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Economy

Remittances keep Nepal's shaky economy afloat

Ramesh Kumar Thapa and his wife Bimalathaba, together again temporarily in Kathmandu while he applies for work. (​ Photo by Peter Janssen) ​

KATHMANDU -- Ramesh Kumar Thapa, 34, lost his job in Saudi Arabia a few months ago and is now back on the labor market in Kathmandu. "I returned to Nepal four months ago, but there are no jobs here so I'm looking for work in Qatar," Thapa said.

Thapa worked for 18 months in Saudi Arabia, screwing light bulbs into public lamp posts in Jeddah. "One day the company's manager came and said I didn't have a job anymore," he said. "I stayed there three months without work before coming home. When I was transiting in Doha I met a lot of Nepalis who said there was still work in Qatar."

Like most Nepalis seeking jobs abroad, Thapa is using a manpower agency to secure work in Qatar, where the foreign labor force (equal to 91% of the population, according to the World Bank) is predominantly from Nepal. Thapa estimates that he will need to pay the job agency at least 50,000 to 70,000 Nepalese rupees ($468 to $656) to secure work in Qatar, even though the government has set a limit of 30,000 rupees on the fees charged by manpower companies.

IME Money Express handles $1 billion in Nepali remittances a year. ​(Photo by Peter Janssen)​

"Until the government runs this business on their own, there will always be corruption and people will get fleeced by the agents. Poor people like me are supporting the manpower agents, the banks and the government. It's ironic," Thapa said.  

Nepal, a land-locked mountainous country, is ranked among the world's least developed nations. The country's gross domestic product in the fiscal year to July 15, 2016 was $22 billion, up a paltry 0.7% compared with the previous year. Nepal suffered two earthquakes in April and May 2015 that killed more than 8,000 people and destroyed about 800,000 houses and buildings. It was also hit by a 135-day trade disruption with India between September and January that severely limited trade flows. India accounts for about 65% of Nepal's trade.

Despite these calamities Nepal's banks reported an average jump in net profits of 25% in the fiscal year over the previous year, according to the Nepal Bankers' Association. The central bank meanwhile notched up an increase of 26.1% in foreign exchange reserves to 1,039 billion rupees -- enough to pay for 18 months of goods and services imports.

Nepal's economic secret? Remittances.

"The bright side for the economy last year was the remittances which came up to cushion the shock," said Damir Cosic, World Bank country economist for Nepal. Remittances from an estimated 4.5 million Nepalis working abroad, excluding India, amounted to 650 billion rupees, accounting for 29.6% of Nepal's GDP, the central bank says.

These were only the official remittances that went through formal channels. There are another estimated 3 million Nepalis working in neighboring India, sending home another $2 billion to $3 billion annually, albeit in Indian rupees that do not always make it in to Nepal's banking system, according to groups that track migrant labor. In total, more than half of Nepal's labor force of 14 million people is employed abroad.

Flow may be slowing

After the earthquakes in 2015, Nepal's hard working migrant workers in the plantations of Malaysia and construction sites of the Middle East remitted larger portions of their salaries to help their families, many of whom had lost their homes and possessions. Of the 800,000 buildings damaged by the earthquake the majority belonged to poor people. Only 17,000 had insurance. In June, 2015, two months after the first earthquake, remittance inflows shot up by 11% year-on-year, according to World Bank estimates.

Handling remittances from migrant workers to developing economies is a big business worldwide, according to the World Bank, which estimates that global remittance flows amounted to $432 billion in 2015. But there are signs that the flow is slowing, especially to Asia. Remittances to India, the world's largest recipient country, fell by 2.1% to $68.9 billion.

In the same period remittances to Nepal jumped an annual 20.9%, before slowing in the first half of 2016. For the Nepalese fiscal year ending this July, the total remittance flow was up by about 7%, less than half the 15% growth rate a year earlier. The slowdown occurred partly because fewer Nepalis were migrating: The average departure rate of migrant workers was 35,000 a month in 2015-16, compared with 45,000 in the previous fiscal year, according to official data.

