© Arunodaya No.

14 2010

Remittance inflow to Nepal: The Lifeline or a cause of Trade Deficit?

Shashi K. Chaudhary

BACKGROUND
The flow of labor migrants from Nepal to work abroad has increased dramatically over the
last decade and so is the flow of remittance into the country. The magnitude of official inflow of
remittance to Nepal has exceeded NRs. 227 billion. If the present trend continues, it is easy to
speculate that remittance will occupy a major share of GDP in Nepal. In spite of such a huge
amount, remittance has not been desirably successful to meet the major twin goals of the
economy; i.e. poverty alleviation and sustainable development from any side; neither from
concerned authorities nor households that receive it. That's why the foreign employment and
remittance has become an interesting issue to be discussed and analyzed.
In a study (Chaudhary, 2007: p.86-87), it was found that the use of remittance for family
consumption was 20.78 percent and the purchase of durable goods and ornament was 22.08
percent. Only 6.49 percent of the received remittance was used in business and trade. These
figures show how important remittance income has become for the consumption and to fulfill the
needs of households. Though these expenditures are non-productive with no lasting impact on
country’s real income in macroeconomic terms, they possibly have contributed to the welfare and
improved livelihood of recipient households. A study conducted by IMF (2005) shows that
remittance has caused 11 percent fall in poverty level in Uganda, 6 percent in Bangladesh and 5
percent in Ghana. In their study, Adams and John (2003) found that if the contribution of
remittance in the GDP increases by 10 percent, poverty decreases by 1.6 percent (quoted in Shah,
2007: p.48). A similar argument can be raised in Nepalese case too. In 1993/94, the share of
remittance to GDP stood 1.81 percent while it became 10.92 percent in 2003/04. During this
period, the poverty level has fallen from 42 percent to 30.85 percent (MOF, 2009: p.79).
After all, it is important to understand how households have viewed the remittance:
whether as transitory income or permanent income, because the effect of remittance on the
household current consumption would depend on this perception. If they view the remittance
income as transitory gain, their current consumption will remain unaffected and if they expect
the remittance income as a permanent gain, then, certainly it would affect their consumption, but
only marginally as its effect would be distributed over a number of years.

INFLOW OF REMITTANCE TO NEPAL

The remittance amount began to take shape in Nepal only after 1986/87. In this fiscal year,
Nepal received NRs 1,292.6 million worth remittances from India and abroad which ballooned
up to NRs 227453.9 millions in 2008/09. The increasing volume of remittances and its
contribution to the national economy in the recent years is reflected in the increasing remittance
to GDP ratio. The average contribution of remittances to GDP was just 1.51 percent till 1986/87.
Until 1998, it fluctuated around 3 percent, but in the very next year it rose to 11.67 percent. At
present, it has become a major component of the national economy contributing about 24 percent
of GDP (Table 1).
Table 1: GDP, Remittance and Share of Remittance to GDP
(in million NRs.)
FY GDP Rm Rm/GDP Tdef Tdef/GDP
1974/75 16571 204.3 1.23 925.00 5.58
1986/87 61140 1292.6 2.11 7893.8 12.91
1998/99 330018 10314.6 3.13 51849 15.71
1999/00 366251 42759.1 11.67 58682.2 16.02
2000/01 441519 47216.1 10.69 60033.1 13.60
2001/02 459443 47536.3 10.35 60444.2 13.16
2002/03 492231 54203.3 11.01 74421.5 15.12
2003/04 536749 58587.6 10.92 82366.4 15.35
2004/05 589412 65541.2 11.12 90767.9 15.40
2005/06 654055 97688.5 14.94 113546.2 17.36
2006/07 727089 100144.8 13.77 135311.5 18.61
2007/08 818402 142682.7 17.43 162671.2 19.88
2008/09 960012 227453.9 23.69 209321.0 21.80
Source: Various issues of Economic Survey, Ministry of Finance, G/N.

