Dwindling foreign exchange reserves to finance imports for just over six months sound the alarm

Nepal’s foreign exchange reserves have fallen to a level sufficient to support merchandise imports for less than seven months, for the first time in the past six years, setting off alarm bells. Even the import control measures taken by the Nepal Rastra Bank do not appear to be yielding the expected results, and economists say immediate action is essential.

In the first 10 months of the current fiscal year 2021-2022, Nepal’s foreign exchange reserves declined by 21.1% to $9.28 billion in mid-May 2022 from 11. $75 billion in mid-July 2021, according to the Nepal Rastra Bank (NRB).

The current safe is sufficient to support the import of goods and services for only 6.6 months compared to Nepal’s target of maintaining sufficient foreign exchange reserves to cover imports for at least seven months.

In mid-July last year, the country had sufficient foreign exchange reserves to import goods and services for 10.2 months. Reserves slipped below the seven-month mark in November, and there has been a gradual decline since.

In late April, the government banned imports of at least 10 products, which it considers luxury or non-essential, until the end of the current fiscal year in a bid to prevent the country’s foreign exchange reserves to become more exhausted.

Imports of alcohol and tobacco products, diamonds, cell phones over $600, color television sets over 32 inches, jeeps, cars and vans excluding ambulances, motorcycles over 250 CC, dolls, maps and snacks were banned.

The government has also imposed strict controls on the import of gold jewelery and increased duties on bullion imports.

Experts say questions remain over whether reported foreign exchange reserves reflect the true picture among reports of banks and financial institutions approving large amounts of loans without the availability of loanable funds.

According to a report by the Post’s sister newspaper, Kantipur, on June 23, as many as 27 commercial banks approved loans of 383 billion rupees in mid-May amid liquidity shortages.

“Many Letters of Credit (LC) might have been opened for the import of goods for which payment is pending,” said Dipendra Bahadur Kshetry, former governor of the central bank. “Foreign exchange reserves could decline further if payments due on all letters of credit are made.”

Citing the LC trend, experts say there have been no checks on imports of the products the government has banned from importing.

Central bank officials are also not dismissing such a possibility.

“We don’t have details on LC-related liabilities at the moment,” said Prakash Kumar Shrestha, head of the economic research section at the central bank.

If the letter of credit debts have been paid, foreign exchange reserves must be well below what is indicated by the central bank, and officials and experts say this is a major concern.

“We are at a critical juncture, as evidenced by the current level of foreign exchange reserves,” said Nara Bahadur Thapa, former executive director of Nepal Rastra Bank. “As we have become an increasingly import-dependent country, we need to have enough foreign exchange to sustain imports for seven to ten months, at least.”

The ratio of imports of goods and services to Nepal’s gross domestic product (GDP) has increased over the past decade. According to the Central Bureau of Statistics, the country’s estimated ratio of imports to GDP stood at 41.49% for the current fiscal year, compared to 29.17% for the fiscal year 2011-12.

“It suggests our growing dependence on imports for which we need more foreign currency. In fact, we depend on imports for living and carrying out development activities,” Thapa said.

As of mid-August 2020, the country had sufficient foreign exchange reserves to sustain imports of goods and services for 15.6 months as the country lifted a nearly four-month lockdown imposed to curb the spread of the coronavirus.

Not only due to increased imports of goods and services, foreign exchange reserves are also under pressure due to rising world prices. Due to rising inflation, Nepal faces the problem of paying more even to buy less goods.

According to Manik Lal Shrestha, former head of the statistics division of the International Monetary Fund (IMF), the global rise in commodity prices is responsible for increasing Nepal’s import bill by about 20% since the beginning of the 2021-22 financial year.

“Since the start of the current fiscal year, rising prices have weighed on import bills by 20 percentage points,” he said during an interaction on the country’s economy hosted by the Society of Economic Journalists Nepal in Kathmandu in early May.

Kshetry, the former governor, also said there was a need to keep foreign exchange reserves at a comfortable position given the risk of foreign currency outflow due to rising commodity prices and rising costs. import.

In order to increase foreign exchange reserves, the country should either control the outflow of foreign currency by strictly controlling imports of goods and services, or boost exports which can earn foreign exchange and promote other sources such as remittances. funds, foreign aid, foreign direct transfers. investment and tourism.

Officials and experts doubt the government’s efforts to control imports have worked, as import figures remain high.

In December last year, the central bank made it mandatory for importers to maintain a 100% margin to open a letter of credit to import 10 types of goods.

These goods included alcoholic beverages; the tobacco; silver; furniture; sugar and foods containing sweets; glucose; mineral water; energy drinks; beauty products; shampoos, hair oils and dyes; shoe; umbrellas; and building materials such as bricks, marble, tiles and ceramics.

Importers of motorcycles and scooters were required to retain a margin amount of 50%, and importers of private diesel automobiles were also required to retain a margin amount of 50%.

And another central bank directive issued on February 9 increased the number of import items requiring 100% cash margin to 43, while setting the cash margin required to import four types of goods at 50%. .

Monthly figures since mid-January show no significant drop in imports.

For example, monthly imports from Nepal to Paush (mid-December to mid-January) were Rs 160.9 billion, which decreased slightly to Rs 148.1 billion the following month (mid-January to mid-February) but increased again to 161.3 billion rupees. in the month of Falgun (mid-February to mid-January), according to central bank statistics.

In Baishakh (mid-April to mid-May), imports decreased to 137.99 billion rupees, according to the central bank.

But imports soared to Rs158.57 billion in Jestha (mid-May to mid-June), according to data from the Customs Department.

“Import control measures have not been very effective. There has been no significant decline in imports,” the central bank’s Shrestha said. “Despite the reduction in the flow of credit, the persistence of high imports raised questions about whether these were genuine or fake imports and whether traders had informal channels such as Hundi to make payments.”

He said that as long as there are aggregate demands in the economy, traders seek to supply by any means possible.

The persistence of high imports has also raised questions about the implementation of the central bank’s import controls.

“We cannot rule out the possibility that some importers may take loans from one bank to maintain the hundred percent margin in another bank to open a letter of credit to import products discouraged by the government,” he said. said Thapa, the former chief executive of the central bank. . “The purpose of the import control measures taken by the central bank is to deny access to bank loans for the import of certain goods. The measure may not have been implemented correctly.

With imports remaining high, despite improved remittances and tourism earnings, foreign exchange reserves continue to be under pressure.

Another source of foreign currency is foreign aid. But since the government failed to spend the investment budget, there was no significant influx of foreign aid in the first nine months of this fiscal year.

According to the Public Debt Management Bureau, Nepal borrowed a total of 111.68 billion rupees between the start of the current fiscal year and the third quarter.

Of this amount, only Rs 12.21 billion comes from external sources and the remaining Rs 99.47 billion comes from internal sources. Foreign direct investment remained insignificant in the country.

“The cavalier approach to foreign exchange spending needs to be stopped,” Thapa said. “The government must also fast-track projects under development under foreign aid in order to receive reimbursement in foreign currency. More efforts should be made to attract foreign direct investment.

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