NEPAL’S ECONOMY Confronting Crisis

As the flow of remittance has started to decline slowly with the COVID-19 pandemic, Nepal’s relatively healthy Balance of Payment (BOP) is under a strain for the first time in the last two decades

Oct. 8, 2021, 10:17 a.m. Published in Magazine Issue: VOL. 15, No. 06, Oct. 08, 2021 (Ashoj 22, 2078) Publisher and Editor: Keshab Prasad Poudel Online Register Number: DOI 584/074-75

While the Dashain festival is knocking on the door of the people, they are less enthusiastic about it than they would be before the COVID-19 situation. Nepalese economy has been suffering from the pandemic’s very harsh blows.

Although Nepal’s BoP has not worsened, Nepal has to learn a lesson from the recent events of Sri Lanka. Due to depletion in foreign currency reserve, Sri Lanka is facing problems in the import of goods.

Like Sri Lanka, Nepal is also a net importer of foods and other commodities including petroleum products. As Nepal needs foreign currency reserves to pay for those imports, any imbalance in its reserve is likely to impact the economy.

The tourism sector is a major contributor to the Nepalese economy. In 2019, the contribution of travel and tourism to GDP for Nepal was 7.9 percent. Given such a situation, the reduction of number of tourist arrival will likely create a bad economic situation.

Tourist arrivals in the country plummeted in 2020 due to the health crisis and the worldwide restrictions on travel, causing the Nepali economy to shrink by as much as 3.6%.

Nepal's balance of payments (BoP) surplus dwindled to Rs 1.23 billion in fiscal year 2020- 21 (mid July 2020 to mid-July 2021) compared to a surplus of Rs 282.41 billion recorded in the previous fiscal year, the latest macroeconomic update of Nepal Rastra Bank (NRB) shows.

The central bank report reveals that the current account deficit ballooned to Rs 333.67 billion in the review year compared to a deficit of Rs 33.76 billion in the fiscal 2019-20.

Similarly, in the review year, capital transfer increased 7.4 per cent to Rs 15.26 billion and net foreign direct investment (FDI) increased 0.2 per cent to Rs 19.51 billion. In the previous year, capital transfer and net FDI amounted to Rs 14.21 billion and Rs 19.48 billion, respectively.

Meanwhile, remittance inflows increased 9.8 per cent to Rs 961.05 billion in the review year against a decrease of 0.5 per cent in the previous year. This was despite the fact that the number of Nepali workers (institutional and individual-new and legalized) taking approval for foreign employment slumped 62.8 per cent in the review year. It had decreased 20.5 per cent in the previous year.

The number of Nepali workers (renew entry) taking approval for foreign employment decreased 46.8 per cent in the review year against a drop of 34.7 per cent in fiscal 2019-20.

Export Situation

During 2020-21, Nepal’s merchandise exports surged 44.4 per cent to Rs 141.12 billion compared to an increase of 0.6 per cent in the previous year.

Destination-wise, exports to India and other countries increased 51.7 per cent and 27.7 per cent respectively whereas exports to China decreased 14.7 per cent.

At the same time, Nepal's merchandise imports jumped 28.7 per cent to Rs 1,539.83 billion in fiscal 2020-21 against a decrease of 15.6 per cent a year ago. Destination-wise, imports from India, China and other countries increased 32.1 per cent, 28.6 per cent and 19.6 per cent, respectively.

The huge imbalance in the country's exports and imports resulted in the total trade deficit of staggering Rs 1,398.71 billion during 2020-21. Consequently, the trade deficit that had narrowed 16.8 per cent in the fiscal 2019-20 widened by 27.3 per cent last fiscal. The export-import ratio increased to 9.2 per cent in the review period from 8.2 per cent in the year 2019-20.

Releasing the whitepaper in the Parliament earlier this month, Finance Minister Janardan Sharma had also flagged the mounting government debt while fund mobilization in the production sector remains tepid.

"This won't just result in shortage of financial resources for development projects but a large portion of government revenue will be spent to offload interest and loan repayment,"

Meanwhile, Nepalese rupee has lost its value so far this year. The decline in foreign currency reserves, coupled with the depreciation of the national currency, will likely put Nepal in difficulty to pay for imports and meet its debt payments.

Given the depletion of foreign currency, Nepalese received just a minimum of foreign currency they need. From $ 2500 hundred for each traveler, Nepal has already reduced it to $1500.

How the government is tackling the problem

Although the situation is getting worse, Nepal government has not taken any concrete action to retain the current level of foreign currency reserve. With the pressure from vehicle dealers, there is no restriction on imports of vehicles. Similarly, the government is unable to increase the petroleum products due to the pressure from populist political parties.

The statistics related to trade in the first month of the current fiscal year 2021/22 released by the Department of Customs shows that the country imported foreign goods worth Rs 150 billion 731 million 719 thousand in the first month of this fiscal.

This is an increase of 75.66 per cent compared to the import in the first month of the last fiscal year. The import in the first month of the last fiscal year, 2020/21, stood at Rs 85 billion 807 million 900 thousand.

Similarly, goods worth Rs 20 billion 765 million 100 thousand were exported in the first month of the current fiscal year. A high rise has been witnessed in the export in the first month of the current fiscal year compared to the rest of the fiscal years. Goods worth Rs 9 billion 620 million were exported in the corresponding period of the last fiscal year.

Compared to the last fiscal year, export increased by 115.85 per cent in the first month of the current fiscal year.

As per one month's statistics released by the Department, petroleum products top the commodities imported by Nepal. Petroleum products worth Rs 18.13 billion were imported in one month.

Oil products worth over Rs 11.93 billion were exported from Nepal in one month. Similarly, Nepal imported foreign goods worth Rs 150.73 billion from 102 different countries during one month.

As per the statistics, Nepal imported the highest amount of different types of goods worth Rs 89.48 billion from India in one month. Nepal imported a large amount of goods worth Rs 20.97 billion from China after India during the same period.

Similarly, Nepal exported goods worth Rs 16.83 billion in India while Rs 80 million in China in one month.

As the COVID-19 pandemic spread in spring 2020, many feared a major economic catastrophe. But it has so far failed to materialize. At that time, investors withdrew their capital from emerging markets at record speed, threatening to bleed the countries dry financially. But after the initial shock, the situation returned to normal.

Global financial institutions like the International Monetary Fund (IMF) and the World Bank have provided a lot of money and played an important role in stabilizing the markets. In this way, they allayed investors' fears that sovereign bankruptcies could occur as a result of the crisis.

Given the current global economic uncertainty caused by pandemic, Nepal‘s challenges are multiple and it needs to maintain economy in years to come. With the frequent changes in the government due to political instability, Nepal may face major economic challenges.

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