If you ever take an international flight from or to Nepal, it is nearly impossible to avoid running into groups of Nepali workers, with light bags and bewildered looks. With 300-500 Nepali workers leaving the country every day, this is hardly surprising. Yet, these hardworking and honest people are an invaluable resource to Nepal’s ailing economy. Statistics from Nepal Rastra Bank, the country’s central bank, reveal that the Nepali economy in 2004/05 earned over USD 922 million in remittances from overseas workers — accounting for 12.4 percent of national GDP. With 30 to 50 percent of these remittances being transferred through informal channels, total remittances for that year could easily top USD 1.5 billion. More importantly, however, this money is spread throughout the country, providing significantly greater security against a potential economic crisis. In explaining the value of remittances to Nepal, the representative of the Asian. Development Bank, Sultan Hafeez Rahman, recently noted: “Remittances are one of the great equalisers in otherwise inequitable economies. People who go abroad are randomly and evenly distributed from across “the country.”
Migration for employment has long played a crucial role in shaping Southasia. With over 40 percent of the regional population still living on less than a dollar a day, migration to meet basic needs and improve standards of living will continue to play an important role in the region. During the oil boom in the 1970s, the labour-surplus economies of Southasia were able to supply cheap labour to meet the growing labour demands in the Middle East. These labour markets, including those in East Asia, proved vital for Southasian economies. According to the World Bank, by 2004 remittances were injecting USD 3.4 billion into the Bangladeshi economy, USD 4.1 billion into Pakistan, and a staggering USD 23 billion into India — accounting for over 5 percent of the GDP in all three countries.
Although Nepal was a late entry in taking advantage of Middle Eastern labour demands, the country has a long history of job migration. With the drawing of Nepal’s borders in 1816 through the Sugauli Treaty with British India, the. Gorkhali hero Bal Bhadra Kuwar left Nepal to join the army of the Punjabi Sikh King Ranjit Singh. Subsequently, an 1839 treaty allowed Punjab to undertake large-scale recruitment within Nepal. Although Bal Bhadra Kuwar was the country’s most famous expat worker, he was not the first. The British East India Company had already started recruiting Gorkhali warriors in 1815 from their Nepali prisoners of war, while major recruitment started following the 1857 Sepoy Mutiny. During the two world wars, over 300,000 Nepali men fought for the British, suffering over 45,000 casualties.
This massive migration of able-bodied men had a disastrous effect on the traditional agricultural economy. Having seen the outside world, most of those who left did not return. According to historian K Mojumdar, only 3838 Nepali soldiers returned home upon being discharged after World War I. With little to no economic development occurring in Nepal under the autocratic Rana regime, a significant number of Nepali workers proceeded to migrate to India. With the establishment of the tea estates in northeastern India, a considerable number of Nepali workers immigrated and established communities of their own in the region.
Nepali migration to India is a topic of significant importance to both nations, yet has been largely ignored. The open border and lack of passport requirements makes the task of keeping tabs on Nepali workers in India or Indian workers in Nepal extremely difficult. The Nepali census of 1952-54 recorded more than 157,000 Nepali migrant workers in India. By 1991 the numbers had almost tripled to 589,000, accounting for more than 90 percent of the entire migrant work force. However, a mid-1980s report by P P Karan estimated anywhere from 1.8 to 3 million Nepali workers in India. Remittances from those working in the public sector in India alone contributed USD 98 million in 1996. Although remittances from India have declined from 33 percent in 1996 to 23 percent in 2004, they still amounted to USD 161 million for 2003/04.
With around 300,000 Nepali youths entering the job market each year and real GDP growth barely averaging 3 percent annually from 1990 to 2005, the Nepali’ economy cannot produce enough jobs. The logical step for the unemployed lay beyond Nepali borders. With the advent of democracy in 1990 and the liberalisation of passport distribution, the Nepali people were able to obtain passports at their district headquarters. This opened the door for job migration beyond India. The higher wages and ever-increasing demand for labour in the Middle East soon made it a popular destination. The progressively deteriorating economic situation in Nepal has only encouraged migration, with over 180,000 Nepali workers departing in 2005, up from 123,000 in 2004 and leading to a 12 percent increase in remittance flows.
In the past, most Nepali workers who went abroad beyond India were employed in the armed forces, stationed in East Asian countries like Hong Kong, Singapore, Brunei and Macau. This early presence and need for a quick and effective money transfer system gave rise to informal hundi systems. However, job migration to the Middle East and Malaysia are comparatively new phenomena. The presence of formal remittance channels and the lack of a tradition in using informal systems by Nepali workers in these regions have helped to increase the use of the formal sector.
