Current Account determines BoP as inward capital and financial account remains stable

By Ajay Chhetri, Kathmandu, Oct. 25: Nepal Rastra Bank (NRB) report released on October 21 showed that the balance of payment (BoP) of the first two months of the current fiscal year (FY) remained deficit of Rs 23.68 billion.

The BoP which shows the health of external economy has continuously remained in a tight position in Nepal since it was shaken by the COVID pandemic.

The data showed that status of BoP is mostly determined by status of current account. The trend showed that both the current account and balance of payment remained positive during the FY 2011/12 to 2015/16. But, after this, current account started to remain deficit and subsequently BoP also turned deficit for most of the recent FYs with some exception.

Source: Nepal Rastra Bank

According to the NRB  executive director of Research Department Prakash Kumar Shrestha, BoP is largely determined by the current account situation. He viewed that the NRB has closed external capital account which means Nepal welcomes capital from abroad but does not allow capital to be taken out from Nepal to invest abroad. So capital and financial account remains stable. Only repatriation of earing from capital investment in Nepal is allowed. So. unlike current account, it hardly affects BoP account. He said the change in import, earing from service sector and inflow of remittance affects the status of BoP.

The data showed that current account remained surplus of Rs 108.3 billion in FY 2014/15 as net income from service sector recorded Rs 27.6 billion whereas in FY 2016/17 current account remained deficit of Rs 101.3 billion net income from service sector was seen declined to Rs 2.8 billion.

Meanwhile, remittance which one of main source of foreign income has been continuously growing though rate of growth slowed down since the COVID pandemic.

However, deficit in BoP has been widening due to sharp rise in imports in the recent years. The data showed that net export of good and services in FY 2015/16 recorded (-25.8 per cent) of gross domestic product. Now, it is risen to (-36.5 per cent) in FY 2021/22.