Impact of Remittance on Household Consumption Patterns in Nepal

Abstract

The external labour market has a unique role in shaping Nepal's economy, and remittances now account for some 22-28% of the gross domestic product (GDP) in the last decade. Macroeconomically, remittances are being channeled to some specific categories of consumption of the recipient households, and their relationship and the variables smoothing this relationship have been studied at micro scales very little, especially not in a nationally representative, panel data based analytical framework. The study examines the effect of remittance income on disaggregated household consumption expenditure patterns in Nepal, and tries to understand how the moderating factors; financial inclusion and household head gender affect the consumption expenditures. The study uses a quantitative panel research design, based on the Nepal Living Standards Survey (NLSS-III) and the Nepal Household Risk and Vulnerability Survey (NHRV 2016-2018), which has a sample size of 5,988 households. Addressing endogeneity is done with an instrumental variable (IV) two-stage least squares (2SLS) model instrumentalizing remittances in the regression using remittances' migration ratio measures at the village level. The structural hypotheses are tested with PLS-SEM using 5,000 replications. Multi-group analysis is used to explore differences in gender and ecological zone. Remittances exert significant positive effects on food expenditure (β = 0.312, p < .001), education spending (β = 0.274, p < .001), and durable goods acquisition (β = 0.241, p < .001). There is a positive and context dependent relationship with the healthcare expenditure (β = 0.163, p = .028). The interaction term β = 0.189 (p < .001) has a significant increase in financial inclusion. All of the variance in total household consumption is accounted for by the model. No difference is found by gender of head of household which is consistent with the Permanent Income Hypothesis. The findings show the policy interventions are needed that can enhance financial inclusion and re-channel remittance resources to a productive investment in human capital – critical transition from the remittance dependent economy in Nepal towards sustainable economic development.