CAPITAL FLIGHT AND NEPAL

This Commentary was first published in the The Reporter Weekly

"I am surprised to know this figure," Economist Dr. Madan Kumar Dahal said when I shared with him the total amount of illicit financial outflows from Nepal in the last decade ending 2009. The report-- 'Illicit Financial Flows from Developing Countries Over the Decade Ending 2009' –released recently says that total amount of illicit financial outflow from Nepal is estimated to be US $ 6.040 billion during the period.

Trade mispricing, proceeds of corruption and bribery are cited as the three major drivers of illicit financial outflow from Nepal by the report.  Available information suggest that the trade mispricing contributes 83 percent of total l outflows from Nepal. This study by Global Financial Integrity (GFI) tracks the amount of illegal capital flow from 157 countries. The GFI has ranked all the countries on the basis of volume of total illicit financial outflows and Nepal is placed 83rd.

The total illicit financial outflow from Nepal is around 7.25 percent of our Gross Domestic Production (GDP) compared to the same time period.  The amount of money thus lost is enough to run  almost two fiscal years if the amount is compared with that  of the  annual budget of  the government.

The  GFI has taken into account  the balance of payments (BoP), bilateral trade, and external debt data reported by member countries to the International Monetary Fund (IMF) and World Bank while preparing the report. Dr Dahal who is also an expert in Macro Economics, says that this report throws a challenge to the government to  trace the way, and destination of the capital flight and those responsible for it.  Senior officials from Ministry of Finance (MoF) and Nepal Rasrta Bank (NRB) were reluctant to be quoted.

The enactment of the Anti-Money Laundering Act-2008 and Anti-Money Laundering Regulations-2010 together with the establishment of Financial Information Unit (FIU) within the Nepal Rastra Bank (NRB) may be taken as attempts to deal with the problems of illicit financial outflows. But these acts, regulations and units do not appear as effective when Nepal is losing more due to trade-mispricing. The average contribution of trade-mispricing in Asia is just 53.9 percent where as in Nepal's case, the figure is well above -- 83 percent—the mark.

The illicit financial outflow has become a global problem that the governments from different countries are trying to address. But the same cannot be said about Nepal. While some  cases of anti-money laundering in the supreme court of Nepal  filed few months back have taken their own time, government bailing out the  VAT fraud case worth billions of rupees—of late by transferring the investigating officials en masse—makes its intentions clear.

GFI, an NGO based in Washington DC defines illicit financial flows as 'proceeds from both illicit activities such as corruption (bribery and embezzlement of  national wealth), criminal activity and the proceeds of licit business that become illicit when transported across borders in contravention of applicable laws and regulatory frameworks.  And it has its own impacts. The illicit capital flight doesn't only create the illegal problems, but also weakens the capacity of economic indicators of reflecting the situation.

Illicit Financial Outflow

The Economists wondered when I shared with them the amount of money that outflows illegally from the country. The Global Financial Integrity (GFI)’s report "Illicit Financial Flows from Developing Countries Over the Decade Ending 2009” says that US $ 6.040 billion outflows from Nepal illegally between 2000-2009. The amount of money that has been estimated in the report of GFI is almost equivalent to two fiscal years’ budget of Government of Nepal (GoN).

 

Bribing for Monsanto

The hybrid seeds of maize from the American multinational company Monsanto have been distributing in Nepal with the help of some handful of people. There are several news in different local media that United State Agency for International Development (USAID) is lobbying for the entry of this particular company in Nepal.

The latest news has revealed that local contractors in Nepal are trying to push the seeds of Monsanto by bribing to the government officials in Nepal. This news has taken back to the 2009 when the Government of Nepal had to give money to the local farmers in the Terai region of Nepal when the seeds of Monsanto had cost the maize production hugely. The government had dispersed Rs 2 hundred million in the five districts of Terai region through the Ministry of Agriculture and Cooperative (MoAC). 

LOOKING THE OTHER WAY WHEN CRISIS LOOMS LARGE

This article was first published in the The Reporter Weekly

The last staff report of the International Monetary Fund (IMF) in November strongly recommended structural reform in the Nepali economy with emphasis on productivity and growth. In principle, it argues in favor of need for some changes made for the Nepali economy to move ahead, but neither the IMF nor the Government of Nepal   is clear about what really needs to be done immediately.

