E-Kantipur

KATHMANDU, JUN 21 -

Amid persistent reports of large scale capital flight from Nepal, a recently-released UN report has placed the country in the sixth position among Least Developed Countries (LDCs) exporting funds illegally.

A report commissioned by the United Nations Development Programme (UNDP) entitled “Illicit Financial Flows from the Least Developed Countries: 1990-2008” has for the first time recorded the extent of capital flight and exposed the gaping floodgates in the Nepali financial system. It also questions what kind of preventive measures officials will now take to stem the outflow.

According to the report, US$ 9.1 billion (Rs 657.93 billion) in capital was siphoned out of the country during the period 1990-2008. On an average, US$ 480.4 million (Rs 34.73 billion) went out of the country annually.

Trade mis-pricing accounts for the bulk (65-70 percent) of illicit outflows from the LDCs, and the propensity for mis-pricing has increased along with increasing external trade. This holds true for Nepal as well.

Former Finance Secretary Rameshwore Khanal attributes under-invoicing as the leading mode of capital flight from Nepal. “Some 70 percent of the capital outflow is through under-invoicing while 20-30 percent is corruption and kickback money,” he said.

The illicit outward flood of capital from Nepal has increased to such an extent that it has outpaced the official development assistance (ODA). For every dollar received in ODA, 1.1 dollar exits Nepal in illicit flow.

The outflow during 1990-2008 amounting to Rs 657.93 billion is equivalent to 8.07 percent of Nepal’s Gross Domestic Product (GDP) for the period.

Rampant under-invoicing (declaring a lower price than the actual price) of goods at customs points has been a major challenge for Nepali tax authorities.

The main reason for the much talked about value added tax (VAT) evasion probe is under-invoicing.

Tax authorities say under-invoicing is rampant in the country’s automobile trade. “The same can be said about the China trade which is totally based on the hundi system,” said a leading banker.

So how does Nepali money flow out of the country? It is believed that the money goes through informal channels, ie, either hundi or hawala.

However, when the money enters foreign banks, it goes through formal channels, said a banker. According to sources, the amount transferred through under-invoicing generally ends up in countries like the US, South Korea, China and Australia.

Yet, there are other ways to send money abroad. Commissions associated with multi-million-dollar contracts of government agencies like the Nepal Electricity Authority, Nepal Airlines Corporation and others are settled abroad. “The commission is generally deposited in offshore accounts,” said one banker.

The UNDP report shows capital flight till 2008. It is believed that outflow of capital has intensified in the last two years. Two instances of last year verify this trend. The Finance Ministry had found that over US$ 100 million was siphoned from Nepal in the name of wool import to various banks in Hong Kong under the credit import facility.

In another instance, the ministry found that Rs 60 million was refunded under the pretext of vegetable ghee export from Rasuwagadhi Customs. As per the provision, VAT paid by a trader while importing or purchasing raw materials is refunded after the goods manufactured from those raw materials have been exported.

However, some traders forged bills for imported raw materials and customs clearance documents for exports and stole huge amounts of money from the government treasury without any actual exports having taken place.

In a nutshell

Rs 657.93 billion in capital was siphoned out of the country during the period 1990-2008

On an average, US$ 480.4 million (Rs 34.73 billion) went out of the country annually

It is believed the money goes through informal channels, ie, either hundi or hawala

When the money enters foreign banks, it goes through formal channels

 

Posted on: 2011-06-21 08:25

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