Remittances and Economic Growth: The Role of Financial Development in Nepal

How remittances contribute to the economies of remittance-receiving developing countries is a global issue. Considering Nepal as a highly remittance-receiving economy, this paper primarily examines the impact of remittances on economic growth using annual time series data from 1980 to 2021. The study further investigates whether financial development mediates the effects of remittances on economic growth. The bound test approach to cointegration and the error correction model (ECM) under the autoregressive distributed lag (ARDL) model are employed as the estimation techniques. Our findings reveal that remittances consistently exert a positive and statistically significant effect on real GDP per capita, despite remittances being primarily used for consumption, while financial development exhibits a strong positive impact in most specifications. However, the interaction between remittances and financial development is negative and significant, indicating that the growth-enhancing role of remittances diminishes as financial systems deepen—reflecting diminishing marginal returns. These findings remain robust across alternative model specifications, consideration of a post-2001 remittance boom period, and substituting the financial development index with domestic credit to the private sector. Therefore, policymakers must promote a careful synergy between remittances and financial development to maximize their beneficial impact on economic growth.