The Impact of Remittances on Economic Growth in Nepal

Abstract

This paper examines the impact of remittances on economic growth in Nepal by   using Johansen cointegration and error correction methods. Using annual data of remittances, GDP per capita, consumption and investment for the period of 1976–2013, this study finds the evidence of cointegrating relationship between these variables and that an increase in remittances deteriorates GDP per capita growth in Nepal. The main channel through which remittances influence economic growth is through consumption and investment. There is no evidence that remittances are used for investment; however, they have positive and statistical significant causality to consumption. Domestic production contracts with an increase in remittances. This is because of the exodus of farm workers with the rise in emigration due to Maoist’s insurgency, political instability and unemployment.  Besides, demand shifts from traditional Nepali products to differentiated manufactured products with an increase in remittance incomes. The increased demand is met by imports from Indian markets.  There is no evidence of association of remittances and investment; however, they are positively associated with consumption. So, an increase in inflows of remittances decreases agro-product, increases consumption and does not change investment leading to deteriorate GDP per capita. Therefore, remittances are curse for economic growth of Nepal.