January Analysis: Economy & Development

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In the front of Economy and development, the Nepali economy underwent some serious economic scares and crisis during the first month of 2022. With the imports bill hitting Nrs. 1 trillion in just six months of the fiscal year, foreign exchange reserves, remittances and other foreign earnings experienced a sharp fall. Similarly, the sole importer of petroleum fuel, Nepal Oil Corporation (NOC) announced its insolvency following rise in global fuel prices in the international market. Likewise, Nepal Rastra Bank (NRB) affirmed that the nation’s economic growth target of 7 percent is unattainable. World Bank has projected 3.9 percent growth for this fiscal year. Moreover, the government yet again failed in appointing key officials including the Minister for Ministry of Industry and Commerce and chairpersons at SEBON and NEPSE.

Timeline of major events in January

DateEvent
January 09Governor Maha Prasad Adhikari of Nepal Rastra Bank (NRB) affirmed that reaching the economic growth rate of 7 percent is impossible this fiscal year (FY) 2021/22.
January 11Nepal’s foreign exchange reserves reduced by 14.7 percent as per NRB’s report.
January 13Remittance inflow continued to decrease for the fifth straight month in the current fiscal year (FY) 2021/22 by 7.3 percent.
January 15The Sher Bahadur Deuba administration completed six months without a Minister of Industry and Commerce.
January 17SEBON and NEPSE chairperson appointment was delayed again.
January 22Nepal Oil Corporation (NOC) announced its bankruptcy with a monthly loss of Nrs. 3.70 billion.
January 24Nepal’s import bill crossed Nrs. 1 trillion within the first half of the current fiscal year (FY) 2021/22.

Country spends Nrs. 1 trillion on imports, severely depleting forex-

Context

According to the Foreign Trade Statistics (FTS) published by the Department of Customs (DoC), the economy has spent Nrs. 1 trillion in just six months of the current fiscal year (FY) 2021/22 to buy foreign goods. In terms of figures, the imports bill has reached Nrs. 999.34 billion; a rise of 51.13 percent year-on-year as compared to the last fiscal. In contrast to the imports, Nepal’s exports during the same period stands at a mere Nrs. 118.85 billion, widening the trade deficit by Nrs. 880.49 billion.

Table 1: Five Years Trend of Nepal’s Annual Imports Bill

Fiscal Year (FY)Imports (value in Nrs. billion)
2021/22999.34
2020/211539
2019/201196.80
2018/191418.53
2017/181240.0
(Source – Department of Customs)                                                                  

Analysis

Some trade experts and market observers have referred to the current situation as a short-term phenomenon driven by factors including rising domestic demand for foreign goods and services, low domestic production and productivity (due to the pandemic and subsequent lockdowns), and failure on part of the government to promote import substitution industries (as stipulated in fiscal and monetary policies). However, the incessant rise in imports does not bode well for the Nepali economy which is already deep in its own internal economic crisis – a rising liquidity crunch. While spending more money on imports does signal growing economic and business activities, it severely depletes foreign exchange reserves that an economy keeps. Moreover, spending a trillion rupees in just six months is alarming for a small nation which previously recorded such figure after the completion of an entire fiscal.

As a direct consequence of the bloated imports bill, Nepal’s foreign exchange reserve has reduced by 14.7 percent during the first five months of the current fiscal. As of present, forex is left for only 6.8 more months, contrary to NRB’s target of maintaining such reserves to continue imports for 7 more months. Similarly, according to the ‘Current Macroeconomic and Financial Situation’ published by NRB, over 1/4th of remittance received by the economy was spent in making import payment. This has left the economy with little money to be channeled into other productive sectors. Moreover, with weak tourist arrival; tourism income which reduced by 70 percent (in 2020/21) is further anticipated to fall due to future impact inflicted by the Omicron wave. In this scenario, Nepal’s exorbitant expenditure on foreign goods and commodities poses huge repercussions on the country’s revenues. This also signals the nation’s need for an emergency credit facility, which shall be hard for the country to avail amidst its ongoing liquidity crisis. Furthermore, the nation could also expect a financial default, something that Turkey is currently facing due to rapidly reducing foreign earnings; if it does not impose a ceiling on its imports and lessen the rising pressure on its foreign exchange reserves.

