A lame economy crippled by the vulnerability of the external sector

Cholendra Bahadur Karki, who runs a trekking agency, has received inquiries from foreign tourists about trekking destinations, including the Annapurna and Everest routes.

“About 30 groups have already confirmed their trekking plans with us in February, March and April next year,” Karki, managing director of Himalayan Joy Adventure Pvt Ltd, told the Post.

But the emergence of the Omicron variant of the coronavirus has prompted countries around the world to impose travel restrictions.

“After a long time, my company had planned to organize hikes for many groups. It will be a huge setback for us if they are forced to cancel their travel plans due to the new variant, ”said Karki, also the first vice president of the Association of Nepal Trekking Agencies.

Normally, his company organized hikes for more than 60 groups in high season, from February to April.

After Covid-19 cases started to decline in Nepal, as the government stepped up its vaccination campaign, Nepal’s tourism sector, which contributes significantly to the country’s economy, was on the road to recovery , having been wiped out by the pandemic for the past two years.

Nepal welcomed 23,284 foreign tourists by air in October, according to the Nepal Tourism Board. In November, 26,283 foreign tourists traveled to Nepal, the highest number of post-Covid arrivals.

In September, Nepal resumed visas on arrival for foreign tourists in order to revive the tourism sector devastated by restrictions linked to Covid-19.

“Although the pace was slow, we expected a gradual recovery. But the new variant worried us.

The tourism sector is one of the major contributors to Nepal’s foreign exchange reserves.

In the first quarter of the current fiscal year 2021-2022, Nepal achieved a gain of only $ 35 million from the tourism sector, a sharp drop from the $ 153 million in the first quarter of fiscal year 2019-20 before the onset of the pandemic.

Despite a substantial increase in the number of Nepalese migrant workers going abroad in the first quarter of the current fiscal year, remittances fell 7.6% to Rs 239.32 billion. Also in the first and second months, remittances fell 18.1% to 75.96 billion rupees and 6.3% to 155.37 billion rupees.

As foreign exchange earnings from tourism and remittances plummeted, imports soared, leading to foreign exchange outflows.

Gross foreign exchange reserves fell 6.5 percent to $ 10.98 billion in mid-October from $ 11.75 billion at the start of the current fiscal year, according to Nepal Rastra Bank. Volume fell 2.8% and 5.2% respectively in the first and second months of the current fiscal year.

Current foreign exchange reserves are sufficient to support the import of goods and services for 7.8 months, just above the minimum threshold of seven months set by the bank as part of monetary policy for the current fiscal year. Thus, the balance of payments (balance between money inflows and outflows) has also become negative by Rs76.14 billion, according to the central bank.

In the first four months of the current fiscal year, Nepal’s imports increased 61.6 percent to reach Rs 650.29 billion. Although exports also rose 104.3 percent to 82.12 billion rupees, they are insignificant compared to imports, according to the Trade and Export Promotion Center.

A significant portion of bank credits has also gone for import purposes, resulting in liquidity shortages to finance economic activities to support the economy devastated by Covid-19, according to the central bank.

“At a time when there has been an increasing demand for credit for the recovery, a significant share of bank lending has been devoted to payment for imported goods,” Nepal Rastra Bank said in its Quarterly Monetary Policy Review 2021- 2022.

The central bank said that amid the increase in credit for imports, remittances also fell, creating challenges for the stability of the external sector.

The external sector of the economy covers sectors such as export and import, remittances, foreign direct investment and foreign aid.

“So the problems that arise in the external sector also create problems for the internal sector of the economy,” Keshav Acharya, senior economist.

The decrease in remittances also had an impact on deposits. According to the central bank, deposits only increased by 56 billion rupees in the first quarter of the current fiscal year, as loans jumped 286.56 billion rupees, creating a shortage of loanable funds.

Currently, most banks and financial institutions have either stopped lending or are lending selectively depending on the availability of funds.

“The inability of banks to extend loans will have a negative effect on the prospects for economic growth, as economic activities slow down when there is not enough liquidity in the market,” Acharya said.

The government aims to achieve economic growth of seven percent in the current fiscal year.

One way the economy can stay vibrant is when the government spends its capital budget, but the signs are not encouraging on that front either.

“As the government did not spend the investment budget, it was unable to claim reimbursement from donors and the inflow of foreign currency in the form of foreign aid has also slowed,” Acharya said.

As of Friday, government investment spending was just 5.57% of the total allocated investment budget, according to the Office of the Comptroller General of Finance, a government agency responsible for taking into account government revenues and expenditures. The government has allocated Rs 439.65 billion as an investment budget for this fiscal year.

Acharya said the economy has fallen victim to government inefficiency in spending the development budget and a deterioration in the external sector of the economy.

Experts say some of the government and central bank policies have also been damaging to the country’s foreign exchange reserves.

“The central bank’s policy of controlling interest rates has contributed to the flight of capital,” said Prashant Raj Pandey, economist. Last month, the central bank sought to control interest rates by predicting that banks and financial institutions could not increase interest on deposits by more than 10% from the previous month.

“There has long been a practice of depositing money in Indian banks and the policy of controlling interest rates here on deposits will lead to capital flight. When our foreign exchange earnings run out, adopting such a policy could lead to cash outflows, ”said Pandey, who is associated with VRock and Company, a management consulting firm that works in the fields of infrastructure and the financial sector.

According to experts, the government must adopt urgent, medium and long-term strategies to deal with the vulnerability facing the external sector of the economy.

“Given the vulnerability of over-reliance on remittances, we need to take measures to substitute imports and promote tourism,” said Govinda Pokharel, former vice-chair of the National Planning Commission. “We have to find the right balance. Import controls can affect revenue collection. Almost half of government revenues come from imports.

But the more imports are numerous, the more the outflows of currency are important.

One of the long-term strategies Nepal needs to adopt, experts say, is to reduce the country’s over-reliance on remittances. Such a policy has become increasingly important because the host countries of Nepalese migrant workers have started to employ locals.

“Currently, we rely heavily on remittances for foreign exchange earnings,” said Acharya, the economist. “Warning signs are already there and we need to develop alternative sources of foreign currency income to enable us to continue purchasing essential foreign goods and services. “

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