Economic Crisis Blown Out Of Proportion

As per the economic and fiscal data of 11 months published by Nepal Rastra Bank (NRB), the forex reserves are dwindling, imports are rising, exports have not gone up and there are imbalances in the balance of payments (BOP). At the end of Asar 2078, the forex reserves stood at Rs. 1,399.3 billion, which had declined to Rs. 1,176.84 billion by the end of Jestha 2079, which represented a decline of 15.9 per cent. However, the Jestha figure of Rs. 1,399.3 billion was higher than that of Baisakh by Rs. 21.25 billion (USD 170 billion). The current forex reserves are adequate for the import of commodities for 7.53 months and for the import of commodities and services for 6.73 months. 

BOP deficit 

The BOP was in deficit to the tune of Rs. 269.81 billion in the eleventh month of this fiscal year. Such a deficit was Rs. 15.5 billion a year ago. The BOP current account deficit stood at Rs. 595.73 billion vis-à-vis Rs. 298.11 billion a year ago. However, the BOP deficit of Jestha was lower than that of Baisakh by Rs. 19 billion. There was a gaping gap between imports and exports, leading to a huge trade deficit. Imports went up to Rs. 1,763.22 billion, registering an increase of 27.5 per cent against an increase of 25.7 per cent a year ago. The trade deficit stood at Rs. 1,577.39 billion with an increase of 25 per cent as compared to an increase of 24.6 per cent a year ago. Likewise, the export-import ratio stood at 10.5 per cent vis-à-vis 8.8 per cent a year ago. 

There was some improvement on the remittance front with an increase of 3.8 per cent, which was still lower than that of the corresponding period of last fiscal year. During that period, such an increase was 12.6 per cent. Nepal received Rs. 904.18 billion in remittance during the eleven months of this fiscal year. Inflation reached 7.14 per cent because mainly of soaring transportation and construction costs. Policymakers are of the opinion that inflation should be 2 per cent or below. Now, prices of commodities and services are rising owing to a rise in fuel prices driven mainly by the Ukraine war. The Ukraine war has sent the prices of fuel and agricultural products through the roof.  

Nepal intends to attain economic growth of 7 per cent. Owing to various factors, the figure has been revised down to 3.7 per cent by the World Bank. The growth rate has been affected by, inter alia, rising prices of fuel and agricultural products. The banking and financial sector is in a liquidity crunch. Banks and financial institutions are in a tight spot when it comes to managing loanable funds. They are not in a position to extend credit even for the productive sector such as agriculture, energy, tourism and manufacturing. Even increasing rates of interest on deposits has not been of much help. As such, the Bankers Association of Nepal has decided not to increase rates of interest on deposits in Shrawan. 

The share market is on the downswing now. Investors have lost confidence in the share market. As the share market is bearish, share market investors and speculators are down in the dumps. They have demanded several reforms in the share market, including abolishing the 4-12 crore provision. The Nepali economy is predominantly dependent on remittances, agriculture and taxes. The performance of agriculture is not, however, up to the mark. Nepal, once an exporter of agricultural products, has to import agricultural products to meet its requirements. 

Nepal is in the grip of bad governance. Corruption is here, there and everywhere. The local levels are ahead of the provincial and federal governments in corrupt practices. Arrears, irregularities and malpractices are galore in government offices. All these factors are responsible for the shambles the economy is in. As there is an economic crisis looming large, some people, including leaders of major political parties, fear that Nepal may face the fate of Sri Lanka. They believe that the symptoms of the pre-economic crisis of Sri Lanka were similar to those prevailing in Nepal now. However, the economic structures of these two countries are diametrically different.

Nepal has far less external debt than Sri Lanka has. The structure of foreign loans of Nepal differs from that of Sri Lanka. Nepal has availed itself of soft loans with a lower rate of interest, whereas Sri Lanka’s foreign loans consist mainly of commercial loans with a higher rate of interest. The debt service of Nepal for this year is USD 400 million, whereas Sri Lanka has a debt service of USD 4 billion. Likewise, tourism revenue does not constitute a major part of the GDP in Nepal in contrast to Sri Lanka, where tourism revenue makes up 12 per cent of the GDP. The contribution of tourism revenue to the GDP in the country is three per cent. 

Concrete measures

The collapse of the Sri Lankan economy is attributed to various factors such as a decline in tourism revenue, tax cuts, a heavy borrowing of external loans and a misuse of such loans. The government should learn a lesson from Sri Lanka. It should embark on policy-level reforms and take concrete measures to extirpate corruption, bad governance and other anomalies. It should take the initiative in wooing foreign direct investment for infrastructure development and reviving the tourism sector. It should coordinate with diplomatic missions stationed abroad in seeking help from the Nepali diaspora living in various countries. 

The Nepalis living abroad may be encouraged to send remittance money back home through the banking channels only, open US dollar accounts in Nepali banks and make investments in the productive sector. Anyway, Nepal is not going the Sri Lankan way. Some leaders and media are acting as scare-mongers. Concerted efforts on the part of the government, banks and financial institutions, business entrepreneurs and other stakeholders can help improve the economy.  

(Maharjan has been regularly writing on contemporary issues for this daily since 2000. uttam.maharjan1964@gmail.com)