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Forex reserves declining in Nepal: Is the Himalayan kingdom going south the Sri Lanka way?

Nepal’s economy seems to be heading south, the Sri Lankan way. The country is facing an economic crisis that has sent the prices soaring and the foreign exchange reserves diving nose down. And things seem to be heading for worse.

Three former finance ministers of Nepal have predicted that the country’s economy may deteriorate further in the coming days unless the government takes prompt action. Releasing the 12-point joint statement on the country’s current economic situation, Bishnu Paudel, Surendra Pandey, and Dr Yubaraj Khatiwada — all members of the Communist Party of Nepal (Unified Marxist–Leninist) (CPN-UML) — have said that the country’s economy is on the verge of collapse.According to Nepal Rastra Bank (NRB) — the central bank of Nepal — the country’s forex reserves are now barely enough to pay import bills for barely over six months, and less than seven months, which was the threshold set as the benchmark.

The signs of decline in reserves were seen since July 2021, owing to the surging imports, declining inflows of remittance and meagre earnings from tourism and exports. The figures back then stood at USD 11.75 billion. The alarm bells started ringing by February 2022 when the country’s gross forex reserves had decreased by 17 per cent as compared to the July 2021 figures and plummeted to USD 9.75 billion.

In the recent past, the country’s annual import bill crossed the Nepalese Rs 1 trillion for the first time. This was in 2017-18, and the reason for this was the immense reconstruction after the 2015 earthquake that devastated the nation. After that, the country has breached the 1 trillion mark this year, as the import bills over the first eight months of the current fiscal crossed the Nepalese Rs 1.3 trillion.

The trade deficit stands at a staggering over Nepalese Rs 1.15 trillion. The country’s GDP for 2020-21 was at about $35 billion (over Nepalese Rs 4.25 trillion). As of date, a Nepalese Rupee (NR) is worth 63 paise INR (Indian Rupees), or Re 1 (INR) is worth Nepalese Rupee 1.60.

Infighting isn’t helping the situation either. On Sunday, the Nepal government suspended NRB governor Maha Prasad Adhikari over disagreements with Finance Minister Janardhan Sharma on handling the fiscal crisis and pulling the country out of the economic travesty — the second ever time in the country’s history when a central bank governor has been sacked before completing the stipulated five-year term. Before the sacking, the country implemented the central bank’s decision to ban the import of luxury items over the liquidity crunch.

Nepal and Sri Lanka — India’s two neighbours on either side — seem to be afflicted by the same malaise of economic crisis, thanks to the pandemic and exacerbated by the poor financial management by those at the helm.

What’s common between India’s northern and southern neighbours?

For starters, both Nepalese and Sri Lankan economies are heavily dependent on tourism revenue, which has taken a massive hit, thanks to Covid-19. The countries’ tourism was barely recovering from the pandemic shock and was trying to stand, albeit, on shaky grounds, the Russia-Ukraine conflict and the resultant blow to the tourism dealt a knell that has now pushed the economy into a deeper abyss.

Further, both the countries rely heavily on imports even for essential commodities like food and fuel. And both the countries have limited exports for foreign exchange reserves needed to meet the import expenditure.

Despite Sri Lanka’s economy is twice that of Nepal’s, the unprecedented economic crisis seems to be having a similar impact on the ground. With the international prices of essential goods including fuel and food items rising sharply in recent months, the import-reliant countries have been seeing massive inflation with the forex reserves being razed to the ground.

What’s different?

While both the countries are facing the impact of the pandemic and economic mismanagement, Sri Lanka’s case was exacerbated by the government’s measures including tax cuts, doling out freebies, haphazard switch to organic farming and banning chemical fertilisers. The last move was the worst as this affected the country’s main crop — paddy — which failed as a result of the messy switch. The result: revenue fell, forex dwindled and the country’s coffers were empty even for essentials.

In Nepal, however, it was a political crisis that exacerbated the economic crunch. Former Prime Minister KP Sharma Oli’s last days as the Prime Minister of Nepal saw economic turmoil set in. The leader was facing immense criticism as the Himalayan kingdom was ravaged by the second wave of Covid-19, political instability and the economy taking a beating. After his government fell in January 2021, KP Sharma Oli had been warning of an impending economic disaster, the brink of which the country finds itself now.

While unlike Sri Lanka, where the country’s scatty schemes led to the paddy crop failing, Nepal’s biggest forex earners — soyabean oil and palm oil — were never major producers anyway. In fact, it does not produce a single drop of palm oil, which is merely imported into Nepal and then exported from Nepal, earning the Kathmandu coffers benefits of the South Asian Free Trade Area (SAFTA) agreement.

Even though the Covid-19 waves, Nepal’s foreign exchange reserves have been declining steadily as the imports have been surging ever since while the inflow of remittances and earnings from tourism and exports declined. However, things haven’t yet headed as south as they did with Sri Lanka. As Nepal faces the onslaught of an impending economic crisis, the least that the people can expect is a stable and strong government that can contain the damage before it becomes another Sri Lanka-like situation.


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