Country’s imports hit Rs1 trillion mark in the first half of the fiscal yearIf inflation reaches double digits and trade deficit keeps rising, the situation may turn from bad to worse.
Prithvi Man Shrestha & Sangam Prasain
Nepal’s annual imports bill joined a trillion rupee club for the first time in the fiscal year 2017-18. It was due to a reconstruction drive after the earthquakes of 2015 and the burgeoning income of Nepalis following a massive surge in remittance earnings.
Three years later, Nepal spent a trillion rupees in just six months to buy foreign goods, thanks to growing demands of foreign goods as the country recovers from the devastating impact of Covid-19.
According to the Department of Customs, Nepal’s imports bill during the first half of the current fiscal year 2021-22 reached a staggering Rs999.34 billion mark, a rise of 51.13 percent year-on-year.
The amount that Nepal spent to buy foreign goods in six months is one-fourth of the country’s annual value of goods and services produced in the country or gross domestic product (GDP) or equal to earnings that Nepali migrant workers sent home last year.
In 2017-18, Nepal had imported goods worth Rs1.24 trillion, according to the department.
The government statistics show that price hike of the goods is one of the key reasons behind the ballooning imports.
Reports say price gains are shooting higher across many advanced economies as consumer demand, shortages and other pandemic-related factors combine to fuel a burst of inflation.
“The situation is alarming,” said Bishwambher Pyakuryal, an economist.
There is a shortage of inputs like chemical fertiliser. The fuel price has reached a near record level. The country’s debt is rising. Inflation is high, reaching a 64-month high of 7.11 percent.
“Nepal is already in the midst of a crisis. If the inflation reaches double digits, and the trade deficit keeps rising, the situation may turn from bad to worse,” said Pyakuryal.
Some economists have termed the current situation a short-term phenomenon driven mainly due to global factors. But if it continues, the consequences could be more serious, they say.
“If we spend one-fourth of our earnings to import goods in just six months, it will increase business activities to some extent. But the reality is that it hampers economic growth in the long run because of low investment in critical infrastructure projects,” said Pyakuryal.
Economists say if inflation gets out of hand, it would lead to slower economic growth in the long run, making it tough for the government and the private sector to plan and invest.
For a developing country like Nepal, an inflation burst when most of the country’s needs are imported, particularly food and fuel, is a massive cause for concern.
The monthly consumer price inflation climbed to its highest in 64 months in December, rising to 7.11 percent year-on-year from 5.32 percent in November, data from the country's central bank, Nepal Rastra Bank, show. The last time the country saw the highest monthly inflation was in September 2016-17 at 7.9 percent.
In contrast to imports, the exports in the six months, however, are just at Rs118.85 billion, and this has created a staggering trade deficit of Rs880.49 billion.
“The import figure of the six months is extremely high,” Prakash Kumar Shrestha, chief of economic research department at the central bank, told the Post.
These figures indicate growing economic activities after a slump in growth triggered by the two lockdowns in 2020 and 2021.
“The surge in imports has resulted in depletion of foreign exchange reserves,” said Shrestha. “This reduces the country’s ability to buy foreign goods and services.”
The country’s gross foreign exchange reserves decreased 14.7 percent to $10.03 billion during the first five months of the current fiscal year. The reserves are enough for sustaining imports of goods and services for just 6.8 months, less than the central bank’s target of maintaining such reserves for sustaining imports for at least seven months.
“There was a time when we had reserves for sustaining imports for 14 months,” said Shrestha, in an indication how the forex reserves have massively depleted.
As imports are surging, the inflow of remittances, the largest sources of foreign currency, has been on a downward spiral since the beginning of the fiscal year. The remittance inflow decreased 7.3 percent to $3.26 billion in the first five months of this fiscal, according to the central bank.
And the tourism sector has been hit hard.
There has been little contribution to foreign exchange earnings from the tourism sector which has been devastated by the pandemic, and export earnings, though increased by 95.48 percent in the first half this fiscal, are very small compared to imports.
“If we allow imports to rise in the same degree, we cannot rule out the country heading in the direction of what Sri Lanka is facing,” said Shrestha.
But he expressed confidence that the situation would not deteriorate to that level as the country has already started taking measures to discourage imports and taken measures to support foreign exchange reserves.
Sri Lanka is facing a deepening financial and humanitarian crisis with fears it could go bankrupt in 2022 as inflation rises to record levels, food prices rocket and its coffers run dry.
Loss of tourism income due to Covid, government spending and tax cuts eroding state revenues, vast debt liability and the lowest level of foreign exchange reserves in a decade have compounded the situation.
Considering the potential crisis, Nepal Rastra Bank and the government have taken a number of measures to discourage the import of certain goods.
The central bank has directed the banks and financial institutions to provide more interest on deposits of remittance, according to Shrestha.
Non-Resident Nepalis were also allowed to open foreign exchange savings accounts.
“Besides these measures, we have also received an emergency credit facility from the International Monetary Fund. So, we may not head into trouble like Sri Lanka,” said Shrestha.
On January 13, the IMF announced that its board approved a $395.9 million credit facility arrangement for Nepal with $110 million available for immediate disbursement.
“There is also hope that the growth rate of imports may come down due to decreased demands amid a third wave of coronavirus,” said Shrestha.
The country is currently seeing rising cases of Covid-19 with the Omicron variant driving the surge in cases, according to the Health Ministry.
Economists say the government’s lackadaisical approach also contributed to the current surge in imports that affected the external sector of the economy.
“The government is more focussed on increasing revenue instead of promoting domestic industries and exports,” said Ram Prasad Gyawali, a professor of economics at the Tribhuvan University.
On January 17, the Finance Ministry boasted revenue growth of over 40 percent during the first six months.
According to the ministry, revenue collection grew by 45.9 percent during the first half of the current fiscal year, the highest in the last three years. The country collects a majority of its revenue from imports, according to the ministry.
“We are importing large quantities of agricultural goods which can be produced within the country,” said Gyawali, who is also former head of the economics department at the university.
According to a study conducted by the National Planning Commission, Nepal imported agricultural goods worth over Rs200 billion in the fiscal year 2019-20 although such goods are produced within the country. Most agricultural goods came from India, according to the study titled ‘Status of Export and Import of Agriculture Goods.’
Even though officials have been claiming that rising imports suggest ongoing economic recovery, experts said the economy can be back on track only if the goods which are in demand in the country are produced within the country.
“We are helping other countries to recover from the pandemic by buying their goods on a large scale rather than contributing to our own economic recovery,” said Gyawali. “Surging imports may have partially contributed to economic revival because the portion of raw materials in total imports is very small compared to other consumer goods.”