Remittance and reform

Healthy remittance income that has undoubtedly averted in many ways a devastating financial crisis in the country is also providing a toxic cushion for politicians to brush aside much-needed policy reforms for boosting Nepal’s shrinking productivity and competitiveness, a World Bank study released on Tuesday has argued. This may sound odd, but there are many convincing points here. It is undeniable that remittance is the major contributor to the healthy foreign currency reserves that Nepal has long enjoyed and that has enabled it to withstand the immediate impact of a worsening balance of payments deficit.

Remittance-fed reserves have also helped the government settle its international payments obligations, such as extending import financing and repaying external debt, without much headache or effort. More than that, remittances, which currently contribute roughly one-fourth of the GDP, have greatly helped to keep consumption afloat even when the economic growth rate was flat and unemployment was rising.

It is indisputable reality that had there been no remittance inflow at the level the country now enjoys, Nepal’s foreign currency situation would have plunged into serious trouble a long time back. Under that scenario, it would have compelled the government to take urgent reform measures aimed at curbing foreign currency outflow, such as checking imports and boosting exports, through the removal of barriers that crop up in the development of the manufacturing sector. The huge reserves buildup via remittances has given ground for the government to overlook very essential reforms for tackling problems such as rigid labor laws, labor militancy and dwindling investments that have added to manufacturing sector woes.

In addition, the World Bank study has also brought out a mind-blowing ‘vicious policy circle’ of healthy remittance helping the state distance itself from economic reforms which in turn is inducing low growth, low job creation, and ultimately fueling more migration. The study also warns that the toxic combination of high remittance inflow and lack of policy reform has exposed Nepal to the risk of Dutch Disease, an unnatural growth of a certain sector that appreciates the currency and hurts manufacturing and exports. The study has rightly reckoned that remittance-fueled demand and subsequent price rises are ultimately raising the cost of exportable items, thereby leading to loss of competitiveness.

We believe that the gentle but powerful recommendation of the study that the government make migration an option rather than a necessity for survival, needs to be well taken. We have heard many good things about what remittance has done but it’s high time we made an in-depth assessment of the possible negative social and economic consequences that it might bring in the long run.

Source: MyRepublica

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