Hundi (in East or Southasia) or hawala (in the Middle East) are informal money transfer systems that differ only in local nomenclature. They are largely based on trust, and used mainly by expatriate communities or migrant workers to send money back to family members in the country of origin. No records are kept of these transfers, and they lie outside all official channels. The attractiveness of the hundi system is both economic and cultural. Economically, these networks tend to be cheaper than banks or money-transfer companies. They also are faster, more versatile, and have a wider reach compared to most financial institutions. The hundi-wallahs, or hawaldars, generally make money through a minimal service-charge or by taking advantage of exchange rate spreads. These operators are generally members of the community they serve, with bonds of kinship, ethnic ties, or personal relations making them appear worthy of trust.
A hundi system works by developing a credit between two agents, which is used either in reverse-hundi transactions or tagged onto import-export deals. For instance, a USD 10,000 hundi credit is attached to a USD 100,000 export bill, saving some import-tax expenses. A simple transaction works as follows: a Nepali labourer working in, for instance, Malaysia, gives his money in Malaysian Ringgits to a hundi agent in Malaysia. That agent then informs his counterpart in Nepal, while the labourer meanwhile tells his family that he has sent them money, and may even give them a remittance code for verification purposes. The agent in Nepal contacts the labourer’s family and delivers an equivalent sum of money in Nepali rupees.
Nepali workers in India and East Asia use the hundi system extensively due to its wide reach into rural Nepal. There are an estimated 26,000 British army pensioners and over 105,000 Indian Gurkha pensioners. Until the 1970s, money sent home by the Gurkhas was Nepal’s largest source of foreign currency. In The New Lahures, a book on foreign employment and the Nepali remittance economy, the authors claim that in the mid-1980s, Nepal was gaining nearly USD 47 million annually in foreign exchange from the British Gurkhas and over USD 100 million from the Indian armed forces. Of this, an estimated 90 percent arrived through informal channels. With an oblivious formal sector, hundi systems were easy to form and maintain. Further, illegal Nepali workers in countries like Japan, Hong Kong and Thailand are entirely dependent on the informal sector for sending money back home.
Little research has been conducted on issues dealing with Nepali migrant workers and remittances. Misplaced nationalistic pride could be at fault, as such workers are often dismissed for the ‘unpatriotic’ act of leaving the country in search of work. Journalist Rajendra Dahal first brought the issue of Nepali remittance into the public eye in 1997, around the same time as a British Department for International Development (DFID)-supported project was being conducted on the effects of remittance in rural Nepal. This project was an offshoot of research done in 1996 on the rural economy of western Nepal, which showed an increasing reliance on remittances. Presented in 1998, the preliminary findings of the DFID research suggested that the actual volume and importance of remittances to the Nepali economy had been significantly understated, a finding confirmed by subsequent research.
The Nepali informal sector developed and flourished due to an ineffective commercial system. Recent awareness of the value of remittances have increased investment and interest in the area, with major manufacturing houses like Chaudhary Group and Golchha Organisation entering the money-transfer business. Recent scandals and reports of fraud by hundi agents have meanwhile undermined the levels of trust necessary for these operations. In one case, a hundi agent reportedly swindled over NPR 40 million from 70 Gurkhas with whom he had been working for years. Though rare, stories like these have severely dented the credibility of the hundi system, and have encouraged more people to explore formal options.
Most, however, continue to use the informal methods with which they are comfortable. According to Kalpana Shah, whose husband works in Korea, her family prefers to use hundi versus formal channels due to the former’s economy and efficiency. She says that to transfer NPR 100,000 through hundi costs them less than NPR 500, whereas an official service like Western Union would charge NPR 2000 for the same amount. Banks have charged her as much as NPR 3800, and Shah also complains about the indifferent treatment she has received at large financial institutions. Hundi-wallahs, she notes, are friendly and courteous. Sita Vaidya, whose husband works in the Gulf, explains that her inability to read and write disallows her from using the commercial channels. Rajan Ghimire, whose son works in Qatar, says that he stopped using banks when they hassled him for not having the proper papers, after he had traveled a significant distance to Kathmandu to collect his money.
Hundi networks have three major advantages: speed, access and personal service. As hundi systems are entirely dependent on the trust of the labourers and their families, they make exceptional efforts to keep the worker and the worker’s family happy. Because a hundi agent that no one trusts has no business, the development of personal relations and bonds are integral to any hundi network. Users report agents to be personable, helpful and friendly; those same users often find the bureaucracy and the institutional depersonalisation of major financial institutes to be frightening and cold. There is a growing awareness within the formal sector about such complaints, while a growing realisation of the amount of money involved has been a source of renewed motivation.
