Nepal’s economy has been converted to the remittance based economy where remittance specially the foreign remittance, has been the lifeblood of the economy at boththe household and macro levels.
In the household economy, remittance has been a major source of disposable income, and the dependency on remittance is increasing over the period.
For example, as of NLSS 1995/96, 23% of households used to receive remittance, which increased to around 32% in 2004/05.
Similarly, in 2010/11, 56% of households used to receive remittance, and as of the latest NLSS 2022/23, 78.8% of households received remittance.
This indicates the growing dependency of remittance in the household level.
Not only has the proportion of households receiving remittance increased, but the average remittance received per household increased.
For example, in 1995/96, the average remittance per household was Rs. 15,16,0, which was Rs. 34,698 in 2004/05.
This increased to Rs. 80,436 in 2010/11, and as of 2022/23 NLSS, the average remittance received per house is Rs. 1,45,093 (nominal).
Remittance also has a significant role in the overall economy, as indicated by the remittance to GDP ratio.
For example, the remittance to GDP ratio was around 1% before 1990, which has increased to more than 25% in recent years.
The world bank have reported Nepal’s remittance to GDP ration 28.6% in 2024/25.
The remittance income has been growing over the years, which was around 1800 billion Nrs. 2024/25.
Foreign remittance has been a major source of foreign exchange, which contributed around 70 % in total foreign exchange earnings.
This implies that remittance has been an integral component of the Nepalese economy at both the household and macro levels. Such dependency on remittance has both positive and negative implications in the Nepalese economy.
Positive Impact of Remittance in Nepal
Remittance specially the foreign remittance, has played a dominant role in both the household and the national economy of Nepal.
So, it has a positive impact on the overall economy and society. The majority of them are:
- Ease out the liquidity limitation of individuals and households due to remittance.
- Increased investment in human capital, such as health, education, and nutrition, from remittance income.
- Expansion and diversification of local economic activities.
- Increased living standards and poverty reduction.
- Increased household income and investment.
- Increased FOREX reserve and improve the Balance of Payment position.
- Increase in access to ICT and improved public awareness.
- Technology transfer and development.
- Increase government revenue due to increased economic activities.
- Development of rural and community infrastructure.
- Improvement in the empowerment of women and marginalzed community.
- Improve financial literacy and decision-making.
- Minimizes the effects of external shocks such as natural disasters, covid like pandemic, etc., in the remittance-receiving household.
- Maintains exchange rate stability despite the huge trade deficit.
Negative Impact of Remittance in Nepal
Both the household and the overall economy are hugely dependent on remittance income. Such dependency has created various negative implication to the society and economy of Nepal. The majority of them are:
- Increasing risk of vulnerability due to over-dependence on remittance.
- Increasing expenses on unproductive (or less productive) sectors, such as expensive gadgets.
- Increase trade deficit financed by the remittance income.
- Increasing consumerist culture and demonstration effect.
- Appreciation of the real exchange rate of Nepalese currency and erosion in the competitiveness of Nepali products.
- Easy money syndrome, ghost town phenonema and dutch desease.
- Increasing cases of human trafficking, financial crime,s or fraud related to foreign migrations and remittances.
- Inflationary pressure due to increasing consumption demand.
- Family disintegration and higher psychological costs.
- Interest rate instability due to fluctuations in remittance income.
- Growth of illegal and informal financial activities such as Hundi, Online gambling, investment in crypto, and illegal cross-border trade, etc.
Productive utilization of Remittance income in Nepal
Productive utilization of remittance refers to remittance income not only for consumption but also for investment, human capital formation, domestic job creation, and long-term income generation.
For productive use of remittance income, the general framework consists of reducing unnecessary or unproductive consumption from the remittance income to increase the saving rate, channelizing such savings into the formal financial system, and using such money in the domestic job creation or productive sector.
Nepal is one of the largest remittance-receiving countries in terms of the remittance GDP ratio, which is more than 25% in recent years.
And so the issue of productive utilization of remittance is always there.
It is observed that the majority of remittance income goes for consumption, which is mostly import-based. So, despite the huge remittance inflows, around 1800 billion in 2024/25, Nepal is not able to utilize its productive or supply capacity.
Nepal has various policies and practices to promote productive use of remittances; however, they are not as effective as expected.
The most common policies and practices used to improve productive use of remittances in Nepal are:
- Interest premium to remittance account.
- Foreign employment bond offering a higher return than the regular bonds.
- Restriction in import of gold and other luxurious products more than some specific limits.
- Provision of a specific quota on IPO issue to the foreign migrant workers.
- Financial literacy programs for foreign migrants and remittance receiving family.
- Collateral-free loans to the returning migrants based on the project, up to a certain limit.
- Digital infrastructure to transfer remittance income.
- Counselling desk/support to the foreign migrants and returning related to the business of investment.
- Technical support to the returnee migrants and their families to establish the business.
- Incentives for brain drain and entrepreneurship are provided by some of the provincial and local governments.
Suggestion/Recommendation for the Productive Use of Remittance
Despite the various policies and incentives for productive utilization of remittance, Nepal is not able to effectively utilize the remittance income.
Since foreign migration and remittance have been inherent characteristics of the Nepalese economy in recent decades, there is an immense potential for the utilization of remittance income in domestic job creation and sustained economic growth.
As foreign migration not only brings money but also a better equipped mind, Nepal has to give priority to the productive use of remittance such as:
- Channelizing/mobilizing remittance through the formal financial system by:
- Digital and mobile-based remittance platform.
- Remittance linked saving and fixed accounts.
- Diaspora targeted banking products.
- Higher interest and fee waivers on the remittance account.
- Promote remittance-supported saving and investment products through
- Disapora bonds and foreign currency deposits
- Remittance-linked pension and insurance products,
- Long-term fixed deposits incentives through a premium rate.
- Encourage entrepreneurship and SMEs development through
- Remittance-based startup funds.
- Business incubation for migrant and families.
- Technical and financial literacy training.
- Pre-departure and post-return investment counselling.
- Local-level business advisory centers for the returnee migrant and their families.
- Skill matching and certification programs for returnee migrants.
- Promote agriculture and rural economy through remittance income, such as
- Co-operative farming and contract agriculture of the remittance-receiving household.
- Mechanization and modern farming using remittance capital.
- Agro-processing and value chain investment.
- Reintegrate the migrants who worked in the agriculture sector abroad.
- Local infrastructure and community development through:
- Community-based remittance fund.
- Dispora co-financing of local infrastructure.
- Public-private diaspora partnership.
- Integrate remittance into the national development strategy through:
- Coordination among the central bank, federal, provicial and local governments for productive use of remittance.
- Integrate the remittance utilization plan in both macro and sectoral policies.
- Collect information on the migrants related to their experience and interest, and design an appropriate policy for brain gain.
- Regular monitoring and assessment of the policies and programs to promote the utilization of remittance.