KTM2DAY.com
KATHMANDU TODAY

Nepal’s Foreign Currency Reserve of $9.56 billion inadequate

nepal-trade-deficits

A ballooning current account deficit due to increasing imports and weakening exports has taken a toll on Nepal’s vulnerable external sector with officials saying that the existing foreign currency reserves won’t be able to sustain imports for longer than eight months.

The current reserve of $9.56 billion will only be enough to finance imports of merchandise goods and services for 7.9 months even though Nepal Rastra Bank regulations require it to maintain a reserve enough for at least 8 months, according recent statistics released by the central bank.

As other sources of foreign currency like exports, tourism and foreign direct investment are not significant, Nepal has to rely largely on migrant workers’ remittance to strengthen its foreign exchange reserve. In the past, the country received adequate remittance to offset its massive trade deficit, but lately remittance inflows are unlikely to sustain imports despite growing at very healthy rate.

According to the country’s macroeconomic report of the first three month of the current fiscal year (mid-October 2018), worker remittance increased 37.3 percent year-on-year to Rs242.17 billion. However, the growth is not enough to offset the trade deficit which reached Rs349.84 billion during the review period, up 45.9 percent from before.

Economists say the overall picture looks worse than expected a few months ago. Import covers from foreign exchange reserves are fast declining, and if this situation persists for long, it will lead to inflationary pressure and the country’s overall output will suffer, slowing economic growth, according to economist Chandan Sapkota. “The central bank and the Finance Ministry must intervene to stabilise the situation,” he said. “If they don’t act soon, it will be difficult to manage the economy over the midterm.”

Central bank officials agreed that the country’s external sector was under pressure due to ever increasing imports, but denied that a macroeconomic crisis was looming. According to Nara Bahadur Thapa, executive director of the central bank, remittance itself is one of the major reasons behind the surge in imports.

“When people working in foreign countries send back their earnings, their family members back home will use the money for consumption, and this fuels imports,” said Thapa.

forex-reserve-nepal

The aggressiveness shown by the banking industry to expand credit has been instrumental in increasing imports, according to Thapa. Credit disbursement to the private sector by banks and financial institutions swelled more than 25 percent in the first three months of this fiscal year compared to the same period last year. Since the credit is used to import industrial raw materials for production and manufactured goods for trading, it will boost the import volume. Similarly, ongoing reconstruction works are fueling imports as they require a large quantity of imported construction materials.

Thapa said the situation needed to be watched cautiously but not immediate intervention as this might derail the economy. “All imports are not bad as they are necessary to keep the economy moving,” he said. “We should let the economy function on its own till there are enough foreign exchange reserves to pay for imports of goods and services for six months.”

Sapkota said that it was high time the government acted to address the situation through stabilisation and structural measures. Stabilisation measures include removing key bottlenecks faced by industries producing export goods or goods that can help substitute imports. “For example, an adequate and reliable supply of electricity will help these industries to increase productivity,” said Sapkota.

In the long run, however, the authorities should address the situation through structural measures like policy reform that will attract foreign direct investment and increase industrial productivity to boost exports.

Related Post

Foreign exchange reserve swells to record high With the swelling foreign exchange reserves, the richer Nepal can afford to buy more merchandise from abroad to feed its growing consumerism. The f...
Nepal’s foreign exchange reserve swells to Rs 1 trillion Nepal’s foreign exchange reserves have crossed Rs 1 trillion for the first time as imports fell as a result of India’s trade embargo, Nepal Rastra B...
Trade deficit up to Rs 330.34bn The country witnessed a total trade deficit of Rs 330.34 billion in the fiscal year 2010-11 — up by 5.4 per cent compared to a fiscal year ago, acco...
Hotels to accept foreign currency payments The central bank has permitted hotels to accept payments made by guests in foreign currency. The foreign exchange buying rate of the day fixed by h...
Rupee hits record low against dollar Nepali currency has been brought to another historic low as the Indian rupee takes a beating against the US dollar. Today, the exchange rate of Nep...
Foreign exchange reserve swells The gross foreign exchange reserves surged by 32.3 per cent to Rs 360.14 billion in mid-February from a level of Rs 272.15 billion as at mid-July 20...
11 foreign pharmas apply to sell their products in Nepal Nepal’s medicinal drugs market has been drawing foreign pharmaceutical companies in greater numbers. During the first eight months of the current fi...
Loan in Foreign currency permitted to certain businesses Nepal Rastra Bank (NRB), on Friday, announced a new provision wherein tourism businesses, export-oriented industries and hospitals are permitted t...
Traders slash import volume as strong dollar bites The depreciation of the Nepali rupee against the US dollar has forced importers to cut down imports. With the dollar gaining sharply against the Ind...
NRB bans service charge on deposits Nepal Rastra Bank (NRB) has forbidden banks and financial institutions (BFIs) from taking any kind of service charge on deposits following complaint...
Britannia to establish a biscuit and bakery plant in Nepal India's Britannia Industries Limited has received permission to produce its biscuits and bakery products in Nepal. The renowned food company with a...
Citi’s exit from Nepal opens door for other banks The US-based Citi Bank’s decision to discontinue all banking relations with Nepal has opened door for other international banks to expand their busi...
NRB relaxes money exchange rule The central bank has continued to give further relaxation on foreign exchange management in line with this year’s monetary policy. The Foreign Exch...
Banking in Nepal: Exciting Times Ahead It is apparent that Nepali banking space is crowded with 32 Commercial Banks, 88 Development Banks, 70 Finance Companies and several cooperatives un...
Iron and steel products Nepal’s No 1 export items Iron and steel products, yarns, woollen carpets, readymade garments, lentils and textiles, in that order, topped the list of exports from Nepal in t...
26 Commercial Banks enter the ‘billion-rupee-club’ on net profits Proving that concerns about lack of loanable funds squeezing their profits were just a farce, the growth of net profit of commercial banks in the ...
Bangladesh Expo 2017 to be held from 17-21 January Bangladesh Expo 2017 is slated to begin in Kathmandu from Tues-day in a bid to familiarise Nepali consumers and entrepreneurs about Bangladeshi prod...