Nepal’s economic crisis: Is Nepal the next Sri Lanka?

KATHMANDU: Perhaps, never before had the Himalayan nation, Nepal, with a 29 million population faced such a severe economic crisis, both on the external and internal fronts as it is facing today. On the external front, the crisis that the nation is facing is due to depleting remittances, widening trade deficit due to unprecedented growth in imports, soaring imbalances in the balance of payments, and declining foreign exchange reserves. On the domestic front, prices of essential items have increased enormously and the banks have failed to extend loans for most business activities. Because of some of these economic woes, many people in Nepal are worried if Nepal is heading in the same direction as Sri Lanka where the symptoms of the pre-economic crisis were as distinct as it is prevailing in Nepal today.

But Nepal’s Finance Minister Janardan Sharma, who is merely a politician representing the Communist Party of Nepal – Maoist Centre (CPN-MC) headed by Pushpa Kamal Dahal and has little background in economics, has denied the existence of any major economic crisis in the country. Despite such claims, people have started exerting pressure on him to resign for his failure to address the economic crisis.

In his bid to divert people’s attention towards him, Minister Sharma sometimes lay charges against Maha Prasad Adhikari, the Governor of Nepal Rastra Bank—the central bank of the country—of “incompetence, leaking confidential information, and failing to discharge his duties.” Accordingly, he was suspended. This raised suspicion about the commitment of the government to ensure the autonomy of the central bank of the country. It was only through the intervention made by the Supreme Court of Nepal that the Finance Minister’s move to suspend him was quashed and he was reinstated to his job.

The tussle between the Finance Minister and the Governor of the Central Bank of the country is in itself proof of economic troubles. Recent data shows that the inflation rate in the country has galloped to 7.14 percent mainly because of the rise in transportation and construction costs. Besides, the fall in the rate of the Nepal Stock Exchange by 41.77 points has eroded the confidence of the investors in the economy.

Because of the liquidity crunch, the banks and the financial institutions have been finding it increasingly difficult to extend loans even to the productive sectors, like the agriculture, tourism, manufacturing, and energy sectors. The banks had extended INR 187 billion in loans in mid-August-mid-September in 2021 but it reduced drastically to mere INR 11 billion in mid-January–mid-February in 2022.

At the macro level, the rate of economic growth that was projected to grow to 7 percent has been slashed to 3.7 percent by the World Bank. The growth rate of the economy is affected largely due to the impact of the war in Ukraine that increased the costs of fuel and several agricultural products. The country imported oil worth INR 175.53 billion in the last fiscal year, but this year in just eight months, the imports of oil surged to INR 184.98 billion.

Though Nepal is known as an agricultural country, it has imported more and more food grains over the years. Nepal’s imports of agro and food products from India alone surged by 38.9 percent in 2020–21 as compared to the previous year in 2019–20. In 2020-21, the country imported 1.2 million tonnes of rice worth US$ 402.91 million.

Because of the massive growth in imports, the trade deficit escalated to the extent of US$ 9.5 billion in the first eight months of the current fiscal year, which is close to the entire budgetary amount of the Government of Nepal. Apart from this, the country is also running low on foreign exchange reserves, which declined perceptibly from US$ 12 billion in the first eight months of last fiscal year in 2021-22 to US$ 9.6 billion during the same period of the current fiscal year 2021–22 by more than 18 percent. At a time when the country is in dire need of foreign exchange to pay for the debt considering the debt service ratio of US$ 333 million, the present level of foreign exchange reserve that cannot sustain imports for more than nearly six months is a matter of serious concern.

To deal with the economic crisis, the Government of Nepal accepted a US$ 659-million grant from the US government through the United States Agency for International Development (USAID) for five years for the development of infrastructure, including roads, electricity transmission lines, etc. Besides, the traders have been debarred from opening letters of credit to import luxury goods like vehicles and cosmetics.

Furthermore, the government is also considering a two-day weekend policy to curb the consumption and demand of oil. As if this is not enough, the government reduced spending on fuel for the government agencies, ministries, and public enterprises by 20 percent. In its desperate mood, the government also appealed to the Nepalese diaspora living in foreign countries to open dollar accounts , and make investments in the country.

Only time will tell as to how far the above measures adopted by the Government of Nepal to deal with the economic crisis will succeed in addressing the economic crisis that is getting aggravated day by day. Though some of the measures taken by the government could reduce the imports and to some extent check the outflows of dwindling foreign exchange reserves, fear looms large that they might affect the revenue collection. The chances of raising exports at least in the short period is a remote possibility as the nation has only a few exportable items.

Therefore, the only option that is left to the government is to attract Foreign Direct Investment (FDI), revive the tourism industry, and implement the Millennium Challenge Corporation pact to strengthen the foreign exchange reserves. The diplomatic missions in foreign countries, particularly in the developed countries like the USA, UK, Australia, Japan, South Korea, Canada, Hong Kong, and Europe, should be made to engage with the Nepali diaspora to pursue them to send money to Nepal through the banking channel and make an investment in productive sectors. If done so, Nepal could save itself from becoming like Sri Lanka which has been facing a severe economic crisis mainly on account of exhausted foreign exchange reserves.

News source: site of observer research foundation (ORF)

Author: Hari Bansha Jha