Remittance Kills Local Economy

Skyrocketing real estate prices, dying industrial sector, peanuts government budget, crushed local workers and high import vs export, everything is caused by heavy reliance on remittance

Skyrocketing Real Estate

Chinese are fond of real estate. They work hard and save up to buy expensive real estate. Real estate is like retirement plan for most Chinese. With ever growing real estate prices it seems like a good investment. Chinese's real estate craze is not limited to just China. They buy foreign also, especially in Australia. The Chinese's craze is so huge, it has significantly driven up the price of Australian real estate. Local Australians are having a hard time buying property. An average Australian needs to work about 14 years before their total salary can buy a house(for Nepal it is about 33 years working locally). But Australians don't save as much as Chinese do despite the larger per capita. This has made very hard for Australians to buy home.

How is this related to Nepal? While the saving equations is same for Nepalese working abroad or locally. The amount they earn for same work locally is significantly less than what workers abroad earn. Yes workers abroad are hardworking just like the locally working group. But in most of the cases people earn at least 2-3 times more salary for the same work when they work abroad. This translates to 2-3 times more savings for workers abroad and in long run 2-3 times more money to buy real estate.

Add to that, there isn't any significant tax while holding real estate. It doesn't decay like food or depreciate like technology. Land lords expect the price of real estate to be ever increasing. They will sell only when they need the money really hard. It is a supply limited market. Adding more money to the equation increases the demand and eventually price.

The surprising reality is that even if 10-20% of remittance goes into real estate, it drives the price extremely high. The cost of housing/real estate is disproportionally higher than other goods and services. For example, when we compare the rent vs the house cost, the cost of house is determined by what people earn abroad while rent is determined by what people earn locally. Our houses cost comparable to developed nations while rent is 10-20x cheaper.

Industry Collapse

Let's be honest, why should someone work in Nepal if they can earn 3x more in the middle east or 10x more in developed nations like USA or Canada? Most people have common sense and have already opted for working abroad. While more pay is good for the workers, the local industries are the ones loosing the game.

Industries have hard time remaining functional in Nepal. Especially the low margin industries. First the interest rates have historically been extremely high 10-18%. With such large interest rate how can an industry with say profit margin of 2-5% survive. It is just not possible.

Add to that an open global competition for workers created by excessive foreign employment, Nepalese industries have extremely hard time maintaining their workforce. Workers get more pay for the same work abroad, the skill required is often the same and working conditions are almost always better. In sectors like medicine & nursing, the individuals can literally get 20x more salary if they work abroad.

When people abroad send their money to Nepal, the purchasing power disparity motivates even more workers to go abroad. A doctor working in Nepal can expect to work 20 years to achieve the same level of wealth that his/her friends working abroad can generate in a year.

The remittance dump into Nepalese market especially real estate and construction has made housing an impossible reality for local workers. Similarly, this real estate frenzy is what directs the remittance away from the industries leading to even weaker industrial sector.

Rich Citizens Poor Government

When I say rich citizen, some people will start to point people in remote villages living in poor conditions and no facilities. FYI I am not talking about them. Those people indeed need an economic uplift. But the people who go abroad are rich because they earn more and at the same time they make the government poorer because they pay taxes abroad.

A citizen contributes to the nation via tax. When some one goes abroad they pay their taxes abroad. This money should have gone to our government instead. Forget corruption, the declining tax revenue is what is causing our unstable government. A poor government can't fulfill the needs of richer and richer citizens.

Nearly all the politicians or politically motivated economists have hard time realizing this dire situation. Government is in brink of collapse, cutting spending on social programs and civil servant salary to manage ever shrinking budget in the face of inflation.

It doesn't mean government hasn't tried taxing the remittance. Government exercises 5% tax on remittance entering to Nepal. This is pennies compared to 30-40% income tax paid by the local workers.

But there is more, nearly 40% of remittance flows through hundi channels avoiding any remittance tax. Latter the foreign currency collected via remittance is again used to evade import duty via under invoicing scheme.