The formal sector is comprised of banks, postal services, and money-transfer companies like Western Union, MoneyGram and International Money Exchange (IME). Unlike the informal sector, there is an actual transfer of currency between nations, and the amount is recorded by the central banks of both countries. In order to develop commercial money-transfer markets and services, Nepal Rastra Bank official Bhuwanesh Pant explains that the bank had begun granting licenses to private-sector organisations in March 2002. According to Pant, as of 31 January 2006, 29 firms excluding commercial banks are operating money-transfer businesses, and that a letter of intent has been granted to 69 other firms to begin money-transfer businesses.
According to Pradyman Pokharel, the head of business development at Nabil Bank, a premier Nepali Bank, financial institutions that were playing catch up to the Hundi networks have finally levelled the playing field. Money has traditionally been transferred between financial institutions through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system established in the early 1970s. SWIFT transactions work through a series of language-independent data-code messages, piped through multinational banks like Citibank, Bank of America and Credit Suisse. Here, a labourer in one country gives his money to a bank, which then informs a third-party bank, usually a major US or European bank. The third-party bank then transfers an amount equal to the deposit from the first bank to a second and informs the second bank of the deposit. The SWIFT network is exclusively for established financial institutes and has a network of 7400 user banks in 199 countries worldwide. Due to its extended network and the time differentials between member banks, the transaction can take anywhere from one to four days to process.
The other formal channels used by workers sending remittances are retail transfer systems like Western Union, MoneyGram and IME. According to Pralad Neaupane of Annapurna Travels and Tours in Kathmandu, a Western Union agent, these systems offer a match for the hundi networks. All transactions are conducted digitally, Neaupane says, allowing these systems to rival the speed and efficiency of the informal sector. After receiving a labourer’s money in one country, a retail transfer agent enters the transaction into the network; in a matter of hours, the money is available at a company agent in the receiving country. With five principle agents in Nepal, Western Union is the largest money-transfer system in the country. Business has been so lucrative that a Nepali firm, IME, established in May 2000 as a foreign-currency exchanger, decided in 2002 to begin repatriating the income of Nepali workers in Malaysia.
One of the largest advantages the hundi networks in Nepal have long held over the formal sector has been their access and reach into rural areas. In May 2005, Nabil Bank made an agreement with the Agricultural Development Bank (ADB) to act as subagents for Western Union in rural Nepal. With over 400 branches in rural Nepal, the ADB’s extensive coverage dramatically increases the formal sector’s reach and accessibility. Further, to encourage migrant workers to use these official channels, Nabil Bank now allows for special remittance accounts — available only to those who send or receive remittance transfers, and which can be opened for as little as one rupee. According to those working within the formal sector, the biggest reason that people are still using informal remittance methods is simply a lack of awareness. Often, migrant workers have never dealt with financial institutions; they do not have accounts in them, and are unaware as to how they work. Banks believe they are now succeeding in attracting more workers partially due to awareness and marketing campaigns, but also due to the perceived unreliability of the hundi networks.
Due to the lack of established hundi networks in the Middle East, an estimated 70 to 80 percent of remittances are coming through formal channels. This dynamic has also been increased in Malaysia, due to the presence and recognition in that country of Western Union and IME; the latter alone boasts a customer base of over 120,000 Nepali workers in Malaysia. Since 1999, up to forty percent more workers were using the formal sector in 2003/04. Bhuwanesh Pant emphasises that in order to encourage local financial institutes to take on the remittance business, Nepal Rastra Bank provides 15 paisa per US dollar as commission to licensed private firms, in addition to the prevailing buying rate. With Western Union taking 50 percent of the profits in each transaction, keeping this profit in Nepal is a lucrative deal for both Nepali businesses and the country’s economy. Along with IME, the Himalayan Bank has also started its own transfer system.
With a steady increase in Nepali migrant workers and a corresponding increase in remittances, Nepal Rastra Bank has come to realise the value of both remittance and a more liberal monetary policy. Part of the reason this importance remained hidden for so long was simply due to the inherent difficulty in documenting the process. During the 1990s, the Rastra Bank maintained tight control on foreign currency circulation; this increased the demand for foreign currency and led to a rampant black market for these currencies. As such, both the remitter and operator stood to gain by carrying out transactions at a rate higher than the official exchange. In an attempt to divert more remittance-flow through official channels, the Rastra Bank loosened its monetary policy in 2002 by granting manpower agencies the right to open foreign-currency accounts in commercial Nepali banks. It also gradually slackened its grip on foreign currency supplies for Nepali citizens leaving the country. This has reduced the importance of the foreign-currency black market and has had a positive effect in bringing more remittances through formal channels.