Ministry of Industry, SEBON and NEPSE yet to get their heads-

Finance Minister Janardan Sharma participated in a brief presentation on the current economic situation of the country at the Ministry of Finance. Photo: RSS

Context

The Sher Bahadur Deuba administration has failed in appointing a Minister at the Ministry of Industry, Commerce and Supplies (MoICS), six months into their tenure. Following the controversial exit of Gajendra Hamal (who resigned three days after his appointment by Prime Minister Deuba), the position has remained vacant since the previous incumbent, Lekh Raj Bhatta left office in May 2021. Similarly, the Securities Board of Nepal (SEBON) and Nepal Stock Exchange (NEPSE) too are operating without their respective chairperson. Both the previous heads, Bhishma Raj Dhungana and Chandra Singh Saud were sacked by the Ministry of Finance (MoF) on grounds of illegal shares ownership of Sarbottam Cement in October 2021.

Analysis

The repeated delay in appointment of Minister for Industry and Commerce and chairpersons of SEBON and NEPSE has highlighted the presence of heavy politicization, loud disagreements and lack of coordination among ministries and government institutions in appointing key officials. It also shows the government’s lack lustre approach towards industrial and financial development especially considering how badly the economy is operating post the second Covid-19 wave. The absence of the Minister for Industry has left several bills including – The Business Credit Flow Work Procedure 2021 (which had promised to provide seed capital of up to Nrs. 2.5 million at an interest rate of 1 percent) in a limbo. This has been further intensified by the parliament’s failure in passing any bill due to obstruction as staged by CPN-UML post its reinstatement back in 2021. Similarly, the vacancy has also led to an exorbitant rise in market and shipping prices of goods and commodities, with traders setting prices favourable to their business and profit. Likewise, the delay in appointment of chairpersons at SEBON and NEPSE has highlighted the internal conflict between the National Planning Commission (NPC) and the Selection Committee (as formed by the Ministry of Finance) with regards to the ‘Working Procedure on Selection of SEBON and NEPSE Head’. The committee has accused Dr. Biswo Poudel of amending the ‘work procedure’ without prior consultations with MoF, further escalating the conflict of interest between bureaucracy and economic institutions particularly in terms of leadership, superiority and power. Such conflicts have time and again impeded several policies and plans targeted by the government; one could assume the current delay in selection of heads is a fine example of it.

NOC announces bankruptcy, worsening inflation fear across the nation-

Context

The state-owned Nepal Oil Corporation (NOC) on 22 January 2022 announced its bankruptcy, despite months of exorbitant price hike in petroleum fuels and other crude oil. NOC which has been on a price increase spree since 2014, announced its latest hike on 18 January 2022 following which petrol and diesel cost Nrs. 139 and Nrs. 122 per litre, respectively. However, despite the recent hike, NOC is reported to be operating under a loss of Nrs. 3.70 billion per month.

Analysis

The current fuel crisis in Nepal clearly demonstrates the country’s ill guided policies and taxation system with regards to petroleum fuels. All this can be attributed to the directives brought in by the erstwhile KP Sharma Oli led government which commenced the trend of increasing fuel prices in the name of infrastructural development. In addition to infrastructural tax, the government has also imposed various additional taxes on per litre purchase of fuel, to be collected from end consumers. Inflation has a direct relation with fuel prices in Nepal. Hence, the current rising prices is expected to pose heavy repercussions on consumers who are already reeling under a worsening inflation crisis including a monthly consumer inflation rate of 7.11 percent, year-on-year. Moreover, with the country’s economic activities directly dependent oil for on transportation and logistics, increasing fuel inflation is also expected to hamper service industries, by increasing their cost of production. In this scenario, NOC’s repeated price hike is ought to push inflation to greater heights in days to come; making it costlier for consumers to avail fuel and other daily necessities.

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