Cross border payments originating from Nepal are heavily regulated and consumers wishing to import goods and services from foreign countries are faced with a lot of restrictions. With increasing digital presence of businesses on the internet all around the world, Nepal was seemingly lagging in connectivity with such businesses, owing to their regressive payment infrastructure.
In their review of the Monetary Policy of the quarter for the fiscal year 2077-78, the Nepal Rastra Bank in December 2020 (Poush, 2077) stated that arrangements would be made for facilitation of cross border payment for the import of goods and services from foreign countries into Nepal. In furtherance of the same, on March 21 (Chaitra 8, 2077) NRB published a circular of the regulations governing the same.
The need for a new cross border payment infrastructure
Until now, as per NRB laws, an individual is permitted to make a payment of up to USD 2,000 in a year for the purchase of goods in foreign countries for consumption in Nepal. However, these payments are to be made after opening a foreign currency bank account which pose an additional problems to the payee. Further, banks are allowed to provide foreign currency conversion services to Nepali firms, companies and organisations to make payments in foreign countries in lieu of purchase of goods and services up to USD 3,000 made from Nepal. If a company, firm, or organisation wishes to make payment of an amount between USD 3,000 and USD 10,000, it is required to obtain a letter of recommendation from the relevant government entity.
It is safe to say that the laws in Nepal vis-à-vis cross border payment are restrictive in nature. This is primarily pointed to reasoning that in an economy like Nepal allowing cross border payment freely would negatively impact the economy.
The Gross Domestic Product (GDP) of Nepal is heavily reliant on remittance which is the import of foreign currency earned by Nepali workers in foreign countries to be consumed in Nepal. Remittance has enabled a certain level of liquidity in the Nepali markets especially in the consumer sector. Therefore, enabling a free cross border movement of money may severely affect liquidity in the Nepali economy and result in cash crunch that could cripple a growing economy leaving Nepal with long term problems.
Another issue that may arise from enabling unrestricted and unregulated cross border payments from Nepal is the increase in dependence of imports. At a macroscopic level, increase in imports can be harmful for many sectors of businesses especially agriculture. Imports from big economies at lower prices could make the market extremely difficult to compete for local producers and manufacturers to sustain their businesses. Thereafter, an increase in price of imports without having local competitors can deeply affect the market value chain all the way to the consumers.
Having said that, given today’s increasingly digital market, there has been significant demand from the public to be able to make small purchases of goods and services from foreign service providers. In recent days, a lot of businesses are heavily reliant on social media platforms and use it as an additional base to conduct business operations. These businesses incur expenses that are required to be settled cross border such as payments for advertisements on social media platforms, domain registration, web hosting and subscription to various software and applications essential to the growth of their business.
Further, with different applications like Netflix, Amazon Prime Video, Spotify among others, the general public bypasses the existing legal framework for the consumption of these applications. Despite restrictive laws, the general public have established channels through which consumption of the aforementioned foreign services have been made possible. In the past, people have relied on their friends and relatives residing in foreign countries and other individuals that have a foreign bank account by using services such as PayPal, Payoneer, etc to make these payments whilst making payment of the equivalent Nepali rupees locally. This has been acknowledged by the NRB as a completely unregulated “Shadow Economy”.
Apart from this, the Covid19 pandemic has reinforced the optimisation of a digital outlook in day-to-day operations of many sectors. The above reasons may have led the NRB to publish the said circular in order to facilitate the option of cross border payment directly from Nepal in foreign currency.
The NRB has introduced the concept of a prepaid dollar card to make cross border payment for goods and services under certain terms and conditions. This prepaid card may be issued by any bank holding a class ‘A’ or a class ‘B’ license. The limit for payment of the said card is capped at USD 500 in one given year from the date of activation. This amount can be redeemed either in one payment or multiple payments not exceeding the cap amount.
For the issuance of the prepaid dollar card, banks shall be permitted to convert the amount in an individual’s personal bank account and load in on the prepaid dollar card. The prepaid dollar card may be used to make payments in foreign countries for any goods or services that is lawful as per the prevailing laws of Nepal. The Facility of receiving refunds shall also be available to the prepaid dollar cardholders. However, the cardholder shall not be permitted to make local payments through Point of Service (POS) or withdraw cash from ATMs using the dollar prepaid card. One individual is permitted to make only one prepaid dollar card and issuance of two or more cards for the same individual shall be deemed a punishable offence under Foreign Exchange (Regulation) Act, 1963 (2019 BS). These cards can only be issued after the completion of a separate know your customer (KYC) process.
However, the NRB has enabled a provision wherein if the cardholder is found to have generated additional income amounting to at least double the initial amount of USD 500, such cardholder shall be permitted to load additional funds to their prepaid dollar card up to the amount of USD 5000.This is an incentive provided by the NRB to encourage cardholders in income generating activities. However, if a cardholder generates income in excess of this amount, they are mandatorily required to convert the excess amount into NPR and deposit the same in their local bank account. Moreover, it is pertinent to note that even in the event that the cardholder has generated an income of more than USD 5000 using the prepaid dollar card, they shall not be permitted to spend more than USD 5000 in the given year.
While this circular issued by the NRB can be perceived as the beginning of a process that is long overdue, this cannot be treated as a ‘one size fits all’ solution. There are many issues that remain unanswered, despite this proposed plan. For instance, many Nepali individuals choose to enroll in foreign educational institutions wherein they require to make payments for submitting their admission forms. The cap set by the NRB does not enable students to use this to make hefty payments of admission forms in multiple universities and leave them with no choice but to follow the cumbersome process in existence at the moment. NRB must look forward from here and bring more of such reformations to improve the ease of doing business for Nepali entrepreneurs and give access to Nepali consumers to a healthy and competitive market.