There is no doubt if it is said that remittance has contributed substantially to maintain the
macroeconomic stability of Nepal. In recent years, the remittance has taken the lead in the
external sector. Since last few years, remittance income is playing a main role for the foreign
currency earnings and favorable impact on Balance of Payments and ultimately to reduce the
number of people in the country below the poverty line (MOF, 2004/05: p.146). That’s why, it is
often said to be the lifeline for the Nepalese Economy. On contrary, the biggest contribution of
remittance in Nepal has been reported to be in the welfare and improved livelihood of the
receiving households. This indicates that the major parts of the remittance income have been
utilized for family consumption. Since Nepal does not have sufficient domestic production, this
aspect of consumption may lead to the trade deficit facing the nation.

ANALYTICAL PLATEFORM

In this article, I have tried to bring forth the question whether remittance income has played
the role of lifeline for the Nepalese economy or is the cause of trade deficit as well. The nominal
per capita household consumption (PCPC) has been chosen as an indicator of welfare over
household income since the objective of individuals and households, according to economic
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theory is to maximize utility through the consumption of goods and services, subject to a budget
constraint.

To confirm the inter-relationship between per capita household consumption and the
remittance income, Srivastava and Chaudhary (2010) estimated the first difference VAR
equation1 which is as follow:

ΔLNPCPCt = 0.07 + 0.10 ΔLNPCPCt-1 + 0.06 ΔLNRMt-1 ………… (1)

(0.61) (1.76)

The coefficient of ΔLNRMt-1 is only significant at five percent level and therefore is
different from zero. This indicates presence of effect of remittance on the per capita consumption
and the relation is positive. Further, the Granger-causality test in first difference VAR shows that
Granger causality runs one-way from ΔLNRM to ΔLNPCPC. Hence it can be concluded that
remittance income do have effect on the per capita private consumption. This supports the
tentative conclusion of the equation (1). Further, in the equation (1), the effect of remittance
income on the per capita private consumption is marginal (0.06), the model therefore suggests
that the remittance income has been treated as permanent income and has mostly been spent on
durable goods and services.
When we see the composition of materials that occupy major portion in the import are
petroleum products, gold and transport equipments. All these three items are directly or
indirectly connected with the remittance income. The demand for bikes and cars (it is believed
due to excess remittance inflow) has unevenly increased in recent years and so is the demand for
petroleum products. Similar is the story of gold. Not only this, faster rate of residential
construction works has also put due pressure on the BOT imbalance. This correlation is also
observed in the share of remittances and the trade deficit respectively (table 1). The simple
regression analysis suggests that one percent increase in share of remittance to GDP would
increase the share of trade deficit to GDP by 0.53 percent. This figure is statistically significant
at one percent level. In the equational form,

Tdef/GDP = 9.64 + 0.53 Rm/GDP …………….. (2)

(7.3) (4.98)

CONCLUSIONS

1
This equation has been borrowed from “Foreign Employment, Remittance and Household Welfare: A case of
Nepal” (2010), Working Paper by N.L. Srivastava and S.K. Chaudhary, Prithvi Narayan Campus (TU), Pokhara.
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 The empirical analysis shows that the per capita private consumption is marginally affected
by the remittance income. Further, one percent rise in remittance income has influenced per
capita private consumption by only 0.06 percent. In the light of permanent income hypothesis, it
has been concluded that households perceive remittance as permanent income and spend them on
durable goods and services. Of course, such behavior would raise their living standard; but it
would not help the national economy to be self-sustainable. As the major durable goods are
imported goods for Nepal, this kind of practice would lead to long run trade deficit. Its long term
effect would make the nation dependent on others for imports. Therefore, there should be a
national level and nation-wide discussion on the productive use of remittance.

REFERENCES
Chaudhary, S.K. (2007). Role of Remittance in Economic Development of Nepal. An
unpublished M. A. Dissertation submitted to Department of Economics, P.N. Campus, Pokhara.
MOF (2005 to 2009). Economic Survey. Kathmandu: G/N.
NRB (2008). A Handbook of Government Finance Statistics. Kathmandu: Research Department,
Government Finance Division.
Shah, R. K. (2007). Impact of Remittance in Nepalese Economy, Nepali. Kathmandu: Mirmire,
5(276): p. 42:52.
Srivastava, N.L., & Chaudhary, S.K. (2010). Foreign Employment, Remittance and Household
Welfare: A Case of Nepal. Working Paper, Prithvi Narayan Campus (TU), Pokhara.

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