The month of April also saw the Nepali economy going through many changes as inflicted rising inflation rate, the tussle between the executive body and the central bank, and a ban on the issue of letters of credit (LC) to importers. With prices of most goods and services rising to unprecedented levels; individual household savings took the biggest hit in this review period. Similarly, a newly revised list of petroleum prices and the government’s decision to increase transportation fares further exacerbated expenditure for the general public. Further, the government’s ill-guided decision to warrant a suspension of the central banker exposed the executive’s ability to encroach upon the functioning of autonomous bodies and their leaders under vested interests and agendas.
Timeline of Major Events
|01 April||The Department of Transport Management increased public transport fares by 14 percent.|
|06 April||Nepal Oil Corporation raised the price of petrol to an all-time high of Nrs. 160 per liter.|
|07 April||Commercial banks stopped issuing ‘Letters of Credit’ to traders in a bid to stem the outflow of the country’s rapidly depleting foreign exchange reserves.|
|08 April||The government suspended the governor of Nepal Rastra Bank, Maha Prasad Adhikari, accusing him of leaking confidential information to the media.|
|19 April||The Supreme Court reinstated Maha Prasad Adhikari as the governor of Nepal Rastra Bank, curtailing the government’s previous decision to suspend him.|
|22 April||Department of Customs reported a 69.44 percent increase in exports during the first nine months of the current fiscal.|
Forex crisis: is it as alarming as people are assuming it to be?
Increasing domestic demand for goods and commodities has led to a sharp rise in imports of the same. According to Nepal Rastra Bank’s (NRB) data for the first eight months of the current fiscal year (FY) 2021/22, Nepal’s import bill has increased by a whopping 36.1 percent or by Nrs. 344.12 billion. Corresponding to the same report, the outflow of forex (foreign reserves) stands at 84.4 percent (from imports of goods), whereas the inflow of the same stands at a meager 7.7 percent (from the export of goods). Similarly, remittance has also reduced by a large margin, plummeting by Nrs. 20.74 billion year-on-year during the first eight months of the current fiscal. Considering this, the ongoing forex crisis has exacerbated; with the general public anticipating an economic upheaval in the upcoming days.
While Nepal’s current forex crisis was long in building due to its huge dependency on the import of goods and services alongside years of neglect by the government to incentivize domestic manufacturing and exporting capacity, the crisis is not as dire as individuals are assuming it to be. With the country discarding most of its Covid-19 restrictions, demand for imported goods was bound to increase. Looking at it empirically, Nepal’s total imports bill for the first eight months of the current fiscal stands at Nrs. 1308.73 billion, which is a 38.6 percent increment, year-on-year. Being an import-dependent nation, this is not an alarming figure. Moreover, according to the same report, the country still has forex enough to sustain imports (both merchandise imports and merchandise and service imports) for the next 6.7 months. With the economy running in the ninth month of the current fiscal; one can rationally assume that the economy does have sufficient foreign reserves to sustain imports until the formulation, introduction, and implementation of a new national budget.
However, falling remittance earnings are a concern. Drawing reference from the same report, remittances sent home from domestic migrant laborers have been reduced by 1.7 percent year on year. Nevertheless, this too is a short-lived problem that has been propelled by the rising domestic inflation. With global prices (goods and services) at an all-time high due to uncertainties inflicted by the Russia-Ukraine crisis; prices for most basic goods, commodities, and necessities in the domestic market have increased. This is depleting domestic savings; ultimately pushing individuals to use/depend on remittance earnings/savings. Factoring all these together, one can say that today’s depleting forex crisis is a short-term phenomenon that is being heavily publicized by political leaders instead of focusing on and addressing more concerning matters like the rising liquidity crunch and prices of petroleum and gasoline products.
Suspension of governor: an attack on NRB’s autonomy
The government on 08 April 2022 suspended the central banker – Governor Maha Prasad Adhikari, accusing him on charges of leaking sensitive information and not being able to execute his responsibilities effectively. Following this, the government formed a three-member investigation committee headed by the former Supreme Court Justice, Purushottam Bhandari; giving them a month to submit their investigation report. However, the Supreme Court on 19 April 2022 reinstated Adhikari as the governor of Nepal Rastra Bank (NRB), further telling the government not to implement its decision to suspend him.
The government’s decision to suspend the governor at a time when the economy is undergoing an economic crisis has left many wondering if the concerned government authorities have their priorities right. Market observers and economists have referred to Adhikari’s suspension as a clear reflection of the growing discontentment between the executive and the central bank. Apprehensions between the governor and the finance minister started rising as early as during the introduction of the monetary policy for the current fiscal back in August of 2021. With most provisions aimed at limiting equity investments, the stock market fell drastically; irking the finance minister. Fast forward to 2022, the central bank imposed various import ceilings on luxury items and other commodities as a precautionary measure to mediate the rapidly depleting foreign exchange reserves. This too did not sit well with the finance minister. Similarly, the governor’s repeated affirmation where he acknowledged that the economy would not be able to achieve the growth target of 7 percent went against the finance minister’s projections; once again vexing him. The biggest fallout came when Adhikari refused to recognize a shady transfer of Nrs. 400 million from an unidentified source in the US to a businessman (Prithvi Bahadur Shah); which the finance minister has been reported to allegedly protecting/hiding from coming out to public knowledge.
Considering all these, the decision to suspend the governor can be rightly termed as an executive encroachment on the autonomy of the central bank and its functions. Finance Minister Janardan Sharma had long been at loggerheads with the central banker, which was particularly exacerbated by many events that occurred in recent months. Moreover, the move to suspend the governor has also sparked tensions within the coalition government, with many referring to the decision coming on the behest of Prime Minister Deuba’s partner – the Communist Party of Nepal (Maoist Centre). However, the Supreme Court’s decision to curtail the government’s decision has shown that while the executive might attack independent institutions – such as the central bank (which are meant to keep a check on the former’s behavior), personal interest/tussles should never be the reason of disturbance in the functioning of independent and autonomous bodies nor their leaders.