entrepreneurship, and investment. Small- and medium-sized businesses, agriculture, and technology can be assisted by increasing investment in digital financial infrastructure and creating credit and investment products based on remittances. Also, education and training financed by remittances should be in accordance with the domestic labor market in the particular borrowing country. Remittances will be a driver of sustainable and inclusive economic growth rather than a permanent source of dependency with proper policies.
Conclusion
Undoubtedly, remittances have brought a positive change in the lives of Nepalese households, increasing food consumption, financing education, and promoting digital banking, contributing to poverty reduction. Nevertheless, these inflows cannot be relied on and do not ensure growth of the economy in the long run. Nepal can make the most of remittance money through investing it in productive and high paying businesses, enhancing its digital financial infrastructure, and promoting the growth of entrepreneurship. Nepalese remittances are yet to be told. Will it remain a net recipient country, or can the country leverage this financial lifeline to create, invest and grow sustainably? The responses may define the economic future of the country over several decades.
