Outflow of funds from Nepal surpassed inflows by Rs85.32 billion in the first five months of the current fiscal year, mainly due to excessive rise in import bill compared to export earnings.

According the Nepal Rastra Bank’s current macroeconomic report of five months, the country’s balance of payment (BoP) deficit stood at Rs85.32 billion. The BoP deficit in the same period last year was Rs5.48 billion. It reveals a sharp decline in foreign currency reserve, putting pressure on the country’s ability to purchase goods and services from abroad.

As of mid December, the gross foreign exchange reserves stood at $9.29 billion, a decrease of 7.9 percent from $10.08 billion in mid-July. The amount is sufficient to finance merchandise imports for 9 months while goods and service import can be covered for 7.8 months, said the central bank.

The BoP deficit over the period was largely affected by the country’s current account position which reached a deficit of Rs119.33 billion. The current account deficit was Rs64.11 billion in the same period last year. The central bank statistics show that the escalating import bill compared to the slow rise in export earnings was the main cause behind the situation.

In the first five months of the current fiscal year, the country’s import bill surged by 34.2 percent to Rs607 billion. Nepal spent a hefty amount on importing petroleum products, vehicle and spare parts, aircraft spare parts, MS billet, machineries, vegetables, fruits and rice, among others.  

On the other hand, the country’s export earnings increased by mere 11.2 percent to Rs37.50 billion. In the otherwise small export basket, a rise in earnings from yarn, zinc sheet, woolen carpet, pulses, readymade garments, pashmina and jute products proved to be a bright spot. As a result, the trade deficit figure stood at Rs569.49 billion, a rise of 36.1 percent, shows the central bank report. Based on the export and import figures, Nepal is spending Rs16.20 on import for every Rs1 earned from export.

Over the period, inflow of remittance, which has been the main source to fund the country’s import remained fairly satisfactory. As per the central bank statistics, the workers’ remittance increased 31.9 percent to Rs376.59 billion.

An increasing expense by outbound visitors has also been putting pressure on the country’s widening BoP deficit as they bring money out of the country. The statistics show that the travel receipt increased 8.7 percent to Rs31.89 billion in the review period while travel payments increased 38.6 percent to Rs41.33 billion.

The capital transfer under BoP also remained dismal. Nepal received capital transfer of Rs5.27 billion, a drop from Rs8.86 billion. Likewise, capital inflow via foreign direct investment was Rs6.78 billion, down from Rs11.12 billion.

Analysts said the deteriorating foreign currency reserve could hit the country’s ability to finance the import of capital goods and essentials from abroad. “It will give rise to a risk that the country could depend more on foreign borrowing to bring in foreign currency in the future,” said Ram Prasad Gyanwali, economist and former head at the Central Department of Economics, Tribhuvan University.

“In addition, it will also affect foreign direct investment as investors will have doubts over the government’s capacity to provide foreign currency when looking to repatriate their earnings,” he added.