Social Sciences and Humanity Studies Academic Blog

Effect of Remittance in the Economy of Nepal – Shekhar KC

Posted in My life by Shekhar on June 7, 2012


Till 2011, Nepal stands as the fifth largest country in the world map interms of the contribution of the remittance to the nation’s Gross Domestic Product (GDP). The most visible effect of remittance flow in the country is manifested through its 23% share in GDP as stated by “Migration and Remittance Factbook 2011” of World Bank and it is expected to increase with the increasing labor migration (14.5% each year, Nepal Central Bank, 2011/12) particularly in middle east gulf countries like Saudi Arabia which stands as the second largest sources for remittance after US.



The other side of GDP

The direct impact of remittance to nation’s GDP would be only one side of the whole story, as the other side would clarify how this global phenomenon has indirectly resulted in poverty reduction, employment generation, increasing house hold income and capital formation in the nation. As Mankiw states in his book that real variables like GDP doesn’t always explain the economic activities and their consequences in real world and hence there is need of attention to other macroeconomic variables like employment and income (Mankiw, 2003, p.107).

Revenues for Government and Private Sector

Today, remittance has become an important source of revenue for government through tax and fees. These fees include fees paid by manpower companies, passport fees, value added tax and other non-tax revenues. Similarly, remittance has become an important source of revenue for private sector as well. Various recruitment agencies, agents, medical institute, orientation institute, training institute, advertisement, photograph shop, air-ticketing, local transport, hotels, restaurants etc has been collecting significant amount of revenue – Rs 107 million per day, since the foreign labor migration has become a common phenomenon.

Employment Opportunities

 Through 26 commercial banks, 2 finance companies and 45 money transferring agencies which are endowed with the responsibility of transferring foreign currency in the domestic financial market, vacancies for different senior and junior post are not a new phenomenon in different media. Expansion of airlines network and training institutes are increasing in proportion with increase labor migration. It is roughly estimated that about 0.34 million jobs are created all over the country by the phenomenon of labor migration – Foreign employment, remittance and its contribution to the economy of Nepal. These employment opportunities are to be understood in term of hotel accommodation, transport, recruitment agencies and money transfer agencies etc.


Poverty Reduction

 Nepal Living Standard Survey  III states that due to remittance and migration driven economy,  poverty of Nepal reduced from 42% (1995-96) to 25.16%(2011). A report by Dr Jagannath Adhikary and Dr Ganesh Gurung states that if there was no remittance inflow in the country then we wouldn’t have experienced the reduction of poverty by 10.9% in 2006, instead it would drop by only 4.8%.  Such reduction in poverty has helped in diversification in livelihoods, greater ownership and acquirement of assets and capitals. From the macroeconomic point of view, the remittance is the Major source of income for the 56% household in the nation.  Household income increased by just 22.4% in1995-96 while remittance has caused 70% increased during 2008. So, the household income’s contribution in increased financial capital, education of the children, social capital, and migration-specific knowledge can’t be ignored. The retuned migrant were found to have developed values like punctuality, work-ethics, gender sensitivity and productive capability.


Where is Remittance going?

The two most reported uses of remittances received are daily consumption ( 79% ) and repayment of  loans (7%). Other uses are – to acquire household property and only a small percentage of the remittances (2 percent) is used for capital formation. To be noted, such high level of consumption is met through imports causing sever trade deficit in the context when the country has a very little domestic production. Trade deficit as a percentage of GDP was 9.14 in 2000, which increased to 14.9 in 2005, and 21.1 in 2009 (Panday & Shrestha, 2011). Researchers anticipate that the situation will worsen if current situation persist.



Beside, positive role of remittance, the phenomenon of labor migration has not been free from many intricate problems that need to be addressed immediately. The problem starts from the migration process in the home country and doesn’t end in destination countries. Labors have complaints of getting cheated by agents, reluctant to work without work permit, not getting salary in time and no recreational facilities. Since most of migrants were from illiterate and rural background, they had very little power to resist the exploitation and deprivation from basic facilities like medical services and insurance.

Conclusion and Recommendations

Hence, in the context when all the government, private and public sector has acknowledged the contribution of remittance in the economy, it is high time to mainstream the foreign labor migration in government planning process. By reducing the transaction cost associated with the process, diversifying the destination countries and making it a reliable and affordable medium of earning money, government can address the problem appropriately. Also, there has been massive leakage in actual remittance inflow because most of the labor prefers to send their earning through informal channels – almost 40-50% of total remittance. So, government should plans to encourage the migrants to follow the formal channels to send their earnings. An equal attention should be given to secure the female labor whose share in total remittance is 11%.




Adhikary, J & Gurung, G. (2011). Foreign Employment, Remittance and Its contribution to economy of Nepal. Government of Nepal and International Organization of Migration

Current Macro economic situation of Nepal, 2012, Nepal Rastra Bank. Retrieved 2012-05-05 <–2069-01_Text_(Based_on_Eight_Month_Data_of_2068-69)-New.pdf>

Mankiw, N.G. (2003). Money and Inflation. worth Publishers; Newyork

Nepal Living Standard Survey. 2011. Central Bureau of Statistics; Kathmandu

Panday, A & Shrestha, PK. (2012). Parasitical State: Economic Consequence of Remittance.


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