In the first month of the current fiscal year 2021-22, the trade deficit increased, foreign exchange reserves plummeted, and remittances dropped substantially, creating concerns that the external sector of the economy—international Nepal’s economic transactions—could be jeopardised.
The trade deficit increased by 70.6 percent to Rs129.97 billion in a single month, according to the Nepal Rastra Bank’s macroeconomic and financial situation report released on Thursday, putting pressure on foreign exchange reserves. Imports surged to a high of Rs150.73 billion in a single month, putting pressure on foreign exchange reserves.
Because the country is spending a lot of money on imports, remittances, which are the country’s main source of foreign currency reserves, fell by 18.1 percent to Rs75.96 billion in the review period, compared to a 23 percent gain in the previous fiscal year.
This resulted in a 3.2 percent drop in foreign exchange reserves, from Rs1,353.82 billion in mid-July to Rs1,353.82 billion in mid-August.
“The rising imports indicate that the country’s economy is on the mend following the second wave of Covid-19,” said Nara Bahadur Thapa, former executive director of the Nepal Rastra Bank. “However, large import bills and decreased remittance inflows have exacerbated concerns for the economy’s external sector.”
Nepal’s economy shrank by 2.1 percent in fiscal year 2019-20, marking the first time the country has experienced negative economic growth in nearly four decades as a result of the pandemic’s initial wave.
The economy was well on its way to recovery by the third quarter of the previous fiscal year when the second wave of the epidemic hit the country in April, causing the government to go into lockdown once more.
With the drop in Covid-19 instances in recent days, from a high of 9,317 cases on May 11 to as low as 790 cases on Saturday, the government authorities gradually eased the lockdown, eventually lifting it completely earlier this month. This also allowed for a large increase in imports, resulting in a drop in foreign exchange reserves.
The present foreign exchange reserves, according to the central bank, are enough to cover imports of goods and services for 8.3 months. The central bank’s monetary strategy for 2021-22 intends to keep enough reserves to cover imports for seven months.
“We shouldn’t be concerned about it until we have enough foreign exchange reserves to support imports for seven months, and we shouldn’t stop importing goods that assist our economy recover,” Thapa added.
If remittances continue to fall in the following months, he believes the government should look for other ways to boost foreign currency reserves, such as exports, foreign aid utilisation, foreign investment, and tourism.
After the government reinstated on-arrival visas and waived quarantine regulations for fully vaccinated international travellers on Thursday, Nepal’s pandemic-ravaged tourism industry has a chance to recover.
Insiders in the tourism business are optimistic that the latest government statement will provide a significant boost to the industry.
A surge in imports of vehicles and their parts, as well as petroleum items, affected the country’s foreign exchange reserves, owing to global price rises induced by the pandemic.
In the first month of the fiscal year, petroleum import bills jumped by 132.7 percent to Rs15.8 billion, while vehicle imports increased by 117.2 percent to Rs9.48 billion.
In April of last year, the authorities imposed restrictions on the import of foreign alcohol and luxury vehicles costing more than $50,000, as well as betel nuts, peas, peppercorns, and dried dates, in an effort to conserve foreign exchange, following concerns that the pandemic could spread to foreign labour destinations, causing Nepali migrant workers to lose income.
Because remittances did not fall as expected and foreign exchange reserves remained stable, the government began lifting limits on various dates in October of last year.
According to central bank data, intermediate consumption products were the most heavily imported, followed by final consumption goods. Intermediate consumption goods are goods that are used to make final goods.
In the first month of this fiscal year, the country imported Rs80.96 billion in intermediate goods and Rs52.49 billion in finished goods.
According to economist Keshav Acharya, a significant increase in imports should be cause for concern at a time when remittances have declined and other sources of foreign cash, particularly tourism profits, have been unstable.
“We need to look into which commodities contributed to the enormous increase in imports,” Acharya told the Post. “We should also look into whether remittance inflows have reduced despite the increased departure of migrant workers.”
The central bank’s spokeswoman, Dev Kumar Dhakal, stated that despite a modest drop in foreign exchange reserves, there was no need to panic because existing reserves were in good shape.
“Even if remittances fell in the first month of current fiscal year, we shouldn’t be concerned as long as it doesn’t become a trend,” he added, noting that the inflow of remittances has fluctuated for the past year and a half.
Meanwhile, according to the central bank, exports increased by 115.9% to Rs.20.76 billion in the first month of the current fiscal year, owing mostly to the re-export of palm oil to India.
However, the country’s exports are tiny in relation to its imports, therefore the differential in foreign exchange gains is not significant.
The tourism industry has been destroyed as a result of the epidemic, and it will take several years for it to recover to pre-pandemic levels. Although foreign direct investment (FDI) has remained low and the government has received more foreign loans, the present government has adopted a strategy of taking fewer loans in its replacement bill for the budget ordinance.
According to experts and officials, the moment has not arrived to make any policy changes based on data from the first month of the current fiscal year. They did say, however, that data on remittances, exports, and imports should be scrutinised closely to prevent putting the external sector at risk.
“If necessary, we have mechanisms to control the entry of non-productive goods,” said Dhakal, the central bank’s spokesperson.