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Productive use of remittances: To spur economic growth
Efforts to augment the volume of remittances should also be facilitated by efforts in directing remittances to more productive uses for sustainable reduction in poverty. If remittances are utilized for improving skills and productivity of the recipients‚ they will have more sustainable impact on improvements of standard of living.
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BHUBANESH PANT
Efforts to augment the volume of remittances should also be facilitated by efforts in directing remittances to more productive uses for sustainable reduction in poverty. If remittances are utilized for improving skills and productivity of the recipients‚ they will have more sustainable impact on improvements of standard of living

Globally, remittance flows have attracted growing attention in the international discourse, partly owing to their magnitude and stability in the positive growth trend in recent years. A growing consensus is emerging that remittances constitute a significant source of external financing, whose availability, if dealt with appropriate policies, could be particularly valuable for capital-scarce developing countries. Remittances to developing countries are estimated to have risen by 5.0 per cent to reach US$ 435 billion in 2014 and go up further by 4.4 per cent to US$ 454 billion in 2015.

The benefits of remittances are well documented in the literature. Remittances are more predictable as compared to other financial flows and, more importantly, they are counter-cyclical providing buffer against economic shocks. In conflict or post–conflict circumstances, remittances can be crucial to survival, sustenance, rehabilitation, and reconstruction. In providing primarily for household livelihoods, remittances are spent on general consumption items in local communities that contribute to local economies by backing small businesses. A reasonable proportion of these expenditures is directed to the construction of homes, health care and education, together with savings in financial institutions, thereby creating employment in these services sectors.

Moreover, in contributing to foreign exchange earnings, remittances can spur economic growth by improving sending countries’ creditworthiness and expanding their access to international capital markets. However, the impact of remittances on poverty has stimulated considerable debate.

Studies that argue against remittances having poverty-reducing impact indicate that because of the high transaction costs of migrating, the ‘truly poor’ do not migrate. While this argument may have some merit, it has little evidence as a number of studies from different countries have illustrated that the ‘very poor’ and the ‘poor’ do migrate.

With respect to Nepal, remittance flows into the country increased by 25 per cent and aggregated Rs. 543.29 billion in 2013/14 compared to an increase of 21 per cent in the previous year. Remittances to GDP ratio stands at almost 30 per cent, putting Nepal among the top three recipients in terms of size of the economy. During the first five months of 2014/15, remittance inflows amounted to Rs. 227.20 billion.

Remittances in Nepal have been utilized for various purposes, though principally for daily consumption and repayment of loans. However, the degree of usage varies among different surveys. According to Nepal Migration Survey 2009, recipients of remittance in Nepal use it primarily to purchase the basic needs such as food and clothing (54 per cent), followed by paying off debts (22 per cent) while only a negligible amount went towards investment (constructing a house, land purchase and education—5 per cent in each case). Likewise, according to Nepal Living Standards Survey 2010/11, the two major uses of remittances are for daily consumption (79 per cent) and for repaying loans (7 per cent). Other uses are to purchase household property (5 per cent) and for education (4 per cent). Only a small percentage of the remittances (2 per cent) are employed for capital formation, and the rest (3 per cent) is used for other purposes.

Many factors are responsible for the less productive utilization of remittances in Nepal. These include a) lack of promotion support in terms of information, advisory, training and other services pertaining to investment in new and potentially successful sectors, b) less risk involved in the purchase of land and construction of houses, c) lack of knowledge on investment opportunities, d) top priority accorded to household expenditure, and e) lack of expertise in the remittance receiving household for undertaking a business.

The Government needs to formulate policies that encourage the use of remittances to promote longer-term growth and income security. These include a) allowing more remittances to be sent through official rather than unofficial mechanisms, b) increasing the levels of remittances by encouraging migrants to hold their savings in financial assets in the country rather than holding them abroad, and c) encouraging migrants to become investor in productive assets in the country. Financial literacy courses could act as a powerful tool in raising awareness about remittance utilization.

Efforts to augment the volume of remittances should also be facilitated by efforts in directing remittances to more productive uses for sustainable reduction in poverty. If remittances are utilized for improving skills and productivity of the recipients, they will have more sustainable impact on improvements of standard of living. Families obtaining remittances should be permitted to use future remittances as collateral for procuring loans for education, house building or other activities such as procuring fertilizers and machinery for farms. Finally, microfinance seems to be well-suited to address the demand for remittance-linked financial services, particularly among poor and/or geographically isolated populations.

Dr. Pant is Director at Nepal Rastra Bank

source: BHUBANESH PANT(2015),"Productive use of remittances: To spur economic growth "The Himalayan Times, 16 Feb 2015

2015-02-16

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