Structural reform for productivity and growth may not be a vague prescription, but  senior economists and officials here are quite unable to decipher , and interpret it differently.  "Banking sector risks have intensified as financial institutions proliferated in an environment of weak supervision," the staff report of IMF says. This line clearly shows the lack of efficiency on the CBN's part. Dipendra Bahadur Chhetri, Vice Chairman of National Planning Commission (NPC) and former Governor of the Central Bank of Nepal (CBN), says that the IMF's report has an implied meaning- the reengineering of CBN. Finance Secretary Krishna Hari Baskota does not agree with Chhetri.

Perhaps Baskota did not want to be caught in a controversy by making any statement about the recommendation of the IMF. He suggested that the Economic Affairs Division at Ministry of Finance (MoF) was a more competent body to respond to it.  But for one who has already worked  as a Revenue Secretary before moving to the helm of the Finance Ministry  about what the IMF recommendation implies, is unfathomable .

CBN Chief Yubraj  Khatiwada, who is an expert in monetary policy, has not given any statement on the IMF recommendation  either . However, he does not conceal his disagreement  that borderlines with disappointment with the  IMF team, according to a highly placed source in the GoN. The source said that one specific meeting with IMF team had been particularly rocky. The staff report of the IMF which is released annually after the Article IV consultation meeting with Nepal, is implicitly directed towards Dr Khatiwada and the institution he is leading. But others don’t see that unusual.

In the words of vice-chairman of NPC, there is ample room for improvement in the CBN--this is where the IMF is pointing. The efficiency of CBN can be increased if there is willingness from the leader of the institution. But this is being taken by some others as Chetri’s attempt to shirk his responsibility.

As IMF emphasizes on productivity and growth, something directly associated with the NPC that should make Chettri more thoughtful and introspective, instead of blaming the CBN's leadership.  At the same time, Finance Secretary Baskota needs to understand that he should have a clear take on issues raised by an international agency which is there to support Nepal when it is in a difficult situation.

Key technocrats in the three leading government institutions looking in there different directions, and not formulating a joint approach, to say it more precisely, reflects a situation of policylessness in the country in the given context.  This difference shows lack of a harmonious relationship among these institutions and their  leaders . Not being able to formulate a joint approach would mean their collective failure at a time when the nation faces a financial down turn.

Proposal from China for 4 Ports When India Delays

There are news in media that China has proposed to upgrade the ports in the border areas of two countries (Nepal & China). The agreement is about to be signed in the near future. This news has come out just after the Indian Envoy to Nepal Jayant Prasad’s words in the capital city Kathmandu about the Indian investment of almost $ 15 billion worth of in Nepal’s hydro sector. I am sketching this context to observe the competition between two giant economies in Nepal’s neighbor for something but economic advancement.

In the last week of November, Indian scholar S. D. Muni was in Kathmandu and he was sounding a bit aggressive when journalists questioned about what would be the Indian reaction if there was a huge amount of Chinese investment in Nepal. The preparation for signing the agreement to upgrade the ports in the border area of Nepal should be a lesson to India. The most important thing here is that Nepal has been suffering due to the congestion in the Kolkata and Haldia ports. Nepal has been constantly requesting for the facility of Bhisakhapatnam port since last more than a decade.

Nepal-India Petroleum Pipeline in News Again

The petroleum pipeline that has been talking time and again between Nepal and India—this was talked once again in the Inter-Governmental Committee meeting of two sides, which was held in the Delhi last week. This project had started almost one and half year back but couldn’t be materialized due to some irregularities in the Ministry of Commerce &Supply of Nepal then.The Indian Oil Corporation (IOC) had cancelled the Joint Venture proposal (which was in the verge of signing) by saying that the project wouldn’t work in the proper way.

This Project Won’t work in the Long-run 

The pipeline project might be good for the short run of Nepal’s petroleum market but in the long run this might be a problem. I am saying that because the petroleum market of Nepal should be liberalized for private sector--there must be the private sector’s involvement to enhance the quality of market and supply situation. The much talked private sector’s involvement is not happening due to hold of some bureaucratic hazards.  

IFIC Bank Will Have More Share in NB Bank

The International Finance Investment and Commerce Bank Bank Ltd (IFIC Bank) of Bangladesh has shown interest to invest more in the Nepal Bangladesh Bank in Nepal. The Central Bank of Bangladesh has principally provided the permission to IFIC Bank to invest more in the NB Bank in Nepal.