KATHMANDU, MARCH 9
The ongoing Russia-Ukraine conflict will likely exacerbate the economic woes of Nepal as the spiralling oil and commodities prices in the international market will further widen the country's burgeoning trade deficit and exert even more pressure on the country's balance of payments (BoP) and foreign exchange reserves.
Deputy Director General of Federation of Nepalese Chambers of Commerce and Industry (FNCCI) Gokarna Awasthi said the Ukraine-Russia crisis would weaken Nepal's economic growth and quicken inflation.
"The fuel price hike has already increased the cost of doing business due to higher logistics cost. Also, the prices of industrial raw materials and crude that are mainly imported from Russia and Ukraine are spiking, resulting in inflationary pressure on the economy."
The surge of more than 50 per cent in crude oil prices so far this year is likely to have cascading effects for Nepal, primarily an import-based economy. Nepal imported fuel worth Rs 182 billion in the first seven months of the current fiscal, according to the Department of Customs.
This means the COVID-battered economy of Nepal is on the verge of collapse with import bills surging, thereby resulting in steep decline of foreign exchange reserves.
Moreover, the latest available macroeconomic report of Nepal Rastra Bank (NRB) showed the gross foreign exchange reserves decreased 15.9 per cent to $9.89 billion in mid-January 2022 from $11.75 billion at the start of the fiscal (in mid-July, 2021). Based on the imports of six months of 2021-22, the foreign exchange reserves of the banking sector is sufficient to cover the prospective merchandise and services imports of just 6.6 months Economist Bhim Bhurtel warned that the current conflict could lead to food crisis, pushing more people into extreme poverty. "The current tension has led food price to surge by a whopping 100 per cent, and the supply core inflation by 20 to 30 per cent, which could cause problems for macroeconomic stabilisation."
The findings of a research paper by the central bank titled 'The Impact of Food Inflation on Poverty in Nepal' suggest that a 10 per cent rise in food prices is likely to increase overall poverty in Nepal by four percentage points. It implies that one per cent rise in food inflation will push 100,000 additional people into overall poverty and 180,000 additional people into food poverty.
The year-on-year consumer price inflation stood at 5.65 per cent in the sixth month of 2021-22 compared to 3.56 per cent a year ago.
According to Awasthi, the inflationary pressure in Nepal would have been worse if the currency was not pegged with the Indian rupee. "If you look at the statistics, Nepal's import is more than 90 per cent of the total trade. So, strengthening of the dollar will add more inflationary pressure," he explained.
The slide of Indian rupee against the dollar has weighed on the Nepali currency as well.
As per the central bank's reference rate for tomorrow, each US dollar fetched Rs 122.80, an improvement from the all-time low of 123.44 yesterday.
According to President of Federation of Nepalese National Transport Entrepreneurs Yogendra Nath Karmacharya, the price hike of petroleum products has hit public transportation sector the hardest. "The price of diesel has surged by Rs 29 per litre since the public transportation fare was last adjusted," he said.
The Ministry of Physical Infrastructure Development had adjusted the transport fare after four years by increasing it by 23 per cent on November 20 last year.
The FNNTE president warned that transporters would be forced to raise the fare unilaterally if the government continued to ignore their woes due to the fuel price hike.
Meanwhile, the central bank has focused on stabilising the economy and propping up the foreign exchange reserves by trying to limit imports.
"Since it is infeasible to limit the import of fuel, we have recently slashed the import quota for gold to 10 kg per day. If the Russia-Ukraine crisis persists, we will further reduce the limit," he said.
A version of this article appears in the print on March 10, 2022, of The Himalayan Times
