Nepal’s economy is in a bad shape. Economists are urging the government to take drastic measures even as its options are limited.
Ballooning imports, unpredictable remittance inflow, dismal foreign direct investment (FDI), and sluggish recovery of tourism have depleted Nepal’s foreign exchange (forex) reserves, putting authorities on high alert.
The ongoing Russia-Ukraine war has meanwhile disrupted global supply chains, causing prices of oil and commodities to skyrocket. All these factors have pushed up the country’s inflation and strained its balance of payment and foreign currency stock. A prolonged liquidity crisis has added fuel to the fire. Economists warn of an impending economic crisis.
Meanwhile, Sri Lanka’s financial crisis has caused a degree of panic among the public and there is a risk of the private sector losing confidence. Economists and government officials, however, maintain that Nepal’s economic outlook is much better than Sri Lanka’s. Finance Minister Janardhan Sharma has even claimed that the economy is already recovering.
Senior economist Chandra Mani Adhikari says the Sri Lankan crisis has exposed the vulnerability of smaller countries, irrespective of their growth prospects. “Small and emerging economies could plunge into crisis despite their good economic indicators,” he says, “if their policies are flawed and resources are haphazardly mobilized.”
Borrowing from the traffic-light system, he says Nepal’s economy is currently in the “yellow zone”, a notch below the “red zone”. But he also adds that the country's economy has never reached the “green zone”, he adds.
Dilli Raj Khanal, a former MP and National Planning Commission member, says Nepal and Sri Lanka may differ in the nature of their economic woes, but the trends are similar, which is a cause for concern.
“As in Sri Lanka, politicians here are busy covering up their failures. They want to downplay the crisis instead of introducing coping measures,” he says.
Dwindling foreign reserves is a major concern for authorities. The country’s international currency stock decreased by 16.3 percent to Rs.1.17 trillion by mid-March 2022, from Rs.1.39 trillion by mid-July 2021, according to the April 12 records of the Nepal Rastra Bank. The current forex reserves can sustain imports for just six to seven months.
In the pre-pandemic year of 2018-19, the country’s foreign currency pile had increased by Rs 22.5bn. When the pandemic broke out in 2019-20, forex reserves further increased by Rs 386bn, as imports contracted and remittance flow was still stable.
But when the lockdown was lifted, there was a sudden surge in imports, decimating the foreign reserves.
The current crisis did not happen overnight. Over the past few decades, Nepal’s rate of imports vis-à-vis exports has been going up constantly.
According to the central bank, in the past eight months, merchandise imports increased 38.6 percent, to Rs 1.30 trillion, compared to an increase of 2.1 percent a year ago. Destination-wise, imports from India, China, and other countries increased by 28.1 percent, 36.7 percent, and 75.4 percent respectively.
Nepal spends the most on the import of petroleum products, followed by semi-finished iron and non-alloy steel products and electronic devices including smartphones. The country imported petroleum products worth Rs 182bn in the first seven months of the current fiscal, or Rs 51bn more than earnings from its total exports in the same period.
Surendra Pandey, former finance minister, says the current government is not solely to be blamed for the present crisis, but it should still take it upon itself to improve the forex situation.
“Although the policy of import-restriction will help, that alone cannot ensure sufficient foreign reserves,” he says. He also warns the kind of restrictive measures the government is thinking about could decrease revenues, affecting overall development.
Nepal’s public and foreign debt have also been going up. External debt almost doubled in the past five years. Though the country’s foreign debt liability is not quite as high as that of Sri Lanka, a fast increase means it is starting to strain Nepal’s economy.
The country’s total public debt is 40 percent of its Gross Domestic Product (GDP) and the share of foreign debt is 22.24 percent. Nepal has taken loans from multilateral financial institutions such as the World Bank, Asian Development Bank, European Economic Community, and Asian Infrastructure Bank. It also has country-specific loans to pay to Japan, China, and India.
Remittance remains the single largest source of foreign currency for Nepal. However, remittance inflow has become unpredictable. The number of Nepali migrant workers going abroad is increasing and their wages in the host countries are also going up, but the remittance flow is still unsteady.
In fact, remittance inflow decreased by 1.7 percent to Rs 631.19 bn in the past eight months against an increase of 8.7 percent in the same period the previous year. Current account also remained at a deficit of Rs 462.93bn in the review period compared to a deficit of Rs.151.42 bn in the same period the previous year, according to a central bank report.
Here, economists point to the government’s policy lapses. In recent times, more and more money is coming through hundi (an informal money transfer system that bypasses banking channels), hitting the government’s income. With the remittance flow constantly fluctuating, policymakers are unsure of the contribution of remittance to the country’s foreign reserves in the next six months.
Tourism also contributes to Nepal’s forex reserves. But the sector has been badly affected by the Covid pandemic. In 2020, foreign currency equivalent to Rs 24.96bn was earned from foreign visitors—70 percent less than the amount for the same period the previous year. While tourism is slowly reviving, it is not bringing in enough foreign currency.
A long-term solution is to introduce sound policies and programs to attract more FDI.
Last year, the Investment Board of Nepal approved Rs 1.08 trillion in FDI. Likewise, the Department of Industry opened up 5,181 industries for FDI, getting commitments totaling Rs 357bn.
Economist Adhikari says despite the big pledges, little foreign investment is coming to Nepal because of pervasive red tape.
“We adopted a one-door policy to fast-track foreign investment but that has failed to bring desired changes,” he says. “The flow of foreign grant has declined as well.”
