Remittance is buoying a crises-ridden economy

Our economy is not in the best of shapes as relevant indicators suggest. 

According to the macroeconomic report of ADB, the GDP growth rate was 1.9 percent in 2023, which is lower than the average growth rate of the current decade. Agriculture and manufacturing sectors are going from bad to worse, a far cry from the times when both sectors were booming. In 2023, the growth rate of the agriculture and the manufacturing sector was 2.7 percent and 0.6 percent, respectively.

The country is importing food and grains to meet a growing demand, in urban areas as well as in villages. This points at a large scope for growing crops for consumption in villages, mainly in the hills where farmlands have been lying barren for decades. Reviving the farm sector will require structural transformation through the use of modern methods, including enough investment and incentives.

Despite deepening dependencies, a mid-term evaluation of the budget and monetary policy for the fiscal year 2023-24 shows economic indicators on a positive trend. Among others, Nepal has reasonably healthy foreign currency reserves, providing some relief to the government. 

There will surely be differing views vis-a-vis comfortable forex reserves, but I think it will have stronger negative effects than positive ones. In all likelihood, excess forex reserves will raise both liquid and total debt, pull interest rates down, cause a decline in consumption and move labor to tradable sectors from non-tradable ones.

In this context, it will be relevant to put forth some of the findings of the fourth living standard survey. 

Per the survey, the last 12 years have seen a meager reduction in poverty. 

Estimated on the basis of threshold per capita per year income of Rs 19,261, a quarter of the population (25 percent) was under deprivation in 2011. On the contrary, the poverty rate is being calculated on the basis of the threshold per capita income of Rs 72,908 per year in 2023. This level of income was considered as the minimum income required to fulfill basic needs of the people such as food and non-food items. On the basis of this threshold income, the poverty rate has come down to 20 percent, a  paltry 0.16 percent reduction in 12 years. 

Per the survey, Far-Western and Gandaki provinces have the highest (34.16 percent) and lowest (11.88 percent) poverty rates, respectively. Also, poverty runs deeper in rural areas than in urban areas. The poverty rate in rural areas is 24.66 percent against 18.34 percent in urban areas, according to the findings of the survey. These data stress the need for serious efforts to reduce poverty, which is pervasive and deeply-rooted.

Notably, there is a significant change in consumption expenditures between the third and fourth living standard surveys.The average expenditure on consumption of nonfood and food items was 38 percent and 62 percent, respectively in the third survey. It stands at 47 percent for nonfood items and 53 percent for food items in the fourth survey, showing that people have increased consumption expenditure on nonfood items compared to food items over 12 years. The household consumption expenditure as percentage of GDP in 2023 was 88.2 percent while the same was 85 percent  in 2011, an increase of 3.7 percent. It reveals that Nepal has consumed all of its income rather than making long-run investments for achieving sustainable development goals.

In 2011, remittance inflow stood at $4.22bn while in 2023 it swelled to $9.3bn, marking an increase of a whopping 120 percent in 12 years. In 2011, remittance’s contribution to Nepal’s GDP was 19.54 percent, which soared to 22.7 percent (an increase of 16.1 percent) in 2023. During the 12-year reporting period, the poverty rate has come down to 20 percent from 25 percent. 

Apparently, remittance inflow is behind a marginal reduction in poverty and increased forex reserves. 

Without a doubt, a constant inflow of remittances over the past 2-3 decades has been keeping the Nepali economy afloat.