Friday, 7 October, 2022

Remittance Through Informal Channel

Kamal Parajuli


Three million Nepalis working abroad – mainly in Gulf Countries and Malaysia – remitted home $8.1 billion in 2018. As remittance has swelled to make 28 per cent of Nepal’s GDP, population under poverty line has fallen to 21 per cent. No doubt, remittance has kept innumerable families in Nepal alive. Better still, it has kept Nepal’s economy afloat. Thanks to remittance, forex reserve stays substantial at $8.48 billion and balance of payment is only slightly negative despite massive $13 billion in imports and less than a billion dollar in exports.
Such a vital lifeline remittance is but government remains indifferent while most remitters have no clue how cross-border payments work. Migrants can make use of ubiquitous exchange houses found in their host countries to remit. There they submit local currency while their beneficiaries back in Nepal are paid by Himal Remit in equivalent Nepali Rupee (NPR). But hundi/ hawala operators always lurk around with better exchange rate than formal players like those exchange houses and banks could ever offer. So, some migrants have started resorting to informal channel to ‘remit’ their hard earned money. However, the practice not only puts Nepal’s economy in jeopardy it also fosters corruption back home.
Ignorance is bliss as it obviates painful crunching of information to extract knowledge. When remitter does not discern between formal and informal channels he might end up picking the ugly. But his action has consequences as there is stark difference in what actually get transmitted to Nepal. It is USD if the remittance is through formal channel and various goods like gold, smartphones, notebooks and undisclosed items if through informal one. A layman might wonder if the difference matters at all as Nepal need to import those goods anyway.
Now, let me elaborate how remittance through formal channel helps Nepal’s economy while through informal one hurts big-time. First, exchange house converts remittance to Nepal into equivalent USD and deposits it into USD account of Himalayan bank maintained at American banks like JPMorgan Chase, Wells Fargo or Bank of America. The Bank, then, sells that USD to Nepali merchants or Nepal Rastra Bank (NRB) for NPR and makes remittance payments with the proceeds.
A commercial bank not only disburse loan but also finance imports. So, it is whom Nepali merchants contact when they decide to import stuffs. Himalayan Bank uses the USD collected through remittance or any other legal means and issue ‘letter of credit’ on their behalf. As a bank has been used as an intermediary, transactions are recorded and government can keep track of what and how much goods are being imported. This facilitates imposition of tariff. Besides, it also lets government stifle imports if balance of payments worsens or forex reserve dwindles.
The closed loop of Nepali banks raising USD and selling it to merchants to finance imports; automatic record keeping of imports as they originate within banking system; and government imposing tariffs on imports to collect revenue could unravel spectacularly if only USD could be raised outside of Nepal to finance imports. And when there are 3 million Nepali workers who are paid in foreign currencies the feat is not difficult at all. It is for a reason why hundi/ hawala operators always lurk around migrants.
It is banking sector which initiates imports when remittance is made through formal channel. But it is hundi/ hawala operators who set off those when remittance is made through informal one. They buy goods like gold, smartphones, notebooks and undisclosed items cheap in the international market and smuggled them into Nepal by bribing relevant officials. While Nepal loses customs, corruption gets institutionalised. But the saving on price is not passed on to customers. Instead those goods are priced at par with genuinely imported ones which are expensive because of tariff. It generates massive profit which is used to offer better exchange to remitters.
Left unchecked, the cycle goes on. As official imports decline revenue dwindles. Further, contrabands help VAT (value added tax) evasion as those goods are not recorded. Remember, what government spends is what it collects in tax and tariff. Ultimately, there might not be enough fund to construct roads, bridges, schools, hospitals or pay for civil-servants’ salaries. Government could borrow internally to plug in the deficit. That would crowd out investment and raise interest rate. It could, instead, print more money but that would set off inflation.
Imports and servicing of foreign currency denominated debt deplete forex reserve and it needs to be replenished regularly. Being the biggest source of foreign currencies remittance has shouldered the responsibility. But for the hundi/ hawala operators there is another use for USD - to smuggle wealth out of Nepal. Government closed capital account to prevent this very capital flight but it can be executed simply by swapping NPR in Nepal with USD held in the desired foreign country. Thus, the competition for USD in remittance originating countries will hit remittance and simultaneously lowers forex reserve.
But the reserve also signifies months of imports the economy can finance. Ours stands at almost eight months. Anything below that would set off alarm bell. NPR, pegged to INR, would come under immense devaluation pressure. If government relents, imports will get expensive and inflation will soar leading to possible political unrest. Ignorance might be bliss but it is not sustainable.
Remittance originating countries are normally developed ones with open capital account and convertible currencies. Given the use cases of USD stock held outside of Nepal hundi/ hawala operators will always approach Nepali migrants with better exchange rate. But after reading all these they can understand the implications of their action. Besides, greenbacks in the wrong hand can be used to finance terrorism and what not. So, they have to resist the temptation to make quick personal gains at the expense of broader society.
Migrants have two important habits to develop if they wish their children find peace, security, and jobs back home. First, they have to save for their future. Second, they should remit through formal channel. Given the fee exchange houses charge it will be slightly expensive, but everything comes at a cost.

(Parajuli works with Himalayan Bank Limited and can be reached at