When nearly all taxable earners are leaving Nepal. And when government doesn't have a direct source of income it has adopted even more dire path of indirect taxation. Indirect taxation introduces double taxation for the local workers. They pay their fair share of 30-40% on income tax, then again pay import duty, vat, excise duty which have been tuned to generate tax from remittance via consumption.

Unfair Job Market

It isn't that there aren't jobs in Nepal. We have shortage of people in every sector. But why aren't the people working locally?

The reason is local salary can't withstand the ever increasing cost of living brought in by remittance. There isn't a level playing field anymore, foreign employment already puts you 10x higher.

Imagine if none of the people went abroad. We won't be able to purchase foreign goods, so industries emerge to produce the goods locally. People will work locally for each other. They would earn less globally but there won't be a significant income disparity nationally. The cost of goods, services and real estate all will match up with what people can afford locally. The government will tax the income of people directly, government need not generate huge amount of tax because cost of running government will also be low. The civil servant will have lower salary and cost of development will be lower.

In such scheme nation as a whole will rise in the face of global economy via internal production and export. We will import how much we can export. So we will be forced to produce nationally.

This is exactly what Honorable King Mahendra Shah did when he was in power. During his reign, the country had a robust annual growth rate of 3.1% all driven by national production and industrial growth. While the current annual growth of around 4% might seems impressive, it is largely driven by remittance.

Remittance based growth has created an undeniable cycle where local workers get crushed by competition from the foreign workers which again forces them to go abroad. Government's obsession for providing free visa and free ticket adds to the heat. On the other hand, double taxation brought via fine-tuning taxation for remittance based consumption provides the final blow to crush local workers.

The Import Epidemic

The current economic structure has been tuned to work via imports. Believe me poor industrial or production sector isn't the only reason. The government needs to play this dirty import tax game to keep itself alive.

In the face of ever increasing remittance and pilling of foreign currency, imports have become easier and easier. It has become sort of the Dutch Disease. Why produce in Nepal when money flowing from abroad fulfills every needs via import. Why invest in those pesky little industries with 2% margin to generate jobs when workers will earn more money abroad.

The government is a part of the import epidemic. It has been a great stable source of income for government. As long as money flows via remittance, the imports aren't going to slow down. We don't have enough will power to produce nationally. We need an even greater motive a necessity.

Conclusion

Our remittance based economy is an extremely stable economy. We have a large portfolio of countries where we send our people. Even if half of the world is in economic chaos our country will still have a stable economy. Even if our country is in fire, our economy will stand strong due to remittance.

Nonetheless, it is a suboptimal equilibrium. Nepal has a higher potential than this. But to achieve that potential we need to let go this equilibrium state. It means shifting to a chaotic state for a while.

Indians opened up for foreign trade when they ran out of forex reserve. That scarcity is what created the need to open up.

We don't face such scarcity as of January 2026, we have 1.3x per capita forex reserve compared to India, 2.3x compared to Sri Lanka, 3.6x compared to Bangladesh and 8x compared to Pakistan. We are capable of importing stuffs, we don't have a necessity to produce in Nepal.

Will power alone is not sufficient to produce in Nepal be it goods or jobs. Government can't rely on remittance for its revenue, it needs tax paying citizens working in Nepal. It should exist in symbiosis with the local workers not motivate them to leave.

There are bunch of paths ahead: one path is to break the current equilibrium, discourage people to go abroad and limit the flow of remittance. We will experience a downfall but the path after the low will be smoother. It is like climbing down a small mountain to climb even bigger mountain.

Another path is to work even harder without changing the current equation, it is an almost impossible path. It is like building an aircraft at the top of a mountain with no margin of errors. It can happen by investing into innovation and technology, we need to generate the good paying jobs that compete globally. We need strategic policies to direct remittance to innovation. We need stubborn people who are willing to work in Nepal for a fraction of income abroad for a long time.