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Capital Flight $8b siphoned off Nepal in 10 yrs: GFI report

KATHMANDU, DEC 18 - A large scale capital flight has taken place in Nepal between 2001 and 2010, with the country losing a whopping $ 8.01 billion (Rs 703.94 billion billion), says the latest report published by the US-based think tank Global Financial Integrity.

On an average $ 801.4 million (Rs 70.39 billion) went out of Nepal annually, according to GFI report ‘Illicit Financial Flows from Developing Countries: 2001-2010’. Its previous report titled ‘Illicit Financial Flows from the Least Developed Countries: 1990-2008’, had put Nepal’s annual capital flight at $ 480.4 million.

Nepal’s protracted political transition had intensified capital flight in the past few years, with $1.5 billion and $1.8 billion being siphoned off the country in 2009 and 2010 respectively, the report points out. Based on the amount of capital flight, Nepal has been ranked at the 58 position among 143 countries surveyed across the world and sixth among Least Developed Countries (LDCs) exporting funds illegally.

Trade mis-pricing accounts for the bulk of illicit outflows from the LDCs like Nepal, according to former Finance Secretary Rameshwore Khanal. He attributes under-invoicing as the leading mode of capital flight from Nepal. “Some 80 percent of the capital outflow is through under-invoicing followed by corruption and kickback money,” he said.

A major challenge facing Nepali tax authorities is the rampant under-invoicing (declaring a lower price than the actual price) of goods at customs points. The main reason for the much talked about value-added tax (VAT) evasion probe two years ago was also under-invoicing.

According to tax officials, under-invoicing remains rampant in the country’s automobile trade. “Same is the case of the Nepal-China trade as it is totally based on the hundi system,” said a leading banker.

Nepali law prohibits its nationals from investing abroad or holding accounts in foreign banks. But that has not stopped money from going abroad through illegal channels. Leading bankers say representatives of leading private banks like HSBC, Credit Suisse, UBS, Deutsche, EFG, City and Coutts visit Nepal every year to meet individuals with a high net worth.

Nepali money flown out of the country, according to bankers, goes through informal channels, ie either through hundi or hawala. “However, once 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.

Sources said businessmen holding dealership of international products generally keep some part of their commissions in foreign banks.

Economists say the large scale of capital flight, as the GFI report suggests, poses serious challenge for the country. “The capital flight has hit the country’s economic policy hard as Nepal always lack accurate import and export data,” said Khanal.

China leads the GFI’s table of the countries with highest illicit capital flight, with Mexico, Malaysia, Saudi Arabia, Russia, the Philippines, Nigeria, India and Indonesia completing the top 10. 

Posted on: 2012-12-19 08:55

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