Revenue source should be diversified from import

By Laxman Kafle, Kathmandu, Dec.14: All is not well with the country’s economy. It is now facing both external and internal sector challenges with the major problems being lack of liquidity in the financial sector, low revenue collection, current account deficit, increase in prices and bank interest rate and fall in consumption. 

The foreign exchange reserve had fallen sharply because of growing imports and low remittance inflow. However, it has been in the improving trend for the past two months after the restriction imposed on the import of some luxurious products, such as vehicles and high priced mobiles and a rise in remittance inflows.

Economists have said that the country's economy is not free from the pressure of the external sector even though there was an improvement in the foreign currency reserves and balance of payment.

According to the latest report of Nepal Rastra Bank, balance of payments (BoP) remained at a surplus of Rs. 12.43 billion in the first three months of the current fiscal year compared to a deficit of Rs. 87.71 billion in the corresponding period the previous year.

The balance of payments, which has been in deficit for a long time, has improved and recorded surplus.

Foreign exchange reserves increased to Rs. 1,246.22 billion in mid-October 2022 from Rs. 1,215.80 billion in mid-July 2022. However, the current account has still remained at a deficit of Rs. 34.28 billion in the three months of the current fiscal year. 

Economist and former member of National Planning Commission Dr. Chandra Mani Adhikari said that even though an improvement has been seen in foreign currency reserves, BoP and remittance inflows, the widening trade deficit and current account deficit are posing a challenge to the economy.

He, however, said it not certain whether the improvement seen in the remittance inflows and foreign currency reserves will sustain.

The restriction imposed on the import of some items, including vehicles, mobiles and others had contributed to the improvement in the BoP. But the government has recently lifted the restriction. 

No time to adopt liberal policy on import, interest rate

Former chief of Central Department of Economics, Tribhuvan University, Prof Dr. Ram Prasad Gyanwaly said that there was no time to adopt 

the liberal policy and lift the ban imposed on the import of luxurious goods, including vehicles and mobiles for specified categories, because of continued external pressure on 

national economy.

"Now imports will increase again and it will have an impact on the BoP. Therefore, the government's recent decision to lift the ban is unlikely to do good to the country's economy," he said.

"Rising inflation is also another challenge to the country. Even though the NRB showed the inflation at 8.5 per cent, consumers have experienced higher inflation than the NRB's claim.  The price of edible oil, liquefied petroleum products and consumer goods is high at present," he said.

The NRB had added some provisions to the monetary policy to check interest rates raise by managing liquidity in the banking sector. In the meantime, businessmen across the country are staging protests demanding a cut in the interest rate.

Due to inflation, the purchasing power of money has decreased and so has the consumption. 

Not only Nepal, even the developed countries, like America and the United Kingdom have been facing historic inflation for the last couple of months.

"When the interest rate becomes low, the demand for loans will increase and it will support to increase import and hit inflation further. So, the government and the concerned stakeholders should think for the nation first," said Prof. Gyanwaly.

Economist Dr. Adhikari said that the provision added in the monetary policy and import restriction imposed by the government contributed to improve the external sector pressure on the economy for the past two months.

He suggested applying short-term and long-term measures to solve the problems to the existing problems.

The external and internal sector pressure on the economy cannot be solved only from the monetary policy, he said, adding that the effective economy and fiscal policy along with monetary policy should be there.

"The government should intervene through the economic and fiscal policy to address the challenges seen in the economy. Lack of required human resources is another challenge. Human resources are the engine of economic growth. But Nepal is exporting youth instead of retaining them inside the country by creating jobs," he said.

Historical revenue deficit

The country is facing a revenue deficit for the first time this fiscal year. The revenue collection of the government stood at Rs. 317.5 billion while recurrent expenditure stood at Rs. 344.1 billion by December 12, 2022. Dr. Adhikari said that the import-based revenue collection target of the government has always been a problem and the present situation was the outcome of this. 

"The country has faced a revenue deficit this time for the first time in history. The restriction of import hit revenue collection. So, considering this situation, the government should diversify the sources of revenue collection. It is necessary to boost domestic production to overcome this problem," he said.

The government has collected a revenue of Rs. 317.5 billion in about five months (by December 12, 2022). This is only 22.63 per cent of the target.

Around Rs. 292.5 billion has been raised from the tax revenue and Rs. 24.9 billion from non-tax revenue.

The government's revenue collection has decreased due to the fall in imports as the country's revenue collection is based on import, Dr. Gyanwaly said, adding that rather than thinking about revenue collection, it is now necessary to control the pressure of the external sector on the economy.

Investment in productive sector must

Narayan Prasad Pokhrel, Information Officer of Nepal Rastra Bank, said that the external sector's pressure on the national economy has somewhat eased in recent weeks.

He said that while reviewing the first quarter of the monetary policy. The NRB introduced some policy changes in the financial sector without any for the external sector.

"Of course, the government's decision to lift the ban on imports will lead to an increase of imports, but the NRB’s provision of cash margin on imports will help control imports even after the lifting of the ban," he said.

The monetary policy of the NRB has focused on investing in the productive sector through the banks and financial institutions (BFIs), he said, adding that the credit should be in the productive sector and employment generation.

"If we see the statistics of credit flows from BFIs for the last one decade, there is increased credit expansion. But the contribution of credit to the GDP has not been that significant. So, the NRB is focused on increasing credit to productive and employment generation," he said.

Talking about liquidity, he said that there was no need to be worried about the issues of liquidity.

He said, "The issue of concern is not the interest rate, but the availability of funds, the central bank is not saying that it will stop the money supply. This year, NRB is expected to expand money supply by around 12.6 per cent," he said.

According to him, the NRB will provide liquidity to BFIs to expand the money supply according to its target and the problem of liquidity is not that dire as reported.