Why import ban is undesirableThis policy is practically suicidal since the banned items are major sources of revenue.
The government of Nepal has imposed a ban on imports of 10 "luxury" items by issuing a notice in the Nepal Gazette with the aim of conserving the country's rapidly depleting foreign currency reserves. The ban applies to imports of cars and vans and motorcycles with an engine capacity of more than 250 cc, all kinds of readymade liquor, mobile sets worth more than $600, colour television sets larger than 32 inches, diamond, cigarettes and tobacco products, toys and playing cards, and ready-to-eat snacks like potato chips.
Also, the import ban looks like an appropriate step considering the unsustainably burgeoning trade deficit that is threatening to cross the $15 billion mark, which is equivalent to about 42 percent of Nepal's gross domestic product (GDP) by the end of the current fiscal year. According to Nepal Rastra Bank data, gross foreign exchange reserves decreased by 18.5 percent to $9.58 billion in mid-March 2022 from $11.75 billion in mid-July 2021; only sufficient to cover merchandise and services imports of 6.5 months.
The relevance of this policy rests on its ability to tangibly stop foreign currency from draining out of the national treasury. The largest high value product now banned is motor vehicles, the import value of which during the last three quarters of the current fiscal year totalled about $470 million. This is approximately 6 percent of total imports and 21.6 percent of the total depleted reserve of $2170 million. Other fringe items like liquor, playing cards and snacks account for only a few million dollars. It is, thus, apparent that the ban on imports which will remain effective till mid-July is unlikely to save any substantial amount of convertible currency in the interest of the country. It is also because, except for vehicles, everything else now banned is sure to be smuggled into Nepal across the almost 1,900-km-long open border with India.
Policy ad hocism
Nevertheless, it is imperative to find ways to continuously replenish Nepal's foreign exchange reserves which is rather urgent and beyond any question. How sensibly and creatively our policymakers can address it is a different question altogether. Instead of taking populist approaches, the structural issues that shackle the economy must be addressed first, better sooner than later. Unfortunately, this priority does not seem to be in focus.
Nepal has only two major sources of foreign currency earnings; workers' remittances and tourism services. Three other sources—exports, official development assistance and foreign direct investment—have a marginal contribution. For several years now, Nepal's trade deficit has largely been offset by the inflow of workers' remittances which was complemented by the earnings of the tourism industry. But during the last two consecutive years, due to the pandemic, the remitted amount drastically shrank and income from foreign tourists dropped to almost zero.
Nepal's data related to "increased" exports is false, although it is claimed that merchandise exports increased by 82.9 percent to Rs147.75 billion due to a rise in exports of palm oil, soybean oil, polyester yarn and thread, and woollen carpets. In fact, the raw materials for none of these items are produced in Nepal, thus there is lack of much required backward links to the economy. Real value addition is very limited and does not help much in net foreign currency earnings.
The flow of development assistance is also unimpressive. Nepal has received only 23 percent of the Rs60 billion in grant assistance expected from its development partners for this fiscal year. Except for three major multi-year commitments, namely the $500 million Millennium Challenge Corporation for energy infrastructure and $659 million to support Nepal to graduate to a middle-income country from the United States and Rs56 billion from China, Nepal has not received major financial assistance to offset the import-led foreign exchange drain.
Similar is the situation of foreign direct investment (FDI). In this fiscal year, Nepal received only Rs16 billion in FDI. Despite all the tall talk, Nepal's average annual FDI has barely crossed 2 percent of the GDP. The much talked about single window for processing FDI has now literally turned into a rabbit hole. This amount is utterly insignificant to an economy that now stares at a Rs1,800 billion annual trade deficit.
The economy must first explore avenues for the diversification of risk resulting from the monolithic reliance on workers' remittances as the only source of foreign exchange. The remittance amount that enters into the economy lacks the policy ambience to be invested in productive objectives. It is exhausted by consumption of imported goods. Also, a very large chunk of the remittance, almost 50 percent in a rough estimate, is channelled through non-banking channels and isn't configured in the regulatory radar. This has led to excessive property speculation, imports of huge quantities of gold and expansion of the shadow economy.
This restrictive policy is practically suicidal since the banned items are major sources of revenue for the government; some well beyond 250 percent of their factory price. Import restrictions on them are bound to have a telling impact on revenue collection. More appallingly, the policy reflects yesteryears' archaic strategy of running a controlled economy. Enforced without any realistic basis and homework, this single policy decision has landed the country in an unnecessary debate on whether Nepal is heading towards a Sri Lanka-like economic crisis. It only served to create panic which often has self-fulfilling ramifications on inflationary expectations and price distortions.
The state should first put all its efforts into restoring its credibility as an open, transparent and production-oriented economy. This will have multiple desirable effects. Financial assistance from development partners may increase, and Nepali citizens abroad will start to invest in instruments like the foreign employment bonds introduced by the government. A small policy change can enable non-resident Nepalis to invest in Nepal’s capital market. Refocusing on public investment to incentivise manufacturing and agricultural production will help in import substitution. Nepal must think about the exponentially rising cost of service imports like education and health services that are already nearing Rs500 billion in the last nine months, and any realistic possibility of saving on it can only be achieved by making qualitative improvements in our educational outcome and health services delivery. Without these changes, focusing on a restrictive import policy will only prove counterproductive in the long run.