The local government election will fuel cash flow in the market, and in the next 8-9 months, the current liquidity crisis is expected to be solved
Off late, Nepal is facing a credit crunch situation due to the liquidity crisis. It is not a new phenomenon for Nepal, it having witnessed a similar scenario the previous year, too. The CD ratio of almost all banks has crossed over 90 per cent, and they are unable to lend money to the clients.
Deposit interest rates have surged heavily during this period, yet the deposits are not significant enough. The government is unable to utilise its budget as proposed, and cash flow into the Nepal's economy is seriously affected.
But, considering the last quarter of the fiscal year, utilisation of the budget expenditure is likely to increase in the coming month. The local government election will fuel cash flow in the market, and in the next 8-9 months, the current liquidity crisis is expected to be solved.
Currently, the Sri Lankan financial crisis is causing political turmoil and unrest.
It is "debt trapped" and is deemed incapable of repaying its international debt obligation. In this context, some economists of Nepal are comparing Nepal's situation with that of Sri Lanka and giving a pessimistic view of Nepal's economy. However, Nepal's financial indicators as such suggest that it won't face a situation as severe as Sri Lanka's. Here is why:
• The government and Nepal Rastra Bank have already taken proactive financial measures to stabilise its foreign currency reserve
• Nepal's present currency reserve is capable of covering imports of about six-and-half months, a slightly alarming foreign currency position but not worrisome if certain financial measures are taken
• Nepal's foreign debt is not at an alarming level, and its repayment of foreign loans can be met from the current foreign currency reserve. Further, Nepal has taken foreign loan at nominal interest rate with longer payback period, which gives assurance of not immediately running out of currency reserves
• In the last two months, inflows of remittance have started picking up. This is expected to continue in the coming days due to COV- ID-19 relaxation in overseas marketplaces, movement restrictions uplifted in majority of the countries, outbound migrant Nepali workers have increased significantly in recent times, and it will fuel-up growth of remittance inflows
• The tourism industry has started to bounce back, which is another major source of Nepal's foreign exchange
Meanwhile, the government and the central bank have imposed import restrictions to tackle Nepal's trade imbalance. Recently, the import of certain luxury goods has been restricted till Ashad end 2078. But there is a need to segregate luxury goods that will impact our foreign currency reserve:
Foreign liquors: Despite they being a luxury good here, from a tourism perspective, foreigners are likely to prefer taste of alcohol they are used to, even during their stay in Nepal.
So, in a way, relaxing the alcohol import restriction might actually help to improve the foreign currency reserve.
Essential and non-essential goods: Essential and non-essential goods need to be categorised permanently in order to tackle the trade imbalance and retain the foreign currency reserve.
Electric vehicles: Since the demand for fossil fuels is high, electric vehicles must be promoted, which will save significant amounts of foreign exchange of the country. The dependency on petroleum products must be reduced in the days to come.
Overseas remittances make up the backbone of Nepal's economy, which is unlikely to change for another couple of years. Since more than 4 million Nepalis are working abroad and the number only keeps growing, it has been the major source of foreign currency for the country.
The tourism sector has also shown some positive progress post-COVID-19. But the foreign exchange they generate for the country should not be squandered on importing goods used by an elite few.
Major hydro projects are being connected to the national grid, which can help earn bring foreign currency to the nation's coffer by exporting surplus energy to neighboring countries. Hydro energy sector can be leveraged to increase foreign currency reserve of the country.
The agriculture sector is also another potential sector for augmenting Nepal's foreign currency reserve, which could contribute by exporting organic crops around the world. Lastly, the export of Nepali unique handicrafts/ handmade ornaments can play some role in increasing the foreign currