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The recent economic meltdown in Nepal began after the outbreak of Covid-19. The Russia-Ukraine war has made it worse. Amid questionable claims about the economic recovery, the government has not been doing much to address this crisis even as both imports and exports decline, taking a toll on revenue collection. 

In the name of doing something, the government is taking huge loans to cover up the expenses, causing a surge in debt from both internal and external sources. 

Worryingly, most of this debt services the unproductive sector while the masses remain deprived of daily necessities as if rampant corruption at every level of polity were not enough. 

Due to declining demands, industrial production has suffered as overall negative growth of the business and industries sector shows. While some of the businesses and industries have been operating at a loss, most of them have shut down. The meltdown in the productive sector, which employs a large number of people, means a steep rise in unemployment. 

Loss of jobs reduces people’s incomes and purchasing power goes down with it. Consumers do not even have money to buy the daily necessities, which means a decline in the demand for consumer goods. 

Banks, grappling with a liquidity crisis, are unable to provide loans to business, manufacturing, real estate and auto sectors. Construction works are getting delayed. Government revenue collection is declining and not enough even to meet the regular expenditure.

Meanwhile, the cost of manufacturing goods is going up, possibly due to a rise in the cost of labor and raw materials. When the price of a commodity increases, its demand falls. At the time of falling demands, businesses and industries cannot sell their products by lowering their prices. If they do so, they have to bear huge losses. In a similar manner, a shortage of goods in the market can push their prices up. 

When consumers cut expenses, the revenue of business and manufacturing establishments dips, negatively affecting production and productivity. Such a scenario can cause inflation, which Nepal is facing already. While banks are raising interest rates, business establishments are not taking loans. This means that recession has set in.

The consumer price index (CPI) is rising with prices hitting a new high as latest data from the Nepal Rastra Bank (NRB) show. In the fiscal year 2021/22, , CPI stood at 6.32 percent, while it climbed to 7.74 percent in FY 2022/23. 

Data from the central bank suggest that both export and import have been declining over the years. The imports stood at Rs 19bn and Rs 16bn in FY 2021/22 and 2022/23 respectively, while the export figures in both the fiscals were almost the same. These declining figures also mean that the trade deficit has gone down. In the FY 2021/22, trade deficit was Rs 17bn it came down to Rs 14bn in FY 2022/23, narrowed down by Rs 3bn. 

A deficit balance of payment in FY 2021/22 by Rs 3bn has been turned into surplus by the same amount in FY 2022/23. Evidently, the foreign exchange reserve has increased from Rs 12bn in 2021/22 to Rs 15bn in 2022/23. Export and import are the major sources of government revenues. Plummeting government revenues can affect the government’s capacity to spend, taking a toll on development activities. This means a government has to take loans even to cover daily or monthly expenses.

Nepal is not self-reliant even in food production. It has to import on a large scale to feed its citizens. India has banned the export of paddy in recent days. The government is in a rush to request India to supply rice to Nepal even as millions of hectares of farmlands remain barren both in the hills and the Tarai Madhes, mainly due to the absence of irrigation facilities and a shortfall of human resources, among other factors. With farmlands lying fallow, the share of the farm sector to GDP has been declining over the years. Improvement in the agri sector is a must also for sustainable development.

Industrial activities are melting down. Agriculture activities are also on a downward trend and so are business activities. Clearly, the Nepali economy is unwell. 

 Which sector has been playing an active role even in this grim scenario to keep the economy afloat? 

There is only one sector, which has stood as a source of livelihoods for the Nepali people and that is the foreign employment sector. A large number of Nepali youths are migrating in search of livelihood of late. They are sending increasing amounts of money to their families living in Nepal. In FY 2021/22, Nepal received Rs 10.7bn in remittances, while in the FY 2022/23, it received a whopping Rs 12.2bn, an increase of 21.2 percent. This proves that remittance is a major source of foreign exchange and livelihood for the Nepali people.

The government is supposed to create jobs for its citizens. To do so, our own government in Nepal has to specialize in the sectors with high export potential. For instance, it has the potential to export purified drinking water to the Middle East, hydropower to India and Bangladesh, and Himalayan herbs throughout the world.

But no government, either on the left or the right, has had a genuine agenda with which to make Nepal prosperous. Each government has rather made the country more and more dependent on export of human resources, emptying rural homes. The majority of these migrants are semi-skilled and unskilled and they have been migrating in great numbers to the Middle East and East Asian countries, while the relatively more skilled, educated, and talented ones are going to Australia, Europe, America, and Canada.

According to the World Bank, Nepal is getting an average yearly remittance of $1.7 billion, from $0 in 1976 to a maximum of $7.9 billion in 2018. In other words, we are a remittance dependent country.

Remittance helps sustain the Nepali economy in times of conflict and political chaos. Banks get liquidity. Government revenues increase and in turn, remittance helps to pull the economy out of debt trap (a situation of spending more than earning). In a state of conflict and political instability that has prevailed in the country since 1990, remittances are the source of economic lifeline for the poor, helping lift millions of them out of poverty. To an extent, it facilitates poor children in going to school, resulting in significant increase in child enrolment both in public and private schools. Nepal is also facing a large gap in international payments, which makes the balance of payments unfavorable. Remittance can correct this unfavorable situation.

There are dark aspects to remittance as well. First, the economy could face a real exchange rate depreciation, which of course will make the economy less competitive internationally. Second, it may undermine the incentive to work and can slow economic growth. Third, it increases household expenditure on consumer goods as consumption increases with an increase with remittance inflow.

Also read: Nepal as a bridge between India and China

The greater part of the remittance coming into Nepal has been spent on consumption. The rest is being invested in the city-centric real estate and ornaments, making the urban real estate more expensive. In comparison, there is little investment in human resource development and other productive sectors.

This tendency increases the import of consumer goods. This trend, if continued, may make the economy over-dependent on remittance.

Fourth, migrants are seeing their families break apart, and divorces are increasing with increasing physical distance between husbands and wives. This is putting a severe strain on social harmony. 

Fifth, migrants incur great risks in working abroad and they have to toil to save enough to pay back their loans, while also helping maintain the livelihood of their families.

Sixth, the departure of both skilled and unskilled human resources creates labor shortages in Nepal. Finally, the deaths of Nepali migrant workers in foreign lands is becoming a growing problem: three to four dead bodies of migrant workers arrive in mortuary boxes at Kathmandu airport every day.

The dark side of the remittance economy of Nepal thus outweighs the bright side. The country is importing more and more. Exports are nominal in the context of imports. In 2020, exports and imports as a percent of GDP were 6.8 and 33.9 respectively, showing that imports are six times exports. Thus, in this context, remittance becoming the heart of the Nepali economy—which was 1.5 percent of GDP in the 1990s to 24.4 percent of the GDP in the 2010s, an increase of 16 times over the period in consideration—is fraught with risk.

As the unproductive sector absorbs the major chunk of remittance, continuation of this trend can push the Nepali economy towards a crisis. There is also a risk of discontinuity of remittance as it depends on labor demand in the global market.

Any fall in labor demand in the global markets would not only make the economy less sustainable but also increase the risk of an economic failure. In order to save the economy from these grave consequences, the government should design plans, programs, and policies to mobilize remittance in productive sectors. Let us use this money to create jobs on our own soil. 

The author is a professor of economics at Tribhuvan University