Nepal is losing foreign exchange due to illegal Hundi operations

As he inaugurated the ‘Sydney contact office’ of a commercial bank on April 2, senior Nepali politician Ram Sharan Mahat no doubt knew he was doing the right thing for the health of the nation he was the finance minister of.

After all, a regulated body like Global IME Bank would be a good way to discourage illegal Hundi operations which, according to news reports, are seriously harming the Himalayan nation at macro-economic level. Experts clearly believe Nepal is losing foreign exchange due to illegal Hundi operations.

Hundi operations
Dr. Ram Sharan Mahat, finance minister of Nepal.

Hundi is a traditional method of remittance which, by its very nature, does not necessarily follow the strict guidelines that financial organisations are otherwise required to observe. Under the system, the money one sends may not make all the way to Nepal but instead gets diverted to businessmen in third countries who in turn put the fund to their own use, mostly to smuggle gold, Nepal Rastra Bank believes.

According to Kantipur Publications, Nepal’s biggest media outlet, Nepal Rastra Bank (the central bank of Nepal) is concerned with the dwindling rate of remittance growth. It is noteworthy that remittance is the biggest contributor to the foreign exchange reserve of the country.

“The gross foreign exchange reserves increased by just 2.4 percent to $7.11 billion in the first six months this fiscal year, against a rise of 13.4 percent in the same period a year ago, due to a slowdown in remittance growth,” ekantipur.com reported on March 6.

Nepal Rastra Bank.
Nepal Rastra Bank.

A source within Nepal Rastra Bank did confirm to southasia.com.au that the remittance growth rate indeed has ‘decelerated’ this financial year in comparison to the same period last year. The source also indicated ‘under-invoicing’ could be another culprit for the insufficient foreign exchange reserve.

The ekantipur.com said imported gold ‘has remained unsold with banks, but the market has not seen any shortage of the precious metal, suggesting the market has been flooded with smuggled gold’.

Former NRB boss Yuvaraj Khatiwada had strictly warned money transfer agencies and banks saying they could face severe consequences if found involved in Hundi operations. The former governor’s warning came in the wake of reports then that Nepal’s remittance had hit the lowest level in many years.

The central bank suspects the decreased remittance growth might have been caused by the use of Hundi operations to divert remittance for gold smuggling. It is in this light that last December, the Ministry of Finance had directed the Department of Money Laundering Investigation to probe if illegal funds transfer was responsible for the sharp decline in the remittance inflow.

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