Massive capital flight jolts Nepal

India, Nepal's southern neighbour and biggest trade partner that allows Nepalis the same investment facilities as Indians, is the biggest destination of the fleeing funds with ATMs in India being commonly used to transfer them from Nepal.

Nepal Rastra Bank (NRB), the republic's banking regulatory authority, said in the current fiscal, Rs.19 billion had been withdrawn from bank accounts in Nepal through ATMs in India. In the last fiscal, the withdrawals were limited to Rs.3 billion.

Worried by the growing flight of capital, NRB has clamped down on domestic withdrawals. Currently, only Rs.25,000 can be withdrawn daily though ATMs in Nepal and a maximum of Rs.200,000 monthly.

However, with several banks having tie-ups with Indian banks, Nepali customers can withdraw money from Indian ATMs, circumventing the restriction.

The facility has caused the transaction of bank drafts to dip in Nepal.

Earlier, people going to India on business, medical or educational purposes and other reasons, used to buy drafts from Nepali banks and encash them in India.

However, security concerns have now made the process cumbersome. Buyers have to provide documentary evidence for large sums to show why they need the money in India, making the transaction lose its appeal.

The NRB said while the last fiscal saw draft transactions worth Rs.1.83 billion take place, this year it had dropped to Rs.1.50 billion.

Nepal's laws prohibit Nepalis from investing outside the country. While business organisations are lobbying the government to change the archaic rules, investors are not deterred, buying properties outside and doing business in the names of others.

Besides the flight of capital, Nepal has also been grappling with an acute shortage of the Indian currency that till three years ago was easily available and accepted readily in Nepal's shops and hotels.

The ballooning deficit in bilateral trade between the two neighbours has contributed to the crisis. This fiscal, the deficit had crossed Rs.123 billion.

To tide over the crisis, NRB has been forced to sell its dollar reserves and buy Indian currency from the neighbouring country.

Last fiscal, NRB sold $219 billion to buy Indian rupees worth Rs.102 billion. This fiscal, it has bought Indian currency worth over Rs.65 billion.