To tame the outflow of foreign reserves the government has restricted import of non-essential luxury goods like vehicles and is considering steps to minimize fuel consumption, for instance by providing a two-day weekly holiday.
Adhikari says the government should also encourage the use of electricity to reduce cooking fuel consumption.
“To reduce the import of liquid petroleum gas and kerosene, it should assure people of uninterrupted electricity supply so that they can confidently use induction cookers,” he says.
Senior economist Bishwambhar Pyakurel recommends cutting down the use of petroleum products by 50 percent.
Economists also suggest curtailing the illicit cryptocurrency trade and Hundi.
In the long run, they say, the government should work at increasing the productivity of agriculture, creating a conducive FDI environment, decreasing imports and ramping up exports.
It is also important to increase public expenditure, they add.
The Russia-Ukraine conflict, economists say, was a black swan, but its blow could still be cushioned with better coordination among government agencies.
Currently, key bodies like the National Planning Commission, Ministry of Finance, and Nepal Rastra Bank are often working at cross-purposes.
“These three agencies have competing visions and often encroach on each other’s jurisdictions,” says Pyakurel.
He says economic issues have never been a priority of Nepali leaders.
At a time when government agencies should be working together, the central bank governor has been suspended on dubious charges. The government is also yet to remote trade bottlenecks with India and China.
Nepali products are facing non-tariff barriers in the two neighboring countries, but the government has shown no interest in sitting down with India and China to sort things out.
“What we urgently need is a coordinated, comprehensive, and concrete action plan that gives immediate results. The problem right now is that the current crisis is multifaceted, but we are looking at it in a piecemeal fashion,” says economist Khanal.
The confidence of the private sector should be boosted too, he recommends.
“The economy is always based on confidence,” he says. “If the confidence wavers even a bit, it could lead to a serious economic crisis.”
Bishwambhar Pyakurel: No solid plans to fix the economy
Nepal’s economic outlook looks grim. Foreign exchange reserves have dipped alarmingly. Rising imports, decline in tourism revenue, static remittance, and government’s failure to increase capital expenditure have all contributed to this. Some economists have warned Nepal could go the way of the beleaguered Sri Lanka. Is this an alarmist view or could it really happen? Kamal Dev Bhattarai of ApEx spoke to senior economist and former Nepali ambassador to Sri Lanka Bishwambhar Pyakurel.
Let us start with Sri Lanka. What in your view led to its economic crisis?
Sri Lanka didn’t plunge into a severe economic crisis overnight. For a long time, there were clear indications of a looming economic meltdown. This crisis transpired because the Sri Lankan government didn’t take appropriate and timely measures. Unprecedented inflation, dwindling foreign reserves, and mounting foreign debt have crippled the country’s economy.
While some parallels could be drawn between Sri Lanka and Nepal, there is one key difference. Nepal’s foreign debt is comparatively lower than that of Sri Lanka. Sri Lanka has taken out commercial loans at high interest rates, but we haven’t.
As for foreign debt liability, we have to pay $400m by the end of this fiscal. Sri Lanka’s annual foreign debt liability, by contrast, is around $7 billion.
Is Nepal headed towards becoming another Sri Lanka?
So far, the situation in Nepal is under control. But if things were to further deteriorate, we cannot rule out the repeat of the Sri Lankan story here. It depends on how we go about preventing a potential economic crisis.
Nepal Rastra Bank has warned of serious economic consequences if the import of luxury items is not curtailed. For now, Nepal’s current foreign exchange reserves are sufficient to import goods and services for the next seven months. So we should be careful and take right steps to prevent a financial meltdown.
The good news is that remittance inflow is gradually increasing and tourism is also slowly reviving from the beating it took due to Covid-19 pandemic.
So with the cooperation of banks and importers to discourage the import of non-essential luxury goods, our situation can still improve.
What are the reasons for Nepal’s current economic woes?
There are multiple factors. Our foreign reserves are depleting and unnecessary state expenditure is rising, leading to a liquidity crunch. Such challenges can be addressed but there is a need for collaboration among government bodies and the private sector.
Our government and parliament have not prioritized economic issues, which is a cause for concern. The government says financial transactions through Hundi (an illegal remittance transfer system) and the flow of capital through crypto trading have increased. But government agencies are clueless about how to stop them.
While it has discouraged the import of some items, this has not controlled the outflow of money to the desired levels. In a nutshell, this government has no solid plans to fix the economy.
Is this because of a weak leadership?
Yes, 100 percent. Nepal Rastra Bank is handling even fiscal problems. Similarly, the Ministry of Finance is engaging in monetary issues. In many cases, the Ministry of Supply and Commerce is taking unilateral decisions without consulting the Ministry of Finance. The problem is, there are too many leaders, and they are not doing their jobs well. Government agencies are not working in unison.
All ministers in the current coalition government should be held accountable. The current problems cannot be solved without a strong political leadership and without periodic reviews of our economic status and policies.
How much time would it take for Nepal’s economy to recover if we were to take immediate steps?
With a proper policy in place and concerned stakeholders working with determination and energy, it would take no more than six months for our economy to start bouncing back. The current situation is not quite as dire as it has been hyped up to be.
We are facing a fiscal crisis due to mismanagement, failure to reprioritize the areas that need attention, and procedural lapses. There is unnecessary expenditure in government agencies, which needs to be minimized. Consumption of petroleum products should be cut down by around 50 percent because we are spending a huge amount of money on it.
