Friday, 7 October, 2022

Maximising Benefits Of Corona-hit Remittance

Kamal Parajuli


‘Turn the tankers the hell around.’ That was a stern tweet from US senator Ted Cruz on 22nd April, 2020. Nineteen super carriers carrying 40 million barrels of Saudi crude were headed toward the US Gulf. But the US was fighting its own shale oil glut and was wary of additional imports. It was strange turnaround for oil for which the US has stationed 60,000 troops in Middle East to secure supply and has deployed carriers to keep shipping lanes clear.
These days, oil is trading at $30s. But IMF says Saudi needs $76.10 a barrel oil to balance its 2020 budget. UAE, $69.10; Kuwait, $61.10; Bahrain, $95.60; Oman, $86.80; and Qatar, $39.90. It would have been least of our concern had it not been for about half of Rs. 784 billion in remittance Nepal received in fiscal 2018/19 originating from those Gulf countries. Besides, they also host around 1.5 million Nepali migrants.
Till demand rebounds to at least 90 million barrels a day, the sorry state of oil will persist. And Gulf countries will continue to feel financial squeeze. Despite much hoopla, those economies are driven by government expenditures on infrastructure. The spending has spawned labour intensive construction industry which serves as the fount for other dependent industries. And when governments tighten their belt, industries will shrink and countless jobs will vaporise. While Nepalis will lose jobs in thousands, Nepal will lose remittance in billions.
And here we are; completely dependent on remittance – for both foreign reserves and revenue. The USD side of remittance – kept by state – simply goes to finance imports while the NPR side – received by households – goes to purchase those very imports ranging from cars to potato chips. With exports at Rs 97.10 billion and imports at Rs 1,418.53 billion in fiscal 2018/19, Nepal ran a massive trade deficit of Rs 1,321.43 billion. If it were not for remittance to cover the shortfall, Nepali Rupees (NPR) would already be trading alongside Zimbabwean dollar.
The government needs revenue to finance its domestic expenditures which includes salaries to civil servants, spending on roads and schools and servicing debts among others. Last fiscal, government raised Rs 155.36 billion from customs duty out of total revenue of Rs 859.59 billion. Besides, significant portion of Rs 241 billion in VAT and Rs 121.75 billion in excise duty were from imports. And, revenue generated due to remittance – by virtue of import – stood at 44 per cent.
Such a vital lifeline to Nepal, and owing to Covid-19, remittance has witnessed monthly decline of 50 per cent since April 2020. Arresting the slide precipitated by global rout is beyond our ambit. But engineering moves to channel existing remittance into saving which, otherwise, comes as cash pickup and is disposed immediately has become imperative. They are namely Bank account and NRE account.
Nepal still receives over 75 per cent of remittance as cash pickup. It is free money to recipients and, by default, saving is the last priority. A large chunk is spent on superfluous consumption of mostly imported stuffs which also exacerbates current account deficit. And only a fraction of the remittance enters the banking system.
Cash pickup, despite its sins, was allowed to gain popularity because it could be collected instantly from any one of 15,000 remittance payment agents. That was necessary when one working in Dubai wishing to remit to his father’s account with Nepal Investment Bank through international remittance service provided by Himalayan Bank had to wait for at least two days to get the account credited. If he had remitted to his own account with Nabil Bank, he would not have been able to transfer balance to his father’s account, if need be. And if he had no account to begin with, he could have opened an account with select Nepali banks from Dubai. Chances might be those banks had no branches near his home. Cash pickup, then, was revolutionary.
Now, banks and financial institutions have expanded into nooks and corners of Nepal with over 5700 branches. And advent of Nepal Clearing House (NCHL) has flipped the equation in Banks’ favour. Not all banks provide international remittance service; and they do not need to. Real time gross settlement (RTGS) service can transfer fund between banks in seconds. Nowadays, remittance to bank account is as instantaneous as cash pickup. And there is at least a bank nearby for everyone to maintain an account with.
Remittance to self-account of remitter will boost deposit of local bank raising its liquidity and stock of loanable fund. Besides, it will limit consumption – since he is out of country – and by extension imports, saving precious foreign reserves. Remittance to beneficiaries’ account will at least acquaint people with banking.
Surprisingly, it is the Ministry of Labour that has promoted accounts by making it mandatory for issuance and renewal of work permit. Like a stick, it compels Nepalis working abroad to open accounts. But it is carrot that encourages expats to keep remitting to account. And that sweetener can only be crafted by the Ministry of Finance, NRB and Nepali banks working together. Taking a leaf out of Reserve Bank of India’s playbook, they can launch Non-Resident-External (NRE) account for Nepali migrants.
NRE account addresses major ambivalence faced by migrants – repatriation of savings in case of need. Confident in the belief that they would be able to withdraw in their host country they would remit happily to their NRE accounts denominated in Nepali Rupee (NPR). Tax exemption on accrued interest provides further incentive. To prevent outflow of USD at will, conversion back to USD can be kept at premium.
Small economies like Nepal are always vulnerable to capital flight which could send their currencies into tailspin. To prevent NRE accounts from being used for such outflow, those accounts are only allowed to be credited with income earned overseas which is remitted through SWIFT or remittance companies. Provision of home loan based on regular remittance will serve as another impetus to credit the account.
Account credit and NRE account will divert remittance from cash pickup boosting deposits and raising loanable funds of banks. It will also curtail consumption, thus, reducing imports and hurting customs duty. But revenue model based on import is never a sustainable strategy; conserving precious foreign reserves is. Hundi – remittance through informal channel – is the real culprit eating into remittance. How do we tackle it to boost remittance during slowdown? Until next time.

(Parajuli works with Himalayan Bank Limited.