On one hand the remittance inflow has started slowing down and on the other foreign exchange (Forex) reserves has also declined – for the first time in 10 years – squeezing the country’s capacity to import goods and services to 7.8 months.
In the fiscal year 2015-16, even during the blockade, the country had foreign exchange reserves sufficient to import goods for 14.1 months. But the reserve had shrunk to Rs 1039.91 billion – in the fiscal year 2018-19 – just enough to import goods for 7.8 months, though the forex reserve to sustain imports for at least six months is adequate for a country like Nepal. But the increasing imports has made Nepal more vulnerable as it has to maintain the forex reserve to sustain the imports of 10 months, according to the economists.
The decline in forex reserve could also deter foreign investment as investors seek assurances of profit repatriation.
The drop in the forex reserve also signals capital flight in the recent months as the business confidence has seen a low due to various reasons including the government policy like adopting the reference price at the customs. The reference price is updated every six months but the global commodity market is very dynamic as the prices keep changing every hour. Taking advantage of the government’s policy of reference price at the customs, some of the traders are suspected of sending money out of the country, according to a trader, who also claimed that it is happening in the complete knowledge of the government, “otherwise there is no point in implementing age-old reference price.”
According to foreign exchange management department at the central bank, the Monetary Policy for the current fiscal year has also targeted to maintain foreign exchange reserves for seven months of imports.
The International Monetary Fund (IMF) – in February – has asked Nepal not to allow foreign exchange reserve to decline below import levels of five months. “In the last two decades, Nepal has always had reserves for over five months of imports,” according to the IMF.
But the reserves declined in absolute terms last fiscal year for the first time in 10 years. The last time forex reserves had declined was in the fiscal year 2009-10, by seven per cent.
The government is planning to discourage the imports of luxury goods to check the bulging imports so that the forex reserve could be maintained. The government, through the budget for the current fiscal year, has announced to discourage the import of unnecessary luxury and hazardous goods and services.
The government has also presented a bill at Parliament on safeguards, antidumping and countervailing to reduce unnecessary imports to bring the increasing trade deficit into control.
The central bank has also tightened rules for vehicle purchases last November making it mandatory for a borrower to make a down payment of half the price, reduced the foreign exchange availability against passports to $1,500 from $2,500 for a single trip, and foreign exchange availability for migrant workers to $200 per person from $500.
But the Visit Nepal Year 2020 and the reopening of Malaysia for Nepali migrant workers could bring more foreign currency into the country to give respite to the forex reserves.
In the fiscal year 2015-16, even during the blockade, the country had foreign exchange reserves sufficient to import goods for 14.1 months. But the reserve had shrunk to Rs 1039.91 billion – in the fiscal year 2018-19 – just enough to import goods for 7.8 months, though the forex reserve to sustain imports for at least six months is adequate for a country like Nepal. But the increasing imports has made Nepal more vulnerable as it has to maintain the forex reserve to sustain the imports of 10 months, according to the economists.
The decline in forex reserve could also deter foreign investment as investors seek assurances of profit repatriation.
The drop in the forex reserve also signals capital flight in the recent months as the business confidence has seen a low due to various reasons including the government policy like adopting the reference price at the customs. The reference price is updated every six months but the global commodity market is very dynamic as the prices keep changing every hour. Taking advantage of the government’s policy of reference price at the customs, some of the traders are suspected of sending money out of the country, according to a trader, who also claimed that it is happening in the complete knowledge of the government, “otherwise there is no point in implementing age-old reference price.”
According to foreign exchange management department at the central bank, the Monetary Policy for the current fiscal year has also targeted to maintain foreign exchange reserves for seven months of imports.
The International Monetary Fund (IMF) – in February – has asked Nepal not to allow foreign exchange reserve to decline below import levels of five months. “In the last two decades, Nepal has always had reserves for over five months of imports,” according to the IMF.
But the reserves declined in absolute terms last fiscal year for the first time in 10 years. The last time forex reserves had declined was in the fiscal year 2009-10, by seven per cent.
The government is planning to discourage the imports of luxury goods to check the bulging imports so that the forex reserve could be maintained. The government, through the budget for the current fiscal year, has announced to discourage the import of unnecessary luxury and hazardous goods and services.
The government has also presented a bill at Parliament on safeguards, antidumping and countervailing to reduce unnecessary imports to bring the increasing trade deficit into control.
The central bank has also tightened rules for vehicle purchases last November making it mandatory for a borrower to make a down payment of half the price, reduced the foreign exchange availability against passports to $1,500 from $2,500 for a single trip, and foreign exchange availability for migrant workers to $200 per person from $500.
But the Visit Nepal Year 2020 and the reopening of Malaysia for Nepali migrant workers could bring more foreign currency into the country to give respite to the forex reserves.
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