Calling all Countrymen

After the Nepal Rastra Bank’s (NRB) decision to curtail the real-estate lending of commercial banks and other financial institutions, prominent real estate developers were recently quoted in The Post (“NRB checks won’t slowdown realty business: Developers,” Dec. 20, Page 9) arguing that NRB’s action wouldn’t result in any significant slowdown in real estate sector as long as remittance inflows continue. Moreover, one developer even argued that due to limited investment avenues to deal with big remittance inflows, huge capital flight could ensue. Coming from top developers and businessmen involved in real estate sector, these arguments underscore the point that remittance inflows — Rs. 210 billion in Fiscal Year (FY) 2008/09, almost 21 percent of GDP — are largely being channeled into unproductive sectors. Apart from speculative investment in real estate, remittance is also largely being used for consumption purpose which is helping fuel recent expansion of imports.

According to official statistics, remittance inflows have helped alleviate poverty in Nepal by 11 percentage points in the period between 1995 and 2004, however, since most of the remittance income has been used for consumption, the long-run benefit of remittance is questionable. Given the paltry growth of manufacturing sector in the last five years, remittance driven consumption has increased our reliance on imports. Moreover, as mentioned above, because of the absence of other investment avenues, remittance flows have helped create a massive real estate bubble. If and when the remittance inflows stop growing, we will be in trouble because of our over-reliance on imports and possible crash of real estate sector. We are not channeling remittance to expand our industries to sustain rising consumption, build new roads and bridges for additional vehicles, and develop new hydropower plants to cater to burgeoning energy demand.

In the December 2009 issue of International Monetary Fund’s (IMF) Finance and Development magazine, there is an interesting debate on the role of remittance in development. In the debate, Ralph Chami (associated with IMF) and Connel Fullenkamp (associated with Duke University) argue that remittance inflows around the world have predominantly been directed towards consumption and not investment activities. “For years, many countries have received huge amounts of remittances, relative to their gross domestic product, but there is not one example of a country that has exhibited remittance-led growth. Where is the remittances success story?” ask Chami and Fullenkamp. Though they applaud the role of remittance in poverty alleviation, they further argue that many remittance-receiving regions report anecdotal evidence of local real estate price bubbles funded in large part by remittances.

To ensure that remittance ends up in productive sectors, policymakers need to understand the role, if any, of remittance in overall economic growth, and linkages, if any, between remittance and asset bubble. If, as the developers suggest, remittance is being used for (speculative) investments in real estate and if, as the NRB’s recent import data suggest, remittance is fueling imports, how then do we ensure that remittance ends up in productive sector? One of the best possible ways to channel remittance in productive sector is via “Diaspora bonds” argues Dilip Ratha, lead economist at World Bank’s Development Prospectus Group. Many have argued that remittances have not fostered tangible economic growth because many of the high remittance recipient countries don’t have proper policy and institutions to channel remittance into productive sector. In an IMF working paper “Do workers’ remittances promote economic growth” published in July 2009, Barajas, Chami et.al find that, at best, remittances don’t have any impact on economic growth. The authors argue that the result may suggests, among other things, that many countries do not yet have the institutions and infrastructure in place that would enable them to channel remittances into growth-enhancing activities.

The idea of diaspora bond — raising money by issuing bonds to overseas citizens — is not a new concept. India, Israel, Sri Lanka, South Africa and Lebanon, among others, have time and again tapped their diaspora to raise funds. While the motives for the issuance of funds have varied, according to Ratha, these diaspora bonds have provided much needed capital for the government of these countries. Israel in particular has been very successful in raising huge amount of money from their Jewish diaspora and utilising the collected funds for development activities. The Ministry of Finance (MoF), in its annual budget for Fiscal Year 2066/67, has also proposed an idea of “Infrastructure Development Bond” whereby it will raise Rs. 7 billion through Nepal Rastra Bank (NRB) from Nepali workers in Middle Eastern countries, South Korea and Malaysia. According to the MoF, funds raised through issuance of such bonds will be used to finance infrastructure projects. Though there could be issues regarding concept of selling bonds via overseas Nepali embassies and other issuance modalities, the overall idea needs to be applauded. If carried out properly and timely, it could be an important policy tool to channel remittance into productive sectors and foster economic growth. At a time when infrastructure funding is scarce at best, it’s high time we tap remittance inflows and make something productive out of it.

This article was first published in the Kathmandu Post in Jan 7 2010
Link: http://www.kantipuronline.com/2010/01/08/Oped/Calling-all-countrymen/305971/