Nepal Rastra Bank has given up on its plan to license companies to deal with the payment of social media advertisement for the time being as it is content with existing mechanisms.

Early this year, the central bank had directed companies involved in sending foreign currency abroad for advertisements on social media, to route all such payments through the local banking channel.

In a notice, it had stated that any payment outside the local banking channel would be deemed illegal and punishable as per the Foreign Exchange Regulation Act. In response, advertising agencies have demanded a specific policy on how to make payments for foreign services. During a discussion with advertising agencies, the central bank had floated the idea of licensing companies that deal with the payment of foreign currency for social media advertising.

“We had held discussions on the possibility of issuing licenses to certain companies to provide payment service for social media advertising,” said Guru Prasad Poudel, director at the foreign currency management department. “But, we have not moved ahead towards that direction for the time being as existing mechanisms appears to be enough to ensure channelizing of payment of foreign currency through the banking system.”

As per the central bank’s circular, the country’s commercial banks can provide up to $3,000 for service imports against payment in Nepali rupees. The banks can also provide between $3,000 and $10,000 for service imports, based on the recommendation of the regulator for the sector the company is operating in.

For making payments valued higher than $10,000, the central bank’s approval is mandatory.

“It is not necessary to invest big for a social media advertisement one time and one can approach the central bank to make bigger payments by collecting several bills at a time,” Poudel said. “Some companies have been approaching us regularly to make bigger payments.”

He also said that one factor behind the central bank's frozen idea of licensing certain companies for the job is that it could encourage an outflow of more foreign currency which could have a detrimental effect on the foreign currency reserves.

Currently, the country’s foreign currency reserve is at a comfortable level thanks to expectation-defying remittance inflows and reduced import bills.

According to the central bank, foreign currency reserves of the country stands at $12.2 billion as of mid-September which is sufficient to sustain imports of goods and services for 14. 9 months.

The concerns over the foreign currency reserve was one of the reasons that led the central bank to direct firms and individuals against making payment of social media advertisements outside the banking channel.

When the notice was issued, remittance growth was slowing. Coronavirus pandemic posed further risk to the foreign currency risk amid the potential impact of the pandemic on remittance inflow, the biggest source of import financing.

But, according to Rabindra Kumar Rijal, president of the Advertising Association of Nepal, they have estimated a payment of around Rs3 billion annually based on discussions with the stakeholders. “There has been payment of around Rs1.5 billion through advertising agencies and people have spent additional Rs1.5 billion on their own for social media advertising,” he said.

Amid the growing use of social media in the country, agencies are increasingly placing advertisements on social platforms to promote their clients’ products and services. Website developers also have to make payments for purchasing space on the web and many of them are involved in boosting social media presence.

According to advertising agencies, most of them are making payments of advertisements posted on social media such as Facebook, Instagram, Twitter and YouTube through foreign currency cards held by their relatives and friends abroad while reimbursing the amount to the families of the cardholders back home.

After the central bank warned of legal action against those who make payments outside the banking channel, advertising agencies had asked the central bank to come up with the plan that eases them to make payments.

One of the options advertising agencies had suggested in response to the central bank’s notice is that they should be provided international cards worth up to $5,000 to pay for social media advertisements. However, the central bank failed to introduce any further measure to ease such payment.

“The central bank should not have backtracked from its promises of establishing a system of making payment for social media advertising,” said Rijal. “If you don’t give an easy way out, people make payment in whatever way possible.”

He said that the central bank might have underestimated the scale of payment being made for social media advertising because its size has not been much bigger. “There are advertising agencies and firms who may not want the foreign exchange payment to be regulated,” he said.

Advertisers have the advantage of not sending money through the banking channel as they can avoid paying taxes.

“Using banking channels would make social media companies pay taxes. As a result, the client will have to pay more, which they don’t want,” Santosh Shrestha, managing director of Mars Advertising and Research Private Limited told the Post.