The paradox of remittances

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A report titled Current macroeconomic and financial situation published by the Nepal Rastra Bank for the first two months of the current fiscal year 2021-2022 paints a dire picture of the Nepalese economy. Merchandise imports increased 75.9% year-on-year to Rs.314.52 billion. Although exports also increased by 115.4% to 44.04 billion rupees, it is still David ahead of imports who is Goliath. The trade balance is taking an obvious hit. But it was the decline in remittances – the foreign exchange gains that finance imports and bolster Nepal’s foreign exchange reserves – that sounded the alarm. Compared to the corresponding period of fiscal year 2020-2021, remittances during the first two months of this fiscal year (mid-July to mid-September 2021) decreased by 5.8% to reach 1.31 billion of dollars.

Due to the scourge of Covid-19, global growth contracted by 3.5% in 2020. Despite health problems, supply disruptions and price pressures, the International Monetary Fund predicts that the world economy is expected to grow 5.9% in 2021 and 4.9% in 2022. The expansionary fiscal policies pursued by the major economies to compensate for the loss of production and the abundant liquidity of the banking system have led to a price surge of 44.5% in energy, 20.5% in agricultural products and 17.6% in industrial metals in the first two quarters of 2021, Bloomberg reports. Add to that escalating shipping costs, thanks to the shortage of shipping containers.

Sleepless nights

The results: Imports have become notoriously expensive, worsening Nepal’s trade deficit to Rs270.48 billion in the first two months; gross foreign exchange reserves fell 5.2 percent to $ 11.14 billion. While still able to finance imports of goods and services for 7-8 months, a dwindling reserve could trigger a stampede on the country much like a bank rush. So the decline in remittances – the only reliable source of funding that could replenish the reserve – is giving policymakers sleepless nights.

Interestingly, remittances in the first two months of FY2020-21 increased 2.6% to $ 1.39 billion from the corresponding period the previous year. It was a welcome shock to policymakers who were preparing for impending turbulence. After all, if it had not been for the constant influx of dollars from remittances, no political adjustment could save the Nepalese economy based on the consumption of imported goods from a hard landing. But where do we get these vital remittances from? With a share of over 50 percent, the Gulf countries and Malaysia remained the main remittances to Nepal. In addition to housing over 1.5 million Nepalese immigrants, they have also contributed to poverty reduction in Nepal and fostered a semblance of equity. Unfortunately, they have been hit hard by the pandemic.

Tourism, commodities and manufacturing are the foundation of their economies. Travel bans and falling commodity prices hit them hard. In addition, airports have been closed and tourist arrivals have plummeted. Supply chain disruptions have stalled manufacturing. Many Nepalese working in hotels, supermarkets and factories lost their jobs or were forced to take extended leave without pay. As the threat of Covid-19 receded in 2021, travel bans were lifted and flights resumed. The vaccinated could travel very freely. And the Nepalese workers “stranded” at home set out on the journey to the Gulf and Malaysia to continue their work. Everyone breathed a sigh of relief, including the decision-makers. But much to their chagrin, with life returning to normal, remittances have instead started to drop. What feeds the paradox?

Nepalese migrants, with the exception of those working in Western countries, do not have a path to permanent residence in their country of residence and do not have the means to keep their families with them. So many lead lonely lives but regularly recover like clockwork. Thus, the total flow of remittances to Nepal is roughly stable, depending on the Nepalese immigrant population. The only controversy is the relationship of the divisions between the formal channel and the informal channel.

Nepal maintains a closed capital account which makes the Nepalese rupee inconvertible. Thus, it is notoriously difficult to transfer wealth or income out of Nepal. But being a democracy, the movements of entry and exit of the country are not controlled. This creates a demand for US dollars abroad. And thanks to thousands of volunteer Nepalese migrant workers, the supply is also plentiful. The combination has given rise to several “offshore” markets where Nepalese can exchange rupees for dollars, with dollars collected abroad and payments settled in rupees in Nepal.

The main demands for dollars in the overseas market are to settle under-invoiced international trade, to buy gold and gadgets to be smuggled into Nepal and to invest abroad. And to finance the races of Nepalese tourists. The first three needs have been detailed over the years. The latter – a more recent phenomenon where Nepalese traveling to, say, Dubai, buy so much gold and gadgets while returning home to cover their expenses – was gaining strength by the day until the pandemic freezes travel and slows me down.

A closer look at the engines reveals the need for a typical business environment for the market. The lockdown imposed to contain the coronavirus has restricted vehicle traffic, causing a sharp decline in trade; suspended flights have stopped the smuggling of gold and gadgets; global lockdowns have discouraged foreign investment; and no chance of traveling abroad has ended any prospect of having to finance purchases. The developments have temporarily neutralized the demand for dollars in the overseas market.

Reasons for the increase

The World Bank had predicted a drop in remittances for 2020 due to widespread job losses and falling crude oil prices. But remittances to Nepal increased 8.2 percent to $ 8.15 billion in fiscal year 2020-21. Revising its forecast to reflect growth instead, the bank attributed the increase to forays into digital channels, reduced spending by migrants, and shippers’ new affinity for the formal channel.

It’s late 2021. Things are pretty much back to where we left off in 2019 before the coronavirus jumped out to infect humans. The same goes for the drivers of dollar demand in foreign markets. As a result, unscrupulous elements woke up from their slumber and started offering exchange rate bonuses to tap into dollars earned by Nepalese migrants who otherwise would have been legally sent to Nepal. Without intervention, those overseas markets that suck dollars like a vortex are here to stay.


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