The status quo of the Nepali economy is not so simple to understand through a layman’s lens. Different political parties and their economic advisors have different arguments as reports of liquidity problems and soaring imports resulting in a negative balance of payments have been circulating lately. Some, mainly the opposition, even argue that Nepal is close to becoming like Sri Lanka, which is facing a massive economic crisis due to its exhausted foreign exchange reserves. The recent ban on importing luxury goods is also fuelling such arguments and making the economy look like it is in real trouble. On top of that, when the government put all the blame on the governor of Nepal Rastra Bank and initiated an investigation against him after sacking him, the issue has become more political than economic due to the looming general elections.

The immaturity of Finance Minister Janardan Sharma, his limited knowledge of economics, and the biased recommendations of his advisors have taken him down the rabbit hole. Some anomalies in Nepal Rastra Bank’s public statements were also responsible for the commotion. For example, Nepal has never been in such a dire economic condition as a few economists would have us believe, and the finance minister’s desperate appeal to non-resident Nepalis and other stakeholders has also made it look as if we are in a deep recession. This is nothing but immaturity. It is not that the economy is not in trouble, but it is not so severe or dire. Let’s understand what is happening in Nepal and why it is a short-term upheaval seen in the ordinary course of an economy.

Foreign exchange

First, we need to understand that Nepal is getting back on track after the Covid-19 debacle that lasted almost for two years. It is natural for the economy to show a surge in imports as every sector of the economy is recovering and economic activities are increasing. Economic data for the last eight months shows that Nepal’s imports increased to Rs1308.73 billion, which is a 38.6 percent increment on a year-on-year basis. This is natural: Our economy is import-based, and this has not happened overnight. This is how our economy has been for years. Covid-19 vaccines, medicines, and other Covid-19 related issues also greatly influenced import numbers. The Russian invasion of Ukraine has heated the energy market, increasing the price of fuel.

Nepal is in a safe zone as far as depletion of foreign exchange reserves is concerned. Its current reserve are sufficient to cover the prospective merchandise imports of 7.4 months and merchandise and service imports of 6.7 months. Yet, what is real is that remittances have decreased by 1.7 percent year-on-year, which is not serious because high inflation has increased prices worldwide and put pressure on savings. This issue is again a short-term phenomenon. Nepal’s current foreign exchange reserve is not below the average stock level. The country’s average gross international reserves and foreign exchange adequacy remained at seven months from 2020 to 2022. Eased restrictions on international travel and tourism, the endorsement of the Millennium Challenge Corporation pact and the recent Rs80 million USAID grant will strengthen foreign exchange reserves to a healthier position.

Second, politicians and their economic advisors selectively pick on economic downturns to stir up public sentiment for the upcoming elections and argue that the economy is going down the Sri Lankan path. But the situation is not even close. The Sri Lankan problem is not an overnight phenomenon. Huge international debts used in the non-productive sector have caused recent issues in Sri Lanka. But in Nepal's case, it has the lowest risk in South Asia as far as foreign debt risk is concerned, according to World Bank Indicators.

Nepal’s current total public debt is about 41 percent: This shows Nepal still has enough fiscal space to use more debt for development. Moreover, as much as 87.37 percent of total outstanding external debt is owed to multilateral agencies, which are more lenient when it comes to repayment and are considered safe. Therefore, this is not even an issue today. The real issue is the liquidity crisis in the economy. The Nepali financial system is currently overheating due to high interest rates arising from low market liquidity mobility. Again, this is not a new phenomenon, given Nepal’s inability to expend capital expenditure. Recent statistics show that the government’s capital expenditure was only 27 percent during the first nine months of this fiscal year. Amidst a slow economy due to Covid-19, government expenditure is vital.

The real issue is liquidity

However, the government’s inability to mobilise these funds for development projects means money is sitting idle in the treasury, hence the market is running out of cash. Yet, this problem also seems to be short-term, given that elections are just around the corner and more funds will be injected into the economy. Similarly, we have seen that the government spends most of its capital expenditure budget during the last few months of the fiscal year. Hence, money will enter the economy soon, solving the liquidity deadlock.

Therefore, today’s major economic issue is not depletion of foreign exchange reserves as is being heavily publicised. And the discussion on Nepal becoming Sri Lanka is baseless and a political stunt. The real issue is the liquidity crunch in the economy. That said, what is also important to consider is curtailing the import of goods produced in Nepal. But this is not doable in the short run. So, in the short run, to come out of this economic chaos, the government must focus on its spending and maintain the economy in position from liquidity issues. It can be argued that Nepal’s economy is bouncing back to normal sooner than expected. However, there is not much to get too excited about because history says that if the government fails to spend its capital expenditure budget, we can expect a replay of the current scenario as a recurring occurrence.