A limping economy weakened by external sector vulnerability

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Cholendra Bahadur Karki, who owns and operates trekking agency, has been receiving enquiries from foreign tourists regarding trekking sites such as the Annapurna and Everest routes, among other things.

 

In statement to the Post, Karki, managing director of Himalayan Joy Adventure Pvt Ltd, said, “Around 30 groups have already confirmed their trekking plans with us for the months of February, March, and April next year.”

However, the advent of the Omicron coronavirus variety has spurred countries all over the world to adopt travel restrictions as a precaution.

“After a long period of consideration, my company decided to organize trekking for a large of parties. The fact that they are being forced to cancel their vacation plans as a result of the new variation will be a major setback for us,” said Karki, who is also the first vice-president of the Trekking Agencies’ Association of Nepal.

From February through April, during the peak season, his company organized trekking for over 60 groups per day in normal hours.

After the of Covid-19 cases in Nepal began to decline at the same time that the government ramped up its vaccination campaign, the country’s tourism industry, which contributes significantly to the country’s economy, was on the verge of regaining its footing after being virtually destroyed by the pandemic for the previous two years.

According to the Nepal Tourism Board, a total of 23,284 international tourists arrived in Nepal by air travel in October. In November, 26,283 foreign tourists visited Nepal, the greatest of visitors since the Covid earthquake.

In September, Nepal reinstated on-arrival visas for international travelers in an effort to revitalize the tourism industry, which had been ravaged by Covid-19-related restrictions since 2015.

“Even though the recuperation has been delayed, we were anticipating a long-term improvement.” “However, the new version has us a little concerned.”

Nepal’s tourist industry is one of the most important donors to the country’s foreign currency reserves.

With only $35 million in revenue from the tourism sector in the first quarter of the current fiscal year 2021-22, Nepal experienced a significant reduction from the $153 million earned in the first quarter of the previous fiscal year 2019-20, before the pandemic began.

Remittances from Nepal to other countries decreased by 7.6 percent in the first quarter of this fiscal year, to Rs239.32 billion, despite a significant increase in the of Nepali migrant workers who went overseas. In addition, the amount of remittances received declined by a significant 18.1 percent in the first month, to Rs75.96 billion, and by 6.3 percent in the second month, to Rs155.37 billion.

With the decline in foreign exchange profits from tourism and remittances, the rise in imports has resulted in a significant outflow of foreign currency.

According to the Nepal Rastra Bank, the country’s gross foreign exchange reserves fell by 6.5 percent to $10.98 billion in mid-October from $11.75 billion at the start of the current fiscal year. The first and second months of the current fiscal year saw a decline of 2.8 percent and 5.2 percent, respectively, in terms of total volume.

The bank’s current foreign exchange reserves are sufficient to cover imports of goods and services for 7.8 months, which is somewhat over than the minimal threshold of seven months set by the bank in its monetary policy for the current fiscal year, according to the bank. As a result, the central bank estimates that the balance of payment (the difference between inflows and outflows of money) has gone negative by Rs76.14 billion, or Rs76.14 billion.

Nepal’s imports grew by 61.6 percent to Rs650.29 billion in the first four months of the current fiscal year, according to official figures. According to the Trade and Export Promotion Centre, despite the fact that exports increased by 104.3 percent to Rs82.12 billion, the increase is small when compared to imports.

According to the central bank, a large portion of bank credits has also been used for importation, resulting in a scarcity of liquidity to finance economic activity in to assist the economy that has been decimated by the Covid-19 virus.

As the Nepal Rastra Bank noted in its quarterly review of the monetary policy 2021-22: “At a time when there has been an for credit for recovery, a significant share of bank credits has been used to make payments for imported goods,” the bank’s quarterly review of the monetary policy 2021-22.

According to the central bank, despite an increase in credit for imports, remittances have decreased, posing a threat to the stability of the external sector.

Among the sectors covered by the external sector of the economy are export and import, remittance, foreign direct investment, and international assistance.

In turn, the challenges that arise in the external sector are causing problems in the internal sector of the economy, according to Keshav Acharya, an economist at the World Bank.

The decrease in remittance inflows has also had an impact on bank deposits. A deficit of loanable funds has been created, according to the central bank, because deposits climbed by only Rs56 billion in the first quarter of the current fiscal year while lending increased by Rs286.56 billion.

The majority of banks and financial institutions have either stopped lending altogether or are only offering loans in limited quantities dependent on the availability of funds at the moment.

“The failure of banks to offer loans will have a negative impact on the prospects for economic growth since economic activities will slow down when there is insufficient cash in the market,” said Acharya.

The administration intends to achieve economic growth of seven percent in the current fiscal year, according to official estimates.

One method for the economy to remain active is for the government to spend its capital budget; however, the indicators are not favorable on this front as well at this time.

Acharya explained that because the government has not been able to spend the capital budget, it has not been able to claim reimbursement from donors, and as a result, inflows of foreign cash in the form of foreign aid have slowed, as well.

According to the Financial Comptroller General’s Office, a government department responsible for keeping track of the government’s income and expenditures, the government’s capital spending accounted for only 5.57 percent of the total allotted capital budget as of last Friday. The capital budget for the current fiscal year has been allocated by the government at Rs439.65 billion.

As Acharya pointed out, both the government’s incompetence in allocating the development budget and the economy’s deteriorating external sector have contributed to the downturn in the economy.

Some of the practices of the government and the central bank, according to experts, have also been detrimental to the country’s foreign exchange reserves.

“The central bank’s approach of limiting interest rates has contributed to capital flight,” said Prashant Raj Pandey, an economist at the University of California. Interest rates were under control last month thanks to a rule from the central bank that prevented banks and financial institutions from increasing interest on deposits by more than 10% over the previous month.

“Depositing money in Indian banks has been a long-standing habit, and the government’s policy of regulating interest rates on deposits will result in capital flight.” In a time when our foreign exchange revenues are dwindling, adopting such a policy could result in a money outflow,” said Pandey, who is affiliated with VRock and Company, a management consulting business that specializes in infrastructure and the banking sector.

In to deal with the vulnerability that the external sector of the economy is experiencing, experts believe that the government must develop immediate, medium-term, and long-term solutions.

In light of the country’s fragility as a result of its over-reliance on remittances, Govinda Pokharel, former vice-chair of the National Planning Commission, has called for import substitution measures as well as tourism marketing efforts. “There is a delicate balance that must be struck. Controlling imports can have a negative impact on revenue collection. It is estimated that imports account for about half of the government’s total revenue.”

However, the greater the amount of imports, the greater the amount of foreign money that is being exported.

According to experts, one of the long-term initiatives Nepal to implement is lowering the country’s over-dependence on remittances from its citizens. Such a policy has become increasingly necessary as host countries for Nepali migrant workers have begun to hire locals in place of the migrant labor.

We are currently significantly reliant on foreign exchange remittances to generate income, according to Acharya, the economic advisor. We must establish alternate sources of foreign exchange earnings to enable us to continue to purchase important foreign products and services, as warning signs have already appeared.

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