September Analysis: Economy and Development

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On the economic front, due to the ongoing Covid-19 pandemic, Nepal’s government revenue, foreign exchange reserves and remittance continued to fall during the first month of fiscal year (FY) 2021/22; widening the trade deficit by a whopping 70.6 percent. While the number of individuals taking approval for foreign employment recorded a decent figure, foreign capital inflow/reserves took steep fall largely owing due to the ever-increasing imports bill.

Timeline of major events in September:

DateEvent
08 SeptemberInvestment Board of Nepal (IBN) approved foreign investments worth Nrs. 1.1 trillion (USD 10 billion).
09 SeptemberNepal recorded an increase in its foreign direct investment (FDI) by 8.5 percent to Nrs. 198.52 billion (USD 1.68 billion).
10 SeptemberFinance Minister Janardan Sharma presented a replacement bill in the House of Representatives (HoR), making amends to the previous ordinance budget for fiscal year (FY) 2021/22.
17 SeptemberNepal Rastra Bank (NRB) injected Nrs. 20 billion (USD 169 million) in the domestic financial system to ease the growing shortfall of liquidity in the banking system.
22 SeptemberAsian Development Bank (ADB) estimated Nepal to achieve a growth rate of 4.1 percent in the current fiscal year (FY 2021/22).
24 SeptemberNepal recorded a Balance of Payments (BoP) deficit of Nrs. 38.75 billion (USD 328 billion) in the first month of current fiscal year (FY) 2021/22.
26 SeptemberInflow of remittances fell by 18.1 percent to Nrs. 75.96 billion (USD 643 million) during the first month of fiscal year (FY) 2021/22.
27 SeptemberNepal’s trade deficit widened by 70.6 percent to reach Nrs. 129.97 billion (USD 1.10 billion) during the first month of fiscal year (FY) 2021/22.

 

Concerning Macroeconomic Indicators- Nepal’s external economy

Nepal Rastra Bank (NRB) on September 23 unveiled its ‘Current Macroeconomic and Financial Situation of Nepal’ report for the first fiscal month (mid-July to mid-August) of the current fiscal year (FY) 2021/22 revealing a rather concerning future for the country’s external economy with trade deficit soaring by 70.6 percent to reach Nrs. 129.97 billion (USD 1.10 billion). As per the report, merchandise exports increased by 115.9 percent to reach Nrs. 20.76 billion (USD 175 million) as compared to an increase of 8.9 percent during the same period of the last fiscal. Yet the increasing exports fell short in terms of increasing imports. According to NRB, merchandise imports increased by 75.7 percent to register an import bill worth Nrs. 150.73 billion (USD 1.27 billion) as compared to a decrease of 19.6 percent during the last fiscal; expanding the export-import ratio to 13.8 percent from the previous 11.2 percent. Similarly, remittance inflows reduced by 18.1 percent to reach Nrs. 75.96 billion (USD 643 million) in a steep contrast to an increase of 23 percent in the previous fiscal. With most of the remittance earnings being channeled into imports, foreign currency reserves too dropped by 3.2 percent to Nrs. 1,353.82 billion (USD 11.46 billion) during the same period.

While this definitely is an alarming situation in the nation’s external economy, it is not the first time that such figures have been revealed by the central bank. Nepal (being an import dependent nation) has been buying more (imports) goods and services than what it sells (exports). With nominal earning from exports, the country’s trade imbalance has been on an upward growing trend for the last five years. The ‘Current Macroeconomic and Financial Situation’ published by the central bank in fiscal year (FY) 2014/15 recorded imports at Nrs. 774.68 billion (USD 6.56 billion). By fiscal year (FY) 2018/19, imports registered a staggering amount of Nrs. 1418.53 billion (USD 12 billion) within the nation’s current account; with a year-on-year growth of 13 percent annually.

While a number of factors including small export basket, high production cost, non-tariff barriers and weak trade logistics can be reasoned out for the widening trade deficit; the country’s over-dependency on India for most of its imports has been identified as the major reason for the recent surge. Nepal’s trade deficit with India increased by 32 percent between fiscal year (FY) 2019/20 and (FY) 2020/21; reducing the country’s national savings (to meet the bloating imports) and impeding any scope of investment to help boost competitiveness of export-oriented products. Considering this, the nation needs to adopt stronger import-substitution policies including rejection of direct and indirect subsidies extended by its neighbors followed by local production of industrialized products and enhancing competitiveness of export-oriented products to reduce its trade deficit with India in the short run and trade deficit with rest of the world in the longer run.

Tourism sector- A path towards revival

Pokhara’s Fewatal as seen in the morning. Photo: RSS

The economy saw a mixed performance of its tourism sector this month. While requests from trade entrepreneurs regarding provision of on-arrival visa to fully vaccinated tourist and waiving quarantine requirements for such visitors was met, the sector is yet to embark upon a recovery path. The total number of international arrivals in Nepal for the month of August was dismal, registering at just 66,966 individuals. Similarly, a recent forecast by the Asian Development Bank (ADB) revised Nepal’s economic growth for fiscal year (FY) 2021/22 to 4.1 percent from the earlier 5.1 percent, largely due to the stationary and sluggish growth of the tourism sector. Moreover, with barely 20 percent of its population fully vaccinated, the country’s prospects of becoming a ‘vaccine vacation’ country too seems a distant dream. All these has casted uncertainty over the revival of the sector which prior to the Covid-19 pandemic contributed 6 percent to 7 percent to the national gross domestic product (GDP) and 2 percent to 3 percent towards employment growth.

At this juncture, the country needs to come up with both- short-term and long-term recovery plans and policies if it aims to attract more tourists in the days to come. With Gandaki Province inviting ambassadors of 20 different countries to celebrate ‘World Tourism Day’, other provinces too can initiate similar revival strategies to invite both foreign and domestic tourists. To do so, local and provincial governments must prioritize caution and safety first alongside ensuring Covid-19 vaccinations to all those employed in the sector. Similarly, the federal government should advocate for Nepal’s removal from the ‘red zone list’ of the international travel advisory, considering its low Covid-19 infection rate and high recovery rate. Likewise, the government must implement the concessional schemes that it brought in the recent ‘replacement bill on budget ordinance’ to restore the tourism sector including necessary infrastructure construction, promotional programs, special discount for airlines companies on income tax and so on.

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