Remittance inflows have declined for the second straight month amid a surge in imports triggering concern about a possible impact on the economy.

Nepal Rastra Bank (NRB) has blamed increasing use of remittance to finance illegal trade, particularly gold smuggling, for the drop in payments. According to an NRB report on the country’s macro-economy during the first quarter of the current fiscal year, remittance inflows decreased 0.6 percent in Nepali rupee terms. During the first two months, remittance had dropped 4 percent.

The slowdown in remittance inflows has alarmed both the central bank and the government. According to NRB officials, Governor Yubaraj Khatiwada invited bankers, money changers and companies working in the area of remittance for a meeting last week and warned them to be alert about the increased use of remittance for illicit imports. “We have also asked the government to take necessary measures to stop the use of remittance for illegal trade,” said Min Bahadur Shrestha, head of the research department at NRB. 

Although the country has enough foreign exchange reserves to pay for merchandise and service imports of 9.3 months, Shrestha warned that if the current trend of using remittance for illegal trade grows, it would hit the economy hard. According to the NRB report, the gross foreign exchange reserves stood at around Rs 679.40 billion as of mid-October and the balance of payments (BoP) has become positive by Rs 2.96 billion from a negative status during the first two months.

“If the current trend of using remittance for illegal trade continues, the country will see a rise in the BoP deficit,” said Shrestha. There has been no gold shortage in the market even though banks, which are the only authorised importers, have been unable to sell their stocks of the yellow metal.  “This clearly shows that remittance has been used to finance smuggling of gold in the country,” said Shrestha. “Our intelligence reports show that the use of remittance for smuggling goods from China has grown too.” According to Shrestha, traders used to obtain US dollars in cash from the market in the past, but as it had become more difficult to get cash lately, they have been using remittance to pay for their imports.

In another worrying sign, the country’s exports have been on a downhill course for the last three months. According to the NRB report, merchandise exports fell 2.3 percent to Rs 22.53 billion in the first quarter. A particularly sharp fall in exports to India led to an overall decrease in shipments. Exports to India account for two-thirds of the country’s total exports. According to the report, shipments to India decreased 6.4 percent during the first quarter of 2014-15 in contrast to an increase of 18.2 percent in the corresponding period of the previous year.

Exports to India decreased mainly due to a slump in the exports of cardamom, zinc sheet, jute goods and copper wire rod, the report said. However, exports to China surged 93.2 percent in the review period of the current fiscal year. Exports to other third countries slipped marginally by 0.4 percent during the review period. At the same time, merchandise imports increased 12.5 percent to Rs 58.36 billion during the review period, particularly due to a surge in imports from India. As a result, the total trade deficit during the first quarter this year jumped 29.5 percent to Rs 169.72 billion.

“The decrease in remittance and exports against a surge in imports is a clear sign that the country’s economy is facing a serious challenge in the external sector,” said Shrestha.

Published on: 18 November 2014 | The Kathmandu Post