The government and the central bank have progressively removed controls on foreign exchange spending with currency reserves rising to comfortable levels.

Experts say that tossing out import restrictions is the right thing to do now, but authorities should keep an eye out for possible disruptions to remittance inflows due to Covid-19, what with tourism knocked out and export incomes reduced to a trickle.

Foreign aid and foreign direct investment are the two other major sources of foreign exchange. While foreign aid to Nepal has been on the rise, foreign direct investment has remained at a crawl.

As a start, the cabinet on October 8 last year lifted restrictions on the import of foreign alcohol and luxury vehicles costing more than $50,000 for the official and personal use of foreign diplomats, diplomatic organisations and foreign officers.

In March, the freedom to import such fancy automobiles was extended to all, and the government also allowed the import of betel nuts, peas, peppercorns and dried dates by imposing quantitative limits.

Furthermore, Nepal Rastra Bank lowered the daily import quota of gold to 20 kg from 10 kg, and permitted commercial banks to issue dollar cards for the procurement of foreign goods and services.

Authorities had placed controls on the import of these items in April last year in a bid to conserve foreign exchange following concerns that Nepali migrant workers might lose incomes with the pandemic potentially spreading in the labour destinations.

When the impact of the virus outbreak on remittance was less than expected, the government started loosening the purse strings last year. As of the first eight months of the current fiscal year, the country's foreign exchange reserves stood at $12.37 billion, sufficient to import merchandise and services for11.3 months.

“The main reason behind relaxing import controls on a number of items is the comfortable foreign exchange situation lately and revived economic activities,” said Prakash Dahal, joint secretary at the Ministry of Industry, Commerce and Supply. “Why should we restrict the import of these items without any reason?”

The ministry had proposed to relax imports of luxury vehicles, betel nuts, peas, peppercorns and dried dates. “Constant pressure from importers as well as potential revenue collection from the import of these items are other factors.”

When the restrictive measures were applied last year, the Commerce Ministry was not even consulted even though it is responsible for proposing to impose or remove such restrictions. The government had placed controls on the import of these items last year at the Finance Ministry's behest.

Remittance inflows had shrunk in the early months of the lockdown which started on March 24 last year.

Contrary to expectations of a steep drop in remittance, inflows dipped by a marginal 0.5 percent in the last fiscal year 2019-20.

Even though the popular labour destinations in the Gulf Cooperation Council countries and Malaysia were severely impacted by the Covid-19 pandemic that left millions of expat workers with no choice but to pack their bags and leave, money continued to flow into the country.

In April last year, the World Bank had projected remittances to go down by 14 percent. The Central Bureau of Statistics too had forecast a reduction of Rs163 billion, or more than 18 percent.

Experts were pleasantly surprised to see remittance starting to swell with the start of the new fiscal year. As of the first eight months of the current fiscal year, remittance increased by 8.6 percent to Rs642.14 billion.

Apart from comfortable foreign exchange reserves that encouraged the government to do away with import controls, the Commerce Ministry was under pressure from different stakeholders including other government agencies to be kinder, officials said.

“Various stakeholders asked us why we were continuing to restrict the import of these items when economic activities were going on normally,” said Dahal.

“Even the Customs Department was dissatisfied with the import controls as it saw import duties as a way for the government to boost revenue when it was facing a resource crunch.”

Immediately after the government removed the restrictions, traders thronged the Department of Commerce and Supply Management to apply for approval to import betel nuts, peas, peppercorns and dried dates.

The massive demand prompted the department to suspend the issuance of import quotas to traders.

Central bank officials believe that the relaxation of import restrictions on these items will not strain the country's foreign exchange reserves.

“Immediately, there is no risk to the foreign exchange reserves even after the recent import relaxations on a number of products as remittance inflow has been growing and the level of foreign exchange reserves is very good,” said Dev Kumar Dhakal, spokesperson for Nepal Rastra Bank.

He said that even though the new wave of coronavirus pandemic could affect jobs in the Middle East and other labour destinations, the possibility of a steep drop in remittance is unlikely considering last year’s experience.

The central bank not only lifted restrictions on the import of certain products but also allowed banks to issue dollar cards.

“While the availability of adequate foreign exchange is one reason behind allowing firms and individuals to make payment through dollar cards, it was also necessary as such payments were taking place informally.”

He said that this measure had not affected foreign exchange reserves much.

Experts say that it is not necessary for the government and central bank to control the flow of foreign exchange as long as the country has sufficient reserves.

“Having a large amount of foreign exchange is unutilised resources,” said Nara Bahadur Thapa, former executive director of the central bank.

“At a time when economic activities are slowing and the economy has contracted, allowing utilisation of foreign exchange is a good idea. It helps create jobs and helps the growth of the economy.”

According to experts, it is a sensible idea for the government to seek to raise more revenue from the import of previously restricted goods, given the increasing resources needed.

“Obviously, some traders have started to benefit from the removal of the ban on the import of betel nuts, peas, peppercorns and dates dried,” said senior economist Keshav Acharya. “A majority of the imported goods are re-exported to India which has been helping Nepal to earn Indian currency as its requirement is high, but the country often faces a shortage.”

The central bank has enlarged the list of goods that can be imported by paying US dollars. Nepal has also been purchasing Indian currency by selling US dollars for a long time.

Experts say that Nepal should not forget the fact that the source of foreign exchange earnings is limited, even though the recent relaxation in foreign exchange spending may have cheered individuals and firms.

Remittance is the biggest source of foreign exchange earnings, and any setback in the economy of the labour destinations could affect Nepal’s foreign exchange earning capacity as the country's export earnings are limited and the recovery of the tourism sector is uncertain amid the new wave of the coronavirus pandemic.

“Even though we should not worry about foreign exchange reserves because of increasing revenue, we should also seek to increase the contribution of other sources of foreign exchange such as exports,” said Thapa.

According to a recent report of the World Bank, Nepal has untapped export potential worth an estimated $9.2 billion.

The multilateral funding agency said Nepal could boost its exports twelvefold, which represents an opportunity to create around 220,000 new jobs, the report titled Development Update says.

“This shows that we can earn more from exports than remittance,” said Thapa. “We have to make efforts to realise this potential. If we make an effort, we can boost exports to a certain level in the short run and realise the full potential in the long run.”