Trade deficit soared, foreign exchange reserves decreased and remittances declined sharply in the first month of the current fiscal year 2021-22, raising concerns if the external sector of the economy—Nepal’s international economic transactions—might be at risk.

According to the macroeconomic and financial situation of the country report published by the Nepal Rastra Bank on Thursday, the trade deficit increased by 70.6 percent to Rs129.97 billion as imports surged to a high of Rs150.73 billion in a single month putting pressure on foreign exchange reserves.

With the country spending a large amount of foreign exchange on imports, the inflow of remittance, which is the largest source of foreign currency reserves, dropped by 18.1 percent to Rs75.96 billion in the review period in contrast to an increase of 23 percent during the same period last fiscal year.

This resulted in a decline of foreign exchange reserves by 3.2 percent to Rs1,353.82 billion as of mid-August within a month—from mid-July figures.

“The increased imports suggest that the country’s economy is in a recovery mode after the second wave of Covid-19,” said Nara Bahadur Thapa, former executive director of the Nepal Rastra Bank. “But massive import bills and reduced remittance inflow have increased risks for the external sector of the economy.”

Nepal’s economy suffered a contraction of 2.1 percent in the fiscal year 2019-20 and it was for the first time in nearly four decades that the country suffered negative economic growth as a result of the first wave of the pandemic.

As the economy was well on a recovery mode by the third quarter of the last fiscal year, the second wave of the pandemic, which hit the country in April, again affected the economy as the government was forced to go under another lockdown.

Along with the reduction in Covid-19 cases in recent days, which came down to as low as 790 on Saturday from the peak of 9,317 cases on May 11, the government authorities gradually relaxed the lockdown and lifted it completely earlier this month. This also paved the way for a massive rise in imports, leading to decrease in foreign exchange reserves.

According to the central bank, the existing foreign exchange reserves are sufficient to meet the merchandise and services imports for 8.3 months. As per the central bank’s monetary policy 2021-22, it aims to maintain such reserves for sustaining the imports for seven months.

“We should not worry about it until the foreign exchange reserves are sufficient to fund imports for seven months and we should not stop the imports that help our economic recovery,” said Thapa.

He said that if the inflow of remittances continues to decline in the upcoming months, the government should make efforts to increase the foreign currency reserves from other sources such as export, foreign aid utilisation, foreign investment, and tourism.

Nepal’s pandemic-ravaged tourism industry is seeing a chance of revival after the government on Thursday resumed on-arrival visas and threw away quarantine rules for fully vaccinated foreign travelers.

Industry insiders are hopeful that the new government announcement will be a big boost for the tourism industry.

The other factors that hit the country’s foreign exchange reserves were a surge in imports of vehicles and their parts and petroleum products, amid global price rises caused by the pandemic.

Import bills of petroleum products increased by 132.7 percent to Rs15.8 billion while vehicle imports increased by 117.2 percent to Rs9.48 billion in the first month of the fiscal year.

In April last year, the authorities had placed controls on the import of foreign alcohol and luxury vehicles costing more than $50,000, betel nuts, peas, peppercorns and dried dates, in a bid to conserve foreign exchange, following concerns that Nepali migrant workers might lose incomes with the pandemic potentially spreading in foreign labour destinations.

As remittances didn’t decrease as projected and foreign exchange reserves also remained in a comfortable position, the government lifted restrictions on different dates, starting October last year.

According to central bank data, intermediate consumption goods topped the import chart followed by final consumption goods, which means goods that are used to produce final goods were imported in the largest amount.

The country imported intermediate goods worth Rs80.96 billion and finished products worth Rs52.49 billion in the first month of this fiscal year.

Keshav Acharya, an economist, said that a massive increase in imports should be a matter of concern at a time when remittance has decreased and other sources of foreign exchange have not been stable, particularly earnings from tourism.

“We have to scrutinise what types of goods contributed to a massive rise in imports,” Acharya told the Post. “We should also analyse whether the inflow of remittance decreased despite the rising outflow of migrant workers.”

Dev Kumar Dhakal, spokesperson for the central bank, said that despite a slight decrease in foreign exchange reserves, there was no reason to panic as existing reserves were in a comfortable position.

“Even though remittances decreased in the first month of this fiscal year, we should not be worrying as long as it does not become a trend,” he said, adding that there has been a fluctuation in the inflow of remittances for the last year and a half.

Meanwhile, exports also grew by 115.9 percent to Rs.20.76 billion during the first month of the current fiscal year, which is primarily because of re-export of palm oil to India, according to the central bank.

However, the country’s exports in comparison to imports are very small and do not make big differences in foreign exchange earnings.

As a result of the pandemic, the tourism sector has been devastated and the sector is expected to take a few years to return to the pre-pandemic levels. Foreign direct investment (FDI) has continued to remain insignificant and the government has been receiving increased foreign loans but the current government has come up with the policy of taking fewer loans in its replacement bill for the budget ordinance.

Experts and officials said that time has not come for any policy adjustment based on the data in the first month of the current fiscal year. But they said that data on remittance, export and import should be examined closely to avoid any risk to the external sector.

“We have tools to control the import of non-productive goods if required,” said Dhakal, the spokesperson at the central bank.