Global inflation straining Nepal’s forex reservesNepal’s external economic situation isn’t worsening to the level of Sri Lanka but warning signs are visible, experts say.
Surging imports have contributed to a significant depletion in foreign exchange reserves and ballooning of the balance of payment deficit, raising concerns if the country would be able to import essential goods for long.
Though the quantity of goods itself rose sharply in the current fiscal year, rising prices of goods in the international market also contributed to a surge in the country’s import bill, according to economists.
Fuel and commodity prices have surged internationally in the wake of the Russia-Ukraine war.
As a net importing country with imports constituting over 90 percent of international trade, Nepal’s import bill has continued to surge.
“Since the beginning of the current fiscal year, rising prices started to put pressure on import bills by 20 percentage points,” Manik Lal Shrestha, former division head, statistics division, at the International Monetary Fund (IMF), said at an interaction on the country’s economy organised by the Society of Economic Journalists Nepal in Kathmandu on Wednesday.
Presenting his paper, he compared the import data from the perspective of quantity and value of imports from July to March this fiscal year, suggesting a clear link between price rises of goods internationally and rising import bill of Nepal.
“This also affected the foreign exchange reserves,” he said.
Nepal’s foreign exchange reserves have been under strain since the beginning of the current fiscal year. As of the first eight months of the current fiscal year, the country’s foreign exchange reserves dropped by 16.3 percent to Rs1,171 billion in mid-March 2022 from Rs1,399.03 billion in mid-July 2021, according to the central bank.
The available reserves are sufficient to sustain imports of goods and services for just 6.7 months against the central bank’s policy of maintaining the reserves to sustain imports for at least seven months.
Shrestha gave the example of how the rising petroleum prices over the last two years are increasing the fuel import bills.
During the first nine months of the current fiscal year (mid-July 2021-mid-April 2022), Nepal’s total import bill stood at Rs1466.66 billion with a rise of 31.97 percent year-on-year.
During the period, Nepal imported petroleum products including petrol, diesel, liquified petroleum gas (LPG), kerosene, and aviation turbine fuel worth Rs208.94 billion which accounts for 14.24 percent of the total import bills of the country, according to the Department of Customs data.
During the same period last year, Nepal had imported petroleum products worth Rs119.74 billion, suggesting that the import bill of petroleum products has almost doubled in the review period this fiscal year, according to Trade and Export Promotion Centre, which also derives data from customs offices.
And international agencies have suggested the continuation of high prices of commodities in the international market in the next few years.
In its latest ‘Commodity Market Outlook Report released on April 26, the World Bank has stated that the war in Ukraine has dealt a major shock to commodity markets, altering global patterns of trade, production, and consumption in ways that will keep prices at historically high levels through the end of 2024.
The increase in energy prices over the past two years has been the largest since the 1973 oil crisis. Price increases for food commodities—of which Russia and Ukraine are large producers—and fertilisers, which rely on natural gas as a production input, have been the largest since 2008.
Energy prices are expected to rise more than 50 percent in 2022 before easing in 2023 and 2024. Non-energy prices, including those of agriculture and metals, are projected to increase almost 20 percent in 2022 and will also moderate in the following years, according to the report.
“Nevertheless, commodity prices are expected to remain well above the most recent five-year average. In the event of a prolonged war, or additional sanctions on Russia, prices could be even higher and more volatile than currently projected,” the report says.
With global prices of commodities rising, Nepal has been forced to pay more in foreign currency.
“Price increases in imported products are driving and will drive current account balance and put pressure on foreign exchange reserves in this and next [fiscal] year,” said Shrestha.
Price rises of commodities mean Nepal, being a heavily import-dependent country, is forking out more foreign currency to bring those goods. During the first nine months of the current fiscal year, the ratio of imports in total foreign trade stood above 90 percent, according to customs data.
“Imports are dominating the goods market from daily necessities to raw materials to capital goods, even to the extent of replacing domestic production,” said Shrestha.
Growing import bills have been unsustainable for existing sources of foreign exchange earnings. The largest source of foreign exchange of the country is remittance whose contribution stands at 54.6 percent on average in the last five years, according to a presentation made by Biswash Gauchan, executive director, Institute for Integrated Development Studies, a Kathmandu-based think tank.
“Until the fiscal year 2015-16, remittances were able to cover the trade deficit, leading to current account surplus,” said Gauchan. “In the last five years, inflows of remittances grew by 7.8 percent on average and the trade deficit widened by 18 percent on average leading to current account deficit.”
Remittance inflows have been decreasing from the beginning of the current fiscal year. Foreign exchange earnings from tourism have remained minimal due to the impact of Covid-19. Though exports have surged, earnings from exports have remained insignificant.
At the same time, credit expansions fuelled the imports which resulted in the depletion of foreign exchange reserves and raising concern if the country would head to the direction of Sri Lanka.
Amid concerns, the government recently banned import of 10 types of goods including vehicles, high-end mobile phones and television sets, and liquor products.
But experts said that Nepal’s situation is still far away from worsening to the level of Sri Lanka.
“Nepal does not have debt liability that cannot be paid and the balance of payment deficit that cannot be bridged like that of Sri Lanka,” said Swarnim Wagle, an economist and former vice-chairperson of National Planning Commission. “There are, however, some worrying signs in these sectors.”
He said that bad policy choices on whims driven by politics created Sri Lanka’s current situation.
“Without active intervention from the central bank and the press, there is the risk that Nepal’s leadership can also make wrong policy choices in the name of introducing populist programmes,” he added.
In the current context of the economy, the International Monetary Fund has emphasised the need to further tighten monetary policy, including by increasing interest rates at a time when the private sector is complaining about higher interest rates.
“Taken together with the gradual unwinding of Covid support measures in the banking system, this approach is expected to address decreasing international reserves without the need to resort to import restrictions that could exacerbate inflation and hamper economic growth,” the IMF said in a statement on Wednesday after the conclusion of its mission in Nepal.