Kathmandu, September 28

Nepal’s economy may face severe headwinds in the coming days, if the latest central bank report is anything to go by, as imports are surging like never before, leading to greater outflow of funds from the country.

Outflow of money from the economy surpassed inflows -- which is technically referred to as balance of payments -- by Rs 24.8 billion in the first month of the current fiscal year despite robust growth in remittance income, as imports of merchandise goods surged by a staggering 54 per cent to Rs 120.6 billion, shows the monthly macroeconomic report of the Nepal Rastra Bank (NRB) released today.

Imports grew massively due to greater demand for aircraft spare parts, other machinery and parts, petroleum products, MS billet, and vehicles and their spare parts, according to the NRB report.

The surge in imports probably would not have raised eyebrows had the country been able to export goods on that scale. But exports of merchandise goods grew by a mere 3.2 per cent to Rs 6.9 billion in the one-month period. If inflation of 4.2 per cent and weak currency are taken into account, Nepal’s exports in the first month of this fiscal year registered a negative growth in real terms.

“The export figure does not look very good. We are devising strategies to make corrections,” Revenue Secretary Sishir Kumar Dhungana said without elaborating.

If the imbalance in exports and imports continues, trade deficit, which stood at 39 per cent of the gross domestic product in the last fiscal year, will further widen, reducing the stock of foreign currency in the country. Robust foreign exchange reserves are required to settle import bills, generate liquidity for banks and facilitate foreign investors to repatriate earnings.

Nepal’s foreign exchange reserves contained US$9.8 billion in the first month of this fiscal year, down from $10.5 billion in the same period a year ago, says the NRB report. This is the second time since mid-November, 2016 that the country’s stock of foreign currency has fallen below $10-billion mark.

A shrinking foreign exchange reserves indicates outflow of money from the economy is greater than inflow.

Previously, one of the reasons for the imbalance in inflow and outflow of money from the economy was decelerating remittance income. But that is not the case this time. Remittance inflow surged by 33.1 per cent to Rs 73.9 billion in the first month of 2018-19, the central bank report says. Remittance income was last growing at this pace in fiscal year 2015-16, but the boom has since sputtered out following decline in number of outgoing workers.

“Remittance inflow has bounced back following oil price hike, which has improved financial health of many companies in the Gulf, one of the major absorbers of Nepali labourers, leading to increment in salaries and benefits of workers,” said Nara Bahadur Thapa, executive director of NRB’s Research Department. “Another reason is greater use of formal channels in countries like Australia, India, Japan and Korea to send earnings to Nepal. Also, weakening of Nepali currency has contributed to higher remittance inflow because every dollar now yields more Nepali rupee.”

The rebound in remittance income is good news. But considering the demand for imported goods, Nepal must find other foreign income sources. One of such sources is tourism. But export income from tourism, or money spent by foreign tourists in Nepal, is far less than what Nepalis spend abroad. Nepalis spent Rs 7.6 billion abroad in the first month of the current fiscal year compared to Rs 4.4 billion that the country generated from foreigners who visited Nepal in the one-month period.

Another source of foreign income is foreign direct investment, which also fell by 93.6 per cent to Rs 295.7 million in the first month of the current fiscal year, NRB data show.

“The only sustainable way to generate foreign currency is to ramp up exports of goods with comparative advantage, tourism products and electricity. But nobody has made sincere efforts towards this end,” said Shankar Sharma, a senior economist and former vice chairman of the National Planning Commission.