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Remittances from Nepali migrants can lead to progress if diverted from consumption to capital formation


Across the world, remittances are the second most important source of external funding in developing countries. Specifically in Nepal, remittances account for 30 percent of the country’s gross domestic products (GDP). These monetary transfers have been sent back to the country by more than 400,000 migrant workers who leave Nepal each year in search of better economic opportunities. Nepal is a country that receives one of the highest proportions of remittance in terms of GDP in the world. Through such a high influx of funds, remittances have the ability to create a positive impact on development economics provided they are used correctly by both the government and Nepali citizens.


Various other developing countries have already revised their legal framework to encourage their citizens to send remittances from abroad into their countries of origin. In Bangladesh, India, Sri Lanka and Pakistan for example, non-resident citizens are granted a series of enticing benefits. Both Bangladesh and India have created attractive bonds that encourage people to shift away from sending remittances through informal channels. The Sri Lankan government has encouraged investment by offering different types of credit schemes that cater to the needs of returnee migrant workers.


Money for nothing


However, it is crucial to understand that in their current state, the funds from remittances are only being used as a means for survival. They are based on personal attachments and allow loved ones to keep their families above the poverty line without actually offering a sustainable path to development.


Nepal is a developing nation which has been ranked 144th on the Human Development Index (HDI). Remittances account for a much larger percentage of the GDP than does Official Development Assistance (ODA). It is therefore essential that the Nepali government works to capture a share of remittances for development purposes, while still encouraging transfers through formal channels. An obvious solution would be to put a tax on incoming remittances, however this may be counterproductive as it could encourage remittances to be redirected to informal channels. A more effective solution would be to implement a lucrative diaspora bond.


Diaspora bonds are bonds issued by a country to its own non-resident citizens to tap into their wealth. These bonds can be used to raise funds for infrastructure development within the country, leading to a more sustainable future for the nation. The Nepal Rastra Bank (NRB) previously tried implementing this type of bond back in 2010 under the name of a Foreign Employment Saving Bond (FESB), but their efforts did not catch on. The true reason behind the failure of the bond is largely unknown but it may have to do with a lack of publicity, a short period of marketing, and a short, two-week time frame when the bond could be purchased. In addition, the bond was sold exclusively to overseas migrant workers. However, workers in India, the destination with the largest number of Nepali workers, as well as migrants in the Organisation for Economic Co-operation and Development (OECD) countries were excluded from buying into the bond.


Patriotism for development


Other countries have successfully been using the bonds to enhance their own development for many years. Both India and Israel are prime examples of how diaspora bonds can positively affect a country’s development. For instance, the Israel bond, which was implemented in the 1950s, is designed in a foreign currency so that the country’s foreign currency reserves can be increased. The cost of the exchange is absorbed by the buyer and the government receives the benefit of the foreign currency until the bond matures. While waiting for the bond to mature, the government is able to buy products from around the world to improve infrastructure. The bond pays out a low interest rate, so these bonds are often given as gifts and help connect people around the world to the home country. This patriotism is used to justify the lower interest rate. The Israel bond has enabled the country to develop their infrastructure, and has advanced transportation networks to allow for the shipment of Israeli goods and technologies across the globe.


Different countries have used various strategies to convince their diaspora populations to purchase the bond. Kenya encouraged buyers by using bond money to finance specific projects, this relieved people’s concerns about governmental mismanagement of funds. India restricted sales of the bond specifically to investors of Indian origin, with the intent that the exclusive nature of the bond would make it more appealing to potential investors.


Remittances in Nepal are heavily used on daily consumption and luxury goods. A diaspora bond provides an alternative to invest in the country’s capital formation. Increased economic development would create a more sustainable future for Nepal. The success of Nepal’s economy in the future rests on the success of the government in accessing the capital available from migrant workers remittances and using it for the benefit of all.


Shendroff is interning at the Centre for Migration and International Relations



Published date: Dec, 12 2017

Published on:  Kathmandu Post





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