Remittance inflow decreased in the second and third months of the fiscal year—for the first time in several years. The decline has set off alarm bells as remittance is one of the biggest contributors to the economy.

According to the Nepal Rastra Bank’s (NRB) macroeconomic report for the first quarter, remittance dropped 0.6 percent to Rs 134.19 billion, compared to an increase of 38.2 percent in the same period a year ago. The inflows grew at a meager 0.8 percent in the first month, and decreased 4 percent to Rs 84.48 billion as of the second month of the fiscal year.

Finance Secretary Suman Sharma said the ministry directed the two departments to probe whether illegal funds transfer was responsible for the surprise decline in remittance. The Department of Money Laundering is responsible for investigating transfers of money illegally earned., while the Department of Revenue Investigation probes and takes action against those involved in foreign exchange fraud. The central bank has blamed increased use of remittance to finance illegal trade, particularly gold smuggling, for the decline.

Min Bahadur Shrestha, chief NRB’s research division, said Governor Yuvaraj Khatiwada recently summoned money transfer agencies and banks—two largest media to channel in remittances—and warned they could face strong action if they were found involved in “hundi” businesses too.

“They were asked why the remittance decreased, and warned them of action if they were found involved in ‘double’ businesses,” said Shrestha. On the other hand, the police have also increased vigilance on gold smuggling, confiscating smuggled metal time and again.

The government has only allowed commercial banks to import gold, but the banks have failed to sell their imported gold for more than three months. Even so, the market is not facing any shortage of the precious metal, suggesting a jump in smuggling. Sources say the domestic market has been receiving smuggled gold purchased using remittance.

As the government and the central bank are taking initiatives to curb such illegal activities, Shrestha said the remittance would grow in the coming days. “We are yet to collect full details on remittance, but what we have felt is the situation has improved in the fourth month. But remittance growth has not been substantial yet,” said Shrestha.

Although the country has enough foreign exchange reserves to pay for merchandise and service imports for 9.3 months, Shrestha warned if the trend of using remittance for illegal trade grows, it would hit the economy hard. Particularly, it may hit the country’s balance of payments (BoP) at a time when trade deficit is rising.

The BoP is positive by Rs 2.96 billion as of the first quarter, while the gross foreign exchange reserves stood at around Rs 679.40 billion as of mid-October. According to NRB, the country received remittance worth Rs 543.29 billion in 2013-14.