Remittance inflow: How to capitalise on it

Remittance inflow: How to capitalise on it

Remittance inflow: How to capitalise on it

Remittance incomes have contributed positively to poverty reduction, economic growth and social development by primarily supporting the rural population in fulfilling basic needs and enabling investment in housing, health and education

Illustration: Ratna Sagar Shrestha/THT

Remittances are an important source of income for migrant families across the world. According to the International Fund for Agricultural Development (IFAD), an estimated 800 million people worldwide are directly supported by remittances from relatives and loved ones abroad. These flows have surged five-fold in the past 15 years.

In 2017, an estimated $613 billion was dispatched by migrant workers to their families, of which $466 billion was for developing countries. Although remittances are second only to foreign direct investment (FDI) inflows in terms of scale, they are more than three times larger than official development aid (ODA) and eight times larger than private capital.

Moreover, remittances are steadier and more reliable than both ODA and FDI. While ODA and FDIs fell significantly during the global financial crisis, remittances remained steady. This resilience can be, to some extent, be attributed to their counter-cyclical nature: when a disaster or economic crisis happens in migrant workers’ home countries, these workers dispatch more remittances than usual to save their families from unfavourable economic conditions. Hence, these flows function not only as an additional source of income for the receiving households, but also as a cushion for adverse externalities, which enable receiving households to smooth their consumptions.

While at the macro level remittances form an important source of external financing for many developing economies, at the micro level they can support investments in health, education or small businesses. Remittances also contribute by lowering poverty, promoting food security and facilitating access to adequate housing. As remittances are basically personal transactions from migrants to their friends and families, they tend to be well targeted to the requirements of recipients.

As a first step towards financial inclusion, these financial flows render an opportunity for families to save and invest, raising income and generating jobs.

It had been argued until recently that the majority of remittances are generally spent on consumption and only a small portion is utilised for productive investments. In recent years, however, researchers treat spending on health and education by remittance-receiving households as investments in human capital, for in the long run, those will improve the skills level of the country’s labour force. In this aspect, remittances are not only for consumption but also are contributing to the productivity of the country.

Apart from contributing via financial remittances, transnational communities also contribute by way of “social remittances”, that is, the flow of skills, knowledge, ideas and values that migrants transmit home. The impact of social remittances is generally witnessed in areas such as education, health, employment and business. There is also a broader development impact, when the recipients of social remittances extend beyond the migrants’ immediate circle of relatives and friends to the wider community beyond. Excluding the obvious benefits of remittance inflows, it is, however, contended that the continuous inflows of remittances could lead to adverse situations for an economy through brain drain and export of labour force, over-dependency on the external economy, inflation, higher voluntary unemployment and exchange rate appreciation.

Over the years, Nepal has benefited by exporting its labour abroad, especially to the resource-rich economies of the Gulf and Malaysia, leading to an upsurge in remittance inflows which played a pivotal role in keeping afloat Nepal’s economy. Workers’ remittances in Nepal rose by 8.6 per cent to Rs.755.06 billion in 2017/18 in comparison to its growth of 4.6 per cent a year ago.

Remittance transfers can work as a lifeline for the recipients in Nepal, particularly those in the rural areas. These incomes have contributed positively to poverty reduction, economic growth and social development by primarily supporting the rural population in fulfilling basic needs and enabling investment in housing, health and education. Without remittances, a large number of families in the rural areas would not have had access to proper nutrition, health care or education.

Though remittances have also been contributing positively to the economy by generally maintaining surplus in the balance of payments, the economic benefits have not yet fully materialised. This is because the recipients tend to spend remittances on necessities, education and health and are left with little to invest in financial instruments or other income-generating opportunities. This state of affairs is largely ascribed to the lack of suitable financial instruments as well as insufficient knowledge and financial literacy among migrants and their families.

Still, financial institutions have a vital role to play in leveraging remittances into assets as financial services (such as savings, loans, insurance and investments) to help families cope with or better alleviate risks and diversify their physical, financial and productive assets.

Efforts by policymakers and the private sector to advance financial inclusion with policies specifically targeted and customised to the needs of remittance families can have a multiplier effect on remittances and savings to the benefit of senders, receivers and their communities.

– The Himalayan Times


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