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Cash outflow surpasses inflow amid slashed remittance

Balance of payments posts deficit of Rs 2.1b first time in two years

Kathmandu, September 23, 2016: The outflow of money from Nepal’s economy surpassed inflows in the first month of the current fiscal year, as remittance income fell for the first time in almost two years and influx of foreign grants dropped.

Balance of payments (BoP) recorded a deficit of Rs 2.1 billion in the one-month period between mid-July and mid-August, which means outflow of money from the economy outstripped inflows by Rs 2.1 billion in the first month of 2016-17, according to the latest macroeconomic report of Nepal Rastra Bank (NRB).

This is the first time BoP posted a deficit since September 2014 when it stood at a negative of Rs 10.5 billion, show the central bank data.

BoP deficit was reported afer inflows of money sent by Nepalis working abroad shrank by 2.5 percent and entry of foreign grants fell by 10.2 percent. Also, outflow of money to cover bills of Nepalis studying abroad grew by 59 per cent to Rs 2.9 billion, while demand for foreign currency by outbound Nepali travellers jumped 27 per cent to Rs 7 billion. These factors also played a role in sending BoP to the negative territory.

A negative BoP, or higher outflow of money from the economy, exerts pressure on country’s foreign exchange reserve, which needs to be tapped every time the country imports goods and services, and settles other overseas payments.

The country currently maintains a robust foreign exchange reserve of $9.8 billion, which is almost 45 per cent of the gross domestic product. But gradual fall in stock of this money could create problems in the economy, as import-dependent Nepal needs foreign currency to settle its import bills.

“A BoP deficit will definitely hit forex reserve. But it may be too early to draw conclusions, as we currently have figures of only one month. Also, the BoP deficit may be just a blip and recovery may be made in the coming days,” Nara Bahadur Thapa, head of the Research Department at NRB, told the Post.

Although Thapa’s statement emits a whiff of optimism, the trend, especially that of remittance inflow, says otherwise.

The growth rate of remittance income, for instance, stood at 27.5 percent in September 2015. After that month, remittance growth rate continuously fell and stood at 7.7 percent in July.

Many say the flow of money sent by Nepalis working abroad may not go up in the coming days because of drop in the number of workers leaving the country for overseas employment.

Number of people leaving the country for foreign employment reached the peak in fiscal year 2013-14 when 527,814 Nepalis accepted jobs abroad, show the data of the Department of Foreign Employment (DoFE). That number fell to 512,887 in 2014-15 and to 418,713 in 2015-16, signalling saturation in overseas labour migration. This slackness reduced remittance inflow to Rs 51.9 billion in the first month of the current fiscal year, as against Rs 53.3 billion recorded in the same period a year ago.

This is the first time remittance inflow had registered a negative growth since October 2014.

Fall in remittance income may not bode well for Nepal, as it will reduce consumption and ultimately hit the government’s revenue collection.

However, former NRB governor Yuba Raj Khatiwada said remittance income may have posted negative growth because more Nepalis working overseas may have resorted to informal channels to send money home.

“If remittance income drops next month as well, then the NRB must launch an investigation into it. Also, capital flight may have been taking place on the pretext of sending funds to cover expenses of Nepali students abroad. This issue also needs to be investigated as it is hitting the BoP,” Khatiwada said.

By Rupak D Sharma