Mobilise Foreign Reserves

As the fiscal year (FY) 2023/24 nears its end, two good news have made the headlines: Foreign currency reserves in mid-June 2024 have hit all-time high of Rs. 1,967.19 billion, an increment of 27.8 per cent from Rs. 1539.36 billion in mid-July 2023, and moderation of inflation to 4.2 per cent from 6.8 per cent a year ago.  The reserves can cover the import of goods and services for one-and-a half years. The growth in the reserves also marks the solid growth in remittance as a result of burgeoning youth exodus for better paying jobs abroad. 

The piling up of foreign currency reserves is a double-edged sword. On the one hand, it corresponds to the country's increased wealth and also growing international leverage. On the other, it is the sign of economy grappling with profound challenges, which warrants serious discussions. In order to lift a significant population out of poverty in relatively short time, the national economy growth rate needs to be much higher than 3.3 per cent, as forecast by the World Bank for FY 2024. One of the surefire ways to achieve this is by increasing consumption of goods and services available within the country. 

But the situation of domestic industries is far from satisfactory. The mounting reserves means we are not importing as much as we used to. It also means that we are neither spending the money nor using it to form capital or to invest in something that generates better value in the future, remaining stuck in low-income trap. The dwindling consumption of goods has forced factories to run at a fraction of their capacity or to go out of business altogether, leaving people employed there with reduced salary or rendering them jobless. This has cascading effects: out-of-work people or those with low-income are looking abroad for better-paying jobs to eventually join the ranks of non-resident Nepalis, setting the stage for consumption to fall even lower. This situation is so undeniably true that it takes only a few simple observations around to get the first-hand knowledge about how our small businesses are faring and draw this conclusion.

The owners of a hardware shops, vegetable vendors, those in the business of hotel and restaurants, or even bakery and tea sellers, among many more, all report dismal business. Some shops selling high-end wears or durables targeting youths are also staring at imminent bankruptcy, as they head for abroad in increasing number. These small businesses, the bellwether signaling where the economy is heading, constitute the bedrock of the economy, contributing to the government coffers with taxes. 

As business withers, people are left with little money to spend. What's more, shutters, some even in prime locations, bearing 'To-Let' signs have become a common sight. Even banks, which famously weathered the COVID-19 storm, are not doing well. Who will pay for the pensions of the retirees when the country's workforce dwindles, leaving with fewer and fewer tax payers? Production and consumption are the cornerstones of a sustainable economy and go hand in hand. Mounting foreign exchange reserves amid widespread capital crunch doesn't augur well for the overall economy, calling for the government to roll out measures so that the money finds the conduits to flood the market.