Slumping foreign reserves have raised fears that Nepal could be another Sri Lanka in the making. The Russian invasion of Ukraine has increased the cost of imports, saddling Nepal’s economy with galloping inflation.
According to the World Bank, exporting countries such as Vietnam, Thailand, and Mexico are seeing significant decline in their manufacturing capacity, particularly in energy-intensive sectors, as a result of the war. Crop exporters such as Turkey, Brazil, and India, as well as fossil fuel exporters like Nigeria and Middle-East countries are also facing difficulty with exports.
Analyzing the data from the Ministry of Industry, Commerce and Supplies, Nepal gets almost two-thirds of the goods—from petroleum to cereals—from India. With India itself grappling with the economic jolt dealt by the Russia-Ukraine war, Nepal is not just importing goods but also inflation. Currently, every exporting country that Nepal relies on has been facing a price hike, which automatically drives up the import rates.
Looking at the data, Nepal’s import bill seems to be increasing in the alternate years we tracked, starting from the fiscal year 2009/10. The increment started well ahead of the Russian-Ukraine war. The war only acted as a catalyst to push Nepal towards an economic crisis.
The government has enforced restrictions on the import of luxury goods to maintain the country’s dwindling foreign currency reserves, but it continues to import the essentials like petroleum and cereals, as well as raw materials like iron and steel at increased rates.
Easier to import goods than manufacture them in Nepal
Pabitra Bajracharya, President, Nepal Retailers Association
Although we can see that the import cost has reduced significantly in 2020, it was a result of the Covid-19 pandemic. The import rate, without a doubt, will escalate in the coming years. One of the solutions to reducing imports is promoting domestic goods. But the policy for domestic production is not favorable for investors as well as industry owners.
Our policies have made it easier to import goods rather than manufacture them within the country, increasing the country’s dependency on foreign goods. The reason for this is the higher cost of manufacturing in Nepal.
Moreover, importing raw materials, ensuring the manufacture of final goods and hoping to make profit out of them are tedious processes. It is far easier to import, which also ensures profit for a lot of businesspersons.
There is also the insecurity of not being able to attract an adequate number of buyers. This insecurity is driving up imports and discouraging local manufacturing.
The constant increase in the import cost seen over the last decade might be pushing Nepal towards a devastating economic crisis. The Russia-Ukraine war has hugely affected the import rate.
If we do not proceed with caution, Nepal will become the next Sri Lanka before we know it.