Nepal's Department of Passport made about $150 million off passport sales to workers last year, or 2-3% of all revenues. ​(Photo by Peter Janssen)​

"It is a worry because the foundation of the economy is on the remittances," said Sashin Joshi, CEO of Nabil Bank, Nepal's leading private sector bank by profits and assets. "I don't expect we'll see a decline in the next two years, but maybe it will be visible five years down the road and if we don't do something about this we will see some problems."

All Nepalese banks are highly dependent on fees from remittances, which are paid on transfers to the country from abroad and on subsequent transfers within the country. Nepal also has a number of very successful money transfer companies. Set up in the early 2000s, IME and Prabhu Money Transfer each handle about $1 billion a year in remittances, working through liaison offices in Malaysia and the Middle East, with thousands of agents in Nepal.

However, there is room for the formal banking system to capture more of the remittance flow, much of which is now handled by Hundi, or illegal money operators. In South Korea, for example, thousands of Nepali workers earn a total of about 43 billion rupees a year, of which only 3 billion is remitted though legal networks, in part to avoid Seoul's restrictions on foreign exchange leaving the country.

Laundered money

"For people working in Korea, Hundi people collect money from Nepalis working there and they transfer the funds to maybe Hong Kong, let's say," said IME's Chief Executive, Suman Pokharel. "The beneficiaries of the remittance need to get their payments so the Hundi has another corridor here in Nepal. And where do they get their cash? From the money that is there from avoiding taxes and other illegal activities. It is laundered money."

Nepal has a large informal economy, estimated by one senior local banker at the equivalent of 30% to 40% of GDP, which is based on illicit gains from smuggling and under-invoicing on legal imports.

Remittances also fuel imports of consumer goods such as motorcycles, smart phones and electrical appliances, mostly from India. Consumption accounted for an estimated 94.7% of GDP last fiscal year, according to the Asian Development Bank. Government coffers benefit from this through customs duties on imports, and from sales of passports to would-be migrants, which cost $100 each. The Passport Department earned $150 million from passport sales last fiscal year, amounting to between 2% and 3% of government revenues, according to Sujeev Shakya, founder of Beed Consult, a Nepal-based business advice group.

"Remittances are the transformative flow for the Nepalese economy, as they support the domestic consumption, savings and overall growth in Nepal via ever growing service sector (50% of GDP)," the World Bank said in a recent report entitled "Remittances at Risk." The report added: "Remittances are estimated to constitute a quarter of the income of all households, and almost two-thirds of the income of those receiving money from abroad." 

Despite the World Bank's warning, the jury is still out as to whether remittances are really "at risk" in Nepal. The sharp fall in global oil prices has led to cuts in construction projects in Saudi Arabia, where some 67,000 migrant workers are reportedly now stranded without work. But in Qatar, which is gearing up to hold the soccer World Cup in 2022, construction is still going on apace.

"Nepalis will find new markets," said Shakya, whose book "Unleashing Nepal" provides a graphic analysis of Nepal's recent economic history and the challenges ahead. "They keep finding new places to go," he added. "In Portugal, there are about 45,000 Nepalis."

The bigger question for Nepal's governments (there have been many in the past 20 years) is whether they can get the country's affairs sufficiently in order in the next few years to build the infrastructure and develop the policies that are needed to attract investments in new forms of local production. That might create the jobs needed to keep Nepalis at home instead of seeking new, and often dangerous, pastures abroad.

"People have all sorts of bad experiences working abroad, but they don't share their suffering with their families," Thapa said. "They work abroad because they need to pay off their debts and there are no jobs in Nepal."

While Thapa has no more dreams for his own future, he and his wife Bimalathaba still have some hopes for their son. "My son asks me why his father isn't here, and I say, 'He's working abroad to finance your education'," Bimalathaba said. "We want him to get an education so he won't need to work overseas like his father."

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