Nepal’s foreign exchange reserves crossed the $10-billion mark for the first time as money flowing into the economy surpassed outflows.

According to the latest macroeconomic report of Nepal Rastra Bank, the country held foreign currency deposits totalling $10.03 billion (Rs1,088.85 billion) as of January, up 8.2 percent year-on-year.

This war chest is sufficient to cover 14.3 months of merchandise imports and 12.4 months of merchandise and services imports, said the central bank report. The projections were made based on imports of the first six months of the current fiscal year.

Net-importing countries like Nepal must maintain a good stock of foreign currency to pay for goods that are brought in from abroad. A healthy foreign exchange reserve is also required to meet various obligations, such as debt repayment, and to enable foreign investors to repatriate earnings made in the country.

Nepal’s inability to maintain a robust foreign exchange reserve even triggered a financial crisis around three decades ago.

In December 1985, Nepal’s foreign exchange reserve depleted to around $40 million, which was hardly sufficient to finance a week’s merchandise imports.

Nepal faced the problem because the central bank at that time did not believe a rise in the money supply would build inflationary pressure. This was based on the assumption that inflation in the country was ‘derived’, or passed through price hikes on goods imported from India.

This misconception led public spending to rise to levels never seen before, prompting the fiscal deficit to widen. 

Rampant hikes in public spending raised the money supply and spurred people’s purchasing power. This increased demand for goods, especially those imported from India, exerted pressure on the foreign exchange reserve. 

The central bank was compelled to offload US dollars to purchase Indian currency. As this cycle repeated, the country had to brace for a full-blown financial crisis. Since then, the country has not faced such a severe foreign exchange crisis. 

If fact, Nepal has been maintaining a robust foreign exchange reserve for the last few years because of higher inflow of money into the economy than outflow. 

This trend led the country to record a balance of payments (BoP) surplus of Rs45.02 billion in January, says the NRB report. However, this BoP surplus is lower than Rs139.75 billion recorded in January last year.

The BoP surplus has lately been narrowing because of a deceleration in remittance inflows due to a drop in the number of Nepalis going abroad and rising imports.

The country’s remittance income grew 5.7 percent to Rs342.2 billion in the first six months of the current fiscal year. Remittance income had gone up by 17.3 percent in the same period a year ago.

Imports, on the other hand, surged 67.3 percent to Rs464.6 billion in the six-month period between mid-July and mid-January, shows the NRB report. As the country’s exports could not keep pace with imports, its trade deficit widened by 74 percent in the first six months of this fiscal year to Rs428.3 billion.

This caused the current account to slip into a deficit of Rs1.1 billion in January, says the NRB report.