Rocketing remittances

Billions of dollars from overseas workers will be key to rebuilding Nepal’s ravaged economy

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When it comes to remittances received as a proportion of a country’s gross domestic product (GDP), Nepal is among the best in the world.

In 2014, the 2.2 million Nepalese who work overseas sent remittances that amount to about 25% of the small Himalayan country’s GDP. On GDP terms, Nepal’s remittance inflow lagged only Tajikistan and Kyrgyz Republic, sharing the third place with Moldova. Estimated at over $4 billion annually, remittances were nearly double the country’s revenues from exports of goods and services.

And these remittances, which are likely to spike after the disastrous earthquake on April 25, will be key to rebuilding Nepal’s ravaged economy.

The economic loss caused by the earthquake is estimated to be anywhere between $1 billion and $10 billion, according to the US Geological Survey’s best estimate. Rajiv Biswas, chief Asia economist at IHS, reckons that rebuilding costs could easily exceed $5 billion.

External funding will be critical to rebuild critical infrastructure like roads, highways, power plants and even tourist attractions.

The high proportion of remittances in Nepal, which have been rising since 2010, is a result of a huge migration of workers to foreign countries, driven by a lack of employment opportunities at home.

Thanks to a stagnant economy growing at around 5% annually and political deadlock that has prevented necessary spending, the unemployment rate in the country hovers above 40%. The majority of the labour force in the country is engaged in agriculture, while the tourism industry contributes about 7% of the total jobs.

Nepal’s overseas migrant workers are mostly employed in the Middle East—there were 150,000 Nepali workers in 2012 in the United Arab Emirates alone. Many work as unskilled labour in the construction industry.

Remittance reaction

Not surprisingly, there seems to be a pattern between the amounts of money that foreign workers send back home, and the timing of natural disasters in their home countries. A 2009 study by the World Bank (pdf) found that remittances typically increase after a natural calamity hits an overseas worker’s home nation. “Migrant remittance flows increase in the aftermath of natural disasters, macroeconomic or financial crises, and act as a safety net for households that have migrants abroad,” the study said. 

Sanket Mohapatra, a former senior economist with the World Bank and one of authors of the study, explained that Nepal’s emigrants collectively possess significant financial resources, which could be of substantial help to the country.

“Migrants actively help their family, friends, and communities when a disaster strikes and remittances sent by migrants played a positive role after several disasters in the past,” Mohapatra said in an email.

For instance, the study points out that the survey of households in four villages in Pakistan after a devastating earthquake in 2005 revealed that migrant remittances were important factors in disaster recovery and reconstruction. Indonesia’s Aceh region, too, recovered faster from the tsunami in 2004 because of migrant remittances.

Remittances increased in India, Bangladesh, China and Mexico after natural disasters, the study found:

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Nepal-earthquake-remittances-natural-disasters
(World Bank)

Connel Fullenkamp, an economics professor at Duke University, agreed that remittances increase in the wake of a natural disaster, but said it was a mistake to assume the money would go to long-term projects:

“Remittances are motivated by altruism on the part of the people who send money home, so it’s natural to expect that they should increase in the wake of a disaster when family members are in special need,” Fullenkamp told Quartz in an email.

This money can only help the long-term economy if it is invested in activities like education and starting or expanding businesses, he said. “But most remittances are not spent this way, since they are primarily intended to support the day-to-day expenses of the family,” he added.

As Nepal begins a long-drawn reconstruction effort, it must find a way to utilize the incoming remittances efficiently. After all, they amount to a quarter of the country’s GDP.

This article is a part of Quartz India. For more, follow this link.

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