Remittance - Is it good or bad for Nepal?

Most of us प्रवासी Nepalis regularly send money home, through formal and informal channels. Well guess what, we are contributing around 23% of Nepal's Gross Domestic Product. So, is this good or bad for Nepal?

Chandan Sapkota has published an interesting article in MyRepublica titled Costs & benefits of remittances. Rather than going into the details of what is published in that report, I'll just highlight the main points here. Absolute Poverty has declined from 31.5% in 2003-04 to 13% in 2009-10. Nominal average household income has increased by 153%. Average household incomes of the poorest has increased by 297%. So what is responsible for this impressive performance given the inability of our successive governments to bring peace and stability? Remittance! Remittance has increased by 327 percent between 2004 and 2010 (probably through legal channels). The high remittance flows from Nepalis toiling in overseas destinations has directly contributed to outstanding positive results for the average households. This is the good news.

So what is the bad aspect of increased remittances then? It leads to Dutch disease in the Nepali economy. What does this mean in simple words? It means that increasing remittances at the household level leads to high consumption demand. High demand leads to increased demand wages in all sectors which increases the cost of production of Nepali goods. This in turn leads to squeezing of profits, which means that local prices go up. As a consequence customers start looking for cheaper substitutes, thus increasing imports and reducing domestically produced tradables, thus leading to weakening of the whole manufacturing sector.

Either way, if we look at it from the ordinary household perspective, increased remittances are good for the ordinary Nepali citizen and we should congratulate ourselves for our contribution to Nepal's economy.