Two key components are widely used to gauge the macroeconomic soundness of any economy—the foreign exchange reserve and the stock market. Due to the inflow of remittances from Nepali migrant workers abroad, Nepal was fortunate to be able to maintain overall macroeconomic stability, despite the decade-long armed conflict coupled with bad governance, the trade deficit, and the rapid decline of the manufacturing sector.

But, it seems that this macro stability is now being threatened. Ironically, this is occurring during a time of peace, when a powerful, elected government is at the helm of the affairs. For instance, Nepal Rastra Bank is increasingly tightening the noose on the foreign exchange facility enjoyed by the companies thus far. The central bank recently issued new directives related to the companies that traded on software. So far, commercial banks could provide a foreign exchange facility of up to $10,000 to the companies to pay for repair or purchase of such software, without seeking any prior approval. But the new directives have limited such payment without prior approval to only $3,000.

The new directive comes into effect as part of the implementation of the Monetary Policy 2019-20 which said, 'a recommendation from the concerned regulatory agency will be required while granting foreign exchange facility in case of purchase or repair of software’. Another restriction to the exchange facility has been effective since last year, which reduced the amount Nepalis travelling abroad could carry with them from $2,500 to $1,500.

These curtailments may not appear drastic in themselves. However, the indications are clear enough that the central bank is increasingly facing the heat to maintain external sector stability on the face of rising imports against foreign exchange earnings not keeping apace. The low earnings are partly due to the slowing rate of remittance inflow. During the first quarter of the current fiscal year, remittance inflows decreased by 4.9 percent to $2.25 billion. Meanwhile, the foreign exchange reserves in the financial system are sufficient to cover the prospective imports for around 8.5 months. The reserve-to-GDP ratio stood at 31.4 percent, which as such may not be a cause of immediate concern. But the risk attached to remittances and absence of other cushions make Nepal's external sector vulnerable.

Reversing growth

What is important here is not the numbers but an illiberal current account convertibility (CAC) policy paradigm that Nepal is now embarking on. The CAC refers to freedom in respect of ‘payments and transfers for current international transactions’ which would mean freedom of currency conversion in relation to capital transactions in terms of inflows and outflows. The degree of CAC is often axiomatically equated as the extent of openness of the economy. As Nepal vies for a substantially increased level of foreign direct investment, these newer restrictions only serve as an instant repellant to such potential investments. It is, of course, a dent to the economic worthiness of a sovereign state—with other multiple implications.

Although the Ministry of Finance has stuck to its initial forecast, that the economy will grow by 8.5 percent, the growth rate this year is unlikely to cross 6.5 percent. This will break the three-year trend of relatively high growth, of around 7 percent.

Other indicators are equally appalling. According to data published by the Ministry, during the first four months of this fiscal year, total export stood at $360 million whereas import has exceeded $4.5 billion. While the present communist government boasts of 'Nepal's best ever relations with China in history', the country’s trade deficit with her northern neighbour rapidly increased in recent years. If the current trend continues, the deficit is poised to cross an unprecedented $4 billion in the current fiscal year. This is in addition to the existing deficit. These are exactly the reasons why Nepal's foreign exchange reserve is also under unprecedented duress.

Corruption galore

The constitutional anti-corruption watchdog, the Commission for the Investigation of Abuse of Authority (CIAA), is reported to have collected the asset and income details of all public servants. What is completely uncharacteristic and unprecedented is the use of the country's intelligence agencies at the institutional level in such investigations.

Undoubtedly, it is too late to take some bold steps to contain corruption, which has already paralysed the state system. But the modus operandi as such 'to target first and then investigate' is apparently against the principle of jurisprudence. The motive of the prosecution is more likely to be on justifying such a blanket approach of encircling a certain group of bureaucrats over the others and to apply discretion over the due process in apprehending the suspects.

These preliminary investigations are often likely to be biased as there are publicly known instances of some acrimony among personnel of these agencies, like police and civil servant, delegated at the same revenue points, like customs offices. Moreover, the integrity of the one investigating and the one investigated does not generally seem to be fundamentally different.

With the ineffective implementation of the federal polity, fiscal federalism, in particular, a new facet of corruption is just emerging. According to an estimate by the CIAA itself, approximately 30 percent of complaints registered with it are related to the irregularities, bribes or corruption at the local levels. What is absolutely clear is that the state severely lacks the legal, institutional and operational framework, apart from the deficit of political will, to contain the new forms of corruption.

In a nutshell, in addition to chronic ailments, these new challenges are adding worries to the economy. This will constrict productivity, growth, employment generation and stability.