July Analysis: Economy & Development

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Nepal continued to direct its remittance earnings on imports of agricultural products and commodities, unfazed by the COVID-19 pandemic and subsequent lockdowns. Nepal Rastra Bank (NRB) which released it 11 months data via the report ‘Current Macroeconomic and Financial Situation’ revealed that the country received NPR 870.94 billion in remittances during the period between mid-June 2020 to mid-July 2021. The remittance inflow in the last fiscal jumped from 3.2 percent to 12.6 percent to reach NPR 642.14 billion. This increasing remittance earnings was heavily channeled into procuring agricultural imports.

Timeline of major events in July

DateEvent
July 06The government collected tax revenue worth NPR 373.26 billion as compared to the target of NPR 450 billion during the first 11 months of (FY) 2020/21.
July 07Nepal imported rice worth NPR 28.60 billion in the first 11 months of (FY) 2020/21.
July 10Nepal and India signed a Letter of Exchange to the India-Nepal Rail Services Agreement 2004.
July 14Department of Transport Management hiked passenger fares of public transport by 28 percent.
July 15Nepal Rastra Bank reported that the country received NPR 870.94 billion in remittance in the first 11 months of (FY) 2020/21.
July 15The Finance Comptroller General Office reported that the federal government’s development expenditure increased by 309 billion to reach NPR 1,474.64 billion in (FY) 2020/21.
July 16Nepal Rastra Bank reported that the current account deficit has remained at NPR 293.97 billion in the first 11 months of (FY) 2020/21.
June 16Merchandise exports and imports increased by 37.8 percent and 25.7 percent to reach NPR 121.25 billion and NPR 1,383.36 billion during (FY) 2020/21 as reported by Department of Customs.
July 24Digital payments dropped by 12 percent after the easement of second nationwide-prohibitory orders.
July 25Central Bureau of Statistics reported that out of 923,027 total business enterprises in the country, 49.9 percent are operating as informal firms/enterprises.
July 29Dr. Bishwo Nath Poudel took the oath of the office as the Vice-Chairman of the National Planning Commission.

Trade Deficit and the Agro-import Bill

Unfazed by the COVID-19 pandemic and the second nation-wide lockdown which adversely impacted the country’s international trade, Nepal continued to increse its remittance earnings on imports of agricultural products and commodities. Nepal Rastra Bank (NRB) which released its 11 months data via the report ‘Current Macroeconomic and Financial Situation’ revealed that the country received NPR 870.94 billion in remittances during the period between mid-June 2020 to mid-Luly 2021. The remittance inflow in the last fiscal jumped from 3.2 percent to 12.6 percent to reach NPR 642.14 billion. In terms of USD, remittance inflow increased by 10.4 percent to reach USD 7.39 billion. This increasing remittance earnings was heavily channeled into procuring agricultural imports. The country recorded a 30 percent year-on-year increase to its agricultural imports bill, pushing it to NPR 325 billion in (FY) 2020/21. Department of Customs (DoC) has revealed that the share of farm products in the total import bill rose to 21 percent within the NPR 1.53 trillion bill. This staggering import of agricultural produce was due to high domestic demand for items like edible oil, crude soybean oil, cereals, sugar and so on. Soybean oil was identified as the most imported product whose imports increased from NPR 32.66 billion to NPR 82.90 billion. The increase in import of crude soybean oil has been attributed to Nepal’s import of the same from other countries paying minimum tariffs and then re-exporting it as a refined product to South Asian countries (particularly India) under provisions of zero tariffs (as ensured by the SAFTA agreement). Due to this, in the last few years, refined soybean oil has become Nepal’s top export product, despite lacking competitive advantage in the international market.

Similarly, the import bill also registered a huge rise in import of rice. Nepal imported rice worth NPR 28.60 billion in (FY) 2020/21. The country which produced only 5.62 million tons of rice in the last fiscal (which was an increase from (FY) 2019/20’s produce of 5.5 million tons) has been dependent on rice imports for several years now. Apart from agricultural imports, merchandise imports too have increased in the last fiscal by 25.7 percent to reach NPR 1383.36 billion against a decrease of 15.3 percent in (FY) 2019/20. In merchandise imports, commodities such as transport equipment’s and parts and telecommunication tools and equipment’s etcetera have increased. 

A closer look into the statistics in the report, ‘Current Macroeconomic and Financial Situation’ by the central bank has also revealed that merchandise exports has increased by 37.8 percent to NPR 121.25 billion during the first 11 months of the same review period. India has been identified as Nepal’s top export partner followed by other third countries. However, owing to the COVID-19 pandemic and the border closure at Kodari-Zhangmu and Rasuwagadhi-Kerung border points, exports to China has drastically reduced by 17.4 percent, reaching even nil at above-mentioned border points. In total exports, export of commodities including refined soybean oil, cardamom, polyester yarn and threads, jute products, woolen carpets and so on has increased.

In the backdrop, Nepal’s trade deficit has inevitably expanded by 24.5 percent to reach NPR 1262.11 billion during the first 11 months of (FY) 2020/21. The deficit has increased from 16.4 percent as compared to the last fiscal. Export-Import ratio too has increased to 8.8 percent in the same review period, which is an increase of 0.8 percent as compared to last fiscal.

An Analysis-

As of current statistical figures, Nepal’s trade deficit is largely being perpetuated by the ever-expanding agricultural import bill. This is a pressing concern for an agrarian economy like Nepal. While large imports of agricultural commodities are being allowed to continue to meet increasing domestic demand, it is also supporting a bloated trade deficit; ultimately affecting the economic growth of the country. Remittance sent by domestic migrant workers is increasing domestic consumption for fine food products. With increasing income, purchasing power is also increasing; expanding the overall living standard of middle-income Nepalis who are now preferring to consume refined food items. Moreover, easy import procedure from India (where production happens in large numbers) is also making Indian imports cheaper. If allowed to continue, Nepal – a developing and import dependent nation can face greater price volatility (for consumables) in the near future. Likewise, as Nepal’s value of agro import bills is consistently rising above its total value of merchandise imports and exports, the country can also be pushed into a phase of national food insecurity; which can further worsen owing to the ongoing COVID-19 pandemic.

Concerns are also arising regarding the nation’s weak and inadequate agricultural plan and policies. While the government through its budget had allocated NPR 41.40 billion for the growth of agricultural sector in (FY) 2020/21 and the central bank had mandated for other bank’s lending to the sector by 15 percent (during the same fiscal), all such provisions and promised has fared poorly in its implementation. The government’s 20-year Agriculture Development Strategy along with the 10-year action plan has also failed to produce any concrete results. Similarly, the government had invested billions of rupees to provide fertilizers and plant nutrients to farmers on time during the harvesting season; however, agricultural productivity still remains low. If no intervention is introduced here, low agricultural productivity can enlarge population pressure on limited farming resources, promote uneconomic holdings of cultivable land and poor management of available resources and increase subsistence farming; further skyrocketing the import of agricultural goods, expanding the agro-import bills and widening the overall trade deficit.

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