A report entitled Current Macroeconomic and Financial Situation published by Nepal Rastra Bank for the first two months of the current fiscal year 2021-22 paints a dire picture of the Nepali economy. Merchandise imports swelled by 75.9 percent year-on-year to Rs314.52 billion. Though exports too rocketed by 115.4 percent to Rs44.04 billion, it is still David in front of imports that is Goliath. The trade balance takes an obvious hit. But it is the decrease in remittance—the earning in foreign currency that finances imports and buttresses Nepal's foreign exchange reserves—that set alarm bells ringing. Relative to the corresponding period in fiscal 2020-21, remittance during the first two months of this fiscal year (mid-July to mid-September 2021) decreased 5.8 percent to $1.31 billion.

Owing to the scourge of Covid-19, global growth contracted by 3.5 percent in 2020. Despite health concerns, supply disruptions and price pressures, the International Monetary Fund predicts the world economy to grow by 5.9 percent in 2021 and 4.9 percent in 2022. The expansionary fiscal policies run by the major economies to compensate for lost output and abundant liquidity in the banking system have led to a price surge of 44.5 percent in energy, 20.5 percent in agricultural products and 17.6 percent in industrial metals during the first two quarters of 2021, Bloomberg reports. And add to that escalating shipping costs, courtesy of shipping container shortages.

Sleepless nights

The results: Imports have become notoriously expensive, widening Nepal's trade deficit to Rs270.48 billion within the first two months; gross foreign exchange reserves have decreased by 5.2 percent to $11.14 billion. Though still able to finance merchandise and service imports for 7-8 months, a dwindling reserve could trigger a run on the country much like a bank run. So, the fall in remittance—the only reliable source of funding that could replenish the reserve—is giving policymakers sleepless nights.

Interestingly, remittance during the first two months of the fiscal year 2020-21 had increased 2.6 percent to $1.39 billion from the corresponding period a year prior. It was a welcome shock to policymakers who were bracing for imminent turbulence. After all, if not for the consistently rising dollar inflow from remittance, no amount of policy tweaks could save Nepal’s consumption-of-imported-stuffs-based economy from crash landing. But where do we get such vital remittance from? With a share of over 50 percent, the Gulf countries and Malaysia have remained the mainstay of remittance to Nepal. Besides housing over 1.5 million Nepali immigrants, they have also underpinned poverty reduction in Nepal and fostered a semblance of equity. Unfortunately, they were hard hit by the pandemic.

Tourism, commodities and manufacturing form the bedrock of their economies. Travel bans and declines in the price of commodities hit them hard. Besides, airports were sealed, and tourist arrivals plummeted. Supply chain disruptions stalled manufacturing. Many Nepalis working in hotels, supermarkets and factories either lost their jobs or were forced to accept extended unpaid leaves. As the menace of Covid-19 receded in 2021, travel bans were lifted, and flights resumed. Vaccinated could travel much freely. And Nepali workers "stranded" back home embarked on the journey to the Gulf and Malaysia to continue with their jobs. Everyone breathed a sigh of relief, including policymakers. But much to their chagrin, with lives becoming normal, remittance, instead, started to tumble. What fuels the paradox?

Nepali migrants, except for those working in the Western countries, neither have a route to permanent residence in their country of abode nor can they afford to keep their families with them. So, many labour a lonely life but remit regularly like clockwork. So, total remittance flow into Nepal is pretty much stable–a function of the Nepali immigrants’ population. The only contention is the ratio of splits between the formal channel and the informal one.

Nepal maintains a closed capital account which renders the Nepali rupee inconvertible. So, it is notoriously difficult to transfer wealth or income out of Nepal. But being a democracy, movement in and out of the country is unchecked. It creates demand for US dollars overseas. And thanks to thousands of willing Nepali migrant workers, supply is also plentiful. The combination has spawned multiple "offshore" markets for Nepalis to trade rupees for dollars where dollars is collected overseas and payment settled with rupees in Nepal.

The key demands for dollars in the overseas market are to settle under-invoiced international trade, buy gold and gadgets to smuggle into Nepal, and invest overseas. And to finance the shopping of Nepali tourists. The first three needs have been detailed over the years. The last one–a newer phenomenon where Nepalis on a trip to, say Dubai, buy as much gold and gadgets while returning home to cover their expenses–was gaining strength by the day until the pandemic froze travel and slammed a brake on it.

A closer look at the drivers reveals the need for the typical business environment for the market to exist. The lockdown imposed to contain the coronavirus restricted vehicular movement causing a sharp decline in trade; suspended flights halted the smuggling of gold and gadgets; worldwide lockdowns discouraged overseas investments; and no chance to fly overseas ended any prospect of having to finance shopping. The developments temporarily neutralised the demand for dollars in the overseas market.

Reasons for increase

The World Bank had predicted a fall in remittance for 2020 because of widespread job losses and the decline in the price of crude oil. But remittance to Nepal witnessed an increase of 8.2 percent to $8.15 billion during the fiscal year 2020-21. Revising its forecast to reflect the growth instead, the bank attributed the increase to inroads made by digital channels, cut on expenditure by the migrants, and remitters’ new-found affinity for the formal channel.

It is late 2021. Things are pretty much back to where we had left them in 2019 before the coronavirus jumped to infect humans. And so are the drivers of dollar demand in overseas markets. On cue, unscrupulous elements have risen from their slumber and started offering premiums on the exchange rate to tap in dollars earned by Nepali migrants that otherwise would have been legally remitted to Nepal. Sans intervention, such overseas markets which suck dollars like a vortex are here to stay.