Do Remittances Stimulate Economic Growth In Nepal? Evidence From ARDL Approach

Abstract

ABSTRACT: Remittances from migrant workers are the major sources of financial inflows into the Nepalese economy. The World Bank's data of 2021 suggests that Nepal is one of the top ten recipients of remittances in terms of its share of GDP. Even though remittances make up a significant portion of foreign capital flows, the macroeconomic impact of these transfers on economic growth has not been sufficiently studied. Therefore, the aim of our study is to investigate the impact of remittances on the Nepalese economy for the period 1990 -2021 using the autoregressive distributed lag (ARDL) model. The ARDL approach is applied to identify the long-term and short-term effects of worker remittances on the Nepalese economy. The model uses real GDP as a proxy for economic growth and uses workers' remittances as main explanatory variable along with gross fixed capital formation, trade openness, foreign aid, and human capital as the control variables. The findings of the bound test suggest that there is a long-run relationship between remittances and economic growth. Furthermore, it is also demonstrated that remittances, gross fixed capital formation and foreign aid have a positive effect on real GDP. While we found a negative effect of trade openness and human capital on real GDP in short run and long run dynamics. The positive influence of remittances appears to be very weak, as a significant portion of remittances to Nepal are used for private domestic consumption. Moreover, the negative contribution of imports to economic growth suggests that a larger portion of remittances is spent on daily consumption and consumer durable items such as television, refrigerator, washing machine, air conditioning, and so on. Based on the analysis of the results, Nepal needs to develop an integrated policy to motivate migrants in intensity of saving and investment on multiple productive sectors rather spending on basic consumption. In doing so, such practice helps in channelising the remittances into economic growth through the multiplier effect. The transaction cost of remitting money is another challenging issue in Nepal. Therefore, policy measures must be focused on minimising transaction cost of remittances through the formal and organised channels.