Electronic payments during the autumn shopping season were down 20 percent, overturning expectations of a spending surge due to the occurrence of sacred festivals, general elections and the FIFA World Cup.

People celebrated Tihar and Chhath, voted in the polls, and immersed themselves in the soccer championship with gusto, but they seem to have kept a tight grip on their wallets.

According to Nepal Rastra Bank, digital payment transactions during the period mid-October to mid-November amounted to Rs3.94 trillion, down sharply from Rs4.93 trillion last year.

Economists blamed the import restrictions imposed by the government to save foreign exchange for the drop in digital payments, as people made fewer purchases.

Experts also suspect that political parties used informal channels for their campaign expenses as the generous spending that characterises parliamentary elections was not reflected in the central bank's macroeconomic report.

Normally, electronic fund transfers shoot up during festivals and elections. Economists had predicted that the large amounts of money changing hands during the elections would revitalise the stalled economy as all that cash would flow to the market. But that didn't happen.

The experts had also said that the elections would fuel inflation, but price levels actually fell. According to the central bank, inflation dropped to 8.08 percent in the review period from 8.50 percent in the previous month.

“That is something strange,” said economist Govinda Nepal. “The drop in electronic transactions shows that there were more physical cash transactions, especially during the election,” he said.

“In other words, the money that was pumped into the market during the election campaign did not go through the banking system.”

Some economists have said that elections are the right time for politicians to spend their “black money” earned through illegal means.

“Digital payments that had been on a steady rise dropped because the money reached the market from outside the system—not banking,” Nepal said.

In November 2016, the Indian government suddenly invalidated most of the country’s high-value currency notes in a bid to curb corruption and herd people towards digital commerce.

“Digital transactions have declined because the government restricted imports to save foreign currency,” said Dipendra Bahadur Chhetri, former governor of Nepal Rastra Bank.

“A large number of informal cash transactions could have taken place during the elections. People are hoarding cash because of an uncertain economic situation."

The digital payment system grew by leaps and bounds in Nepal after the Covid-19 pandemic as people found it easier to pay for their groceries and other purchases during the lockdowns.

There was a dramatic surge in remittance too when most of the illegal channels were closed during the pandemic, and people started to send money through banks.

Economist Keshav Acharya told the Post in a recent interview that digital transactions, which rose sharply during Covid-19, had been decreasing gradually.

“The money is getting lost. We don’t know where,” said Acharya. According to him, the money is stored somewhere, in cooperatives or people’s homes, but it’s not in the banking system.

“It’s surprising why money is not coming into the banking system even when the interest rate on deposits has increased to 15 percent,” he said.

Electronic payments have been on a declining trend since the beginning of the current fiscal year, and it has accelerated since the local elections in May.

Digital payments dropped from Rs5.68 trillion during the period mid-June to mid-July to Rs4.92 trillion during the period mid-August to mid-September, falling further to Rs4.60 trillion during the period mid-September to mid-October, according to the central bank.

Even though the value of digital payments has been shrinking, the number of transactions has been going up.

During the period mid-October to mid-November, there were 67.19 million transactions, up from 48.66 million a year ago.

“We have assumed that political leaders have distributed money to attract voters. The distributed amounts were not made through the banking system,” Nepal said.

The Election Commission too lowered the spending limit for candidates during the elections. “That could partly be the reason for more transactions happening in informal ways,” said Nepal.

Some economists say that electronic transactions declined due to the rising cost of living. Inflation has been rising but income has stalled, thus reducing people's purchasing power.

Wallet service providers also say that digital transactions have shrunk because people are cutting back on spending due to rising prices of goods and services.

Expensive domestic airfares have significantly reduced online transactions, said a wallet service provider. Fewer people are buying air tickets online.

“Electronic transactions are a reflection of economic activities. Manufacturing and trade activities have slowed because of high interest rates and inadequate loanable funds with banks,” said Neelesh Man Singh Pradhan, CEO of Nepal Clearing House, a company involved in multiple payments, and clearing and settlement systems.

"A reduction in business activities in the market decreases spending. Usually, not many transactions are done in the first quarter of the fiscal year, and that could be one probable cause for the reduction in overall electronic payments,” Pradhan said.

"There has been a rise in mobile banking transactions, wallet and connect IPS which mostly deal with small and retail transactions. But electronic payment transactions made by business houses for trade and other business activities, which are directly linked with large economic activities, have decreased," Pradhan said.

"If online payments drop during mega events and festivals, there is something seriously wrong," said a banker. “It’s either due to slowed economic activities or flourishing black money transactions outside the system.”

Real-time gross settlement amounted to Rs2.74 trillion during the period mid-October to mid-November, down from Rs3.64 trillion a year ago.

Internet banking transactions totalled Rs11.7 billion during the period mid-October to mid-November, down from Rs11.83 billion last year.

Branchless banking transactions declined to Rs1.29 billion from Rs1.31 billion a year ago. However, ATM withdrawals increased to Rs78.27 billion during the review period from Rs62.81 billion previously.

Mobile banking transactions increased to Rs151.98 billion from Rs78.15 billion. Wallet transactions increased to Rs17.22 billion from Rs13.94 billion. Quick response (QR) payments increased to Rs16.14 billion from Rs5.36 billion.

Transactions made through point of sales (POS) increased to Rs4.91 billion from Rs4.41 billion. Transactions through cards increased to Rs663 million during the period mid-October to mid-November from Rs443 million during the same period last year.