Repeating historyLast week, the central bank reported that inflow of money sent by Nepalis working abroad went up by mere 0.7 percent to Rs115.6 billion in the first two months of the current fiscal year. This is not good news for a country which was witnessing double-digit remittance inflow growth rate until two years ago.
Last week, the central bank reported that inflow of money sent by Nepalis working abroad went up by mere 0.7 percent to Rs115.6 billion in the first two months of the current fiscal year. This is not good news for a country which was witnessing double-digit remittance inflow growth rate until two years ago.
Remittance, over the years, has provided a lifeline for Nepal. This income has lifted many out of the poverty trap, raised deposit stock at banks, and helped finance surging imports. So, a drop in flow of this money is expected to hit the country hard.
A sneak preview of looming problems was made public by the central bank last week. Its latest report showed that the outflow of money from Nepal’s economy surpassed inflows by Rs5.9 billion in the two-month period of 2017-18. In other words, the country’s balance of payments slipped into deficit of Rs5.9 billion in mid-September. If this deficit widens, Nepal will start facing shortage of foreign currency to finance ever-growing imports.
Nepal currently has a foreign exchange reserve valued at around $10.6 billion. This war-chest is sufficient to finance merchandise and services imports for 11.4 months. This is good news. But money from this reserve will start evaporating if outflow of foreign currency—due to higher import—continues to outstrip inflows.
It’s high-time that Nepal acknowledged that remittance income will continue to suffer and imports will continue to rise. Worker’s remittance will come under pressure because the number of Nepalis leaving the country for employment purpose has dropped for three consecutive years and will continue to go down in the coming days. Also, economic blockade imposed on Qatar, and Saudi Arabia’s decision to cut back on public spending due to low international oil prices will hit Nepal’s remittance income.
On the other hand, imports will continue to grow because demand for many commodities, like petroleum products, does not subside even when money circulation drops. Also, demand for construction materials, and heavy-duty vehicles, like bulldozers, is expected to go up, as post-earthquake reconstruction and other construction works gather pace. On top of that Nepal is mulling over resuscitating the manufacturing sector, which is in a rudimentary state, for which imports of capital goods, like machinery, is necessary.
These are indications that demand for foreign currency will remain high in Nepal in the near future. To deal with this problem head-on, Nepal must expedite reforms to boost exports, attract more international tourists and bring in more foreign investment. The government must start designing policies in this regard. Otherwise, the country may face a full-blown financial crisis, in a grim replay of events of the mid-1980s when Nepal’s foreign currency reserves depleted to a level which was sufficient to finance just a week’s worth of merchandise imports.