“Remittances can generate a beneficial impact on the economy through various channels, such as savings, investment, growth, consumption and income distribution,” Pant explains. “Remittances have relaxed the foreign-exchange constraints of the country and strengthened its balance of payments position.” Bringing more remittance money through formal channels is critical, as there is no actual flow of currency through informal channels. There is, however, more money being circulated in the receiving country, but without any increase in foreign reserves to balance it out. Depending on the volume, this increase in cash circulation without an increase in foreign reserves can cause inflation. Economists also point out that remittance money can create realestate bubbles and tends to prop up overvalued exchange rates. Furthermore, when the informal sector is utilised, any direct or indirect tax revenues the government would gain from these transactions are lost.
The informal sector can never be entirely eliminated. With the majority of those working in India using informal channels or coming home seasonally with their earnings, formalising money transfers from India will remain extremely difficult. However, considerable provisions can be made to formalise money from other countries; considering their volume, these would lead to a greater impact. Although disrupting the informal channels would have an adverse effect on those who rely on hundi networks for their income, formalising money transfers will benefit the country in the long run through investments and the multiplier effect.
The number of Nepali households receiving remittances has increased from 23 to 53 percent between 1995 and 2004. The amount received per household has also gone up from NPR 15,000 to NPR 35,000 per year. Remittances have been crucial in reducing poverty levels in rural Nepal, and a significant amount of this money is invested in educating the children of the remitter. Shankar Sharma, vice-chair of Nepal’s National Planning Commission, suggests that the reduction in poverty in Nepal from 42 to 31 percent between 1995 and 2004 was a direct result of remittance flows to the poorest sections of society. Experts still argue, however, that remittance money only supports direct consumption — that very little is actually diverted to development-oriented, job-creating investments. But a study by the Bangladesh Institute of Development Studies claims that remittances in Bangladesh have had a multiplier effect of 3.3 on GNP, 2.8 on consumption, and 0.4 on investments. An International Labour Organisation (ILO) report in 1999 also suggests that micro-level social development projects could steer remittances towards more development-oriented channels, thereby making their effects even more profound.
The advantage of migrant workers goes beyond the immediate monetary gains. Some scholars suggest that returning migrants increase social capital through exposure to new technology, ideas, languages and people, and produce intangible but important benefits to societies. A 1999 World Bank report further suggests that remittances might actually be more effective than direct foreign aid. This is a stance supported by many others: given the opportunity to earn, a worker will utilise the money he has in the most beneficial way within his means. Remittance money represents the most essential of family values: hard work, thrift, sacrifice and hope for a better future — values that need to be reinforced and propounded. However, social mobilisation and awareness are necessary requisites for effective use of remittance money. A 2002 ILO report on Maximising Remittances for Development recommended that governments and international organisations enhance coordination and implement innovative micro-credit programs and incentives to increase migrants’ investments in local community development projects. Matching funds for migrant investments and creating migrant investment funds might be best suited to Nepal.
Stopping migration is neither feasible nor desirable. The government instead needs to play a supporting role for those seeking foreign employment and for those migrants seeking to invest in their homelands. In a World Bank paper, economist David Ellerman wrote on what development could mean for a community receiving remittance: “In a community now largely dependent on income from migrant remittances, development would mean building local enterprises that would not live off remittances directly or indirectly (via the multiplier) so that local jobs could be sustained without continuing migration and remittances.” Similarly, in a 2005 report for the International Peace Research Institute, researcher Jorgen Carling claims that if most of today’s remittances are spent on consumption, future consumption will need future remittances. He outlines a simple model to direct some of today’s remittances into investments and savings to finance future consumption. In line with the ILO report, he claims that community development is only possible through collective investments with the government and other development-oriented organisations.
The task for Nepal therefore remains two-fold. First, the government needs to take a more proactive role in securing the safety and rights of its citizens who go abroad to find work. Kathmandu needs to face the economic reality of the country and realise that it cannot currently produce enough jobs; the government needs to find and research markets where Nepali workers can work. Upon finding such opportune markets, work needs to be done to protect workers internally from exploitative manpower agencies, as well as to take on the burden of increasing awareness of their rights among the migrating population. Second, the government must ensure that the money the workers earn reaches the right places. A standardised transfer system would allow workers to directly realise the advantages of their work, while simultaneously protecting them from an unreliable informal sector. Once such a structured system is in place, the government could turn to ensuring that labourers’ monies are being directed to processes that can stimulate economic development and growth, instead of being used to purchase fixed assets, as is currently taking place. The government could also consider opening a pension fund for workers using formal transfer methods, by deducting a small percentage from each transfer. In these ways, not only can Nepali remittance revenue be spread throughout the country, but so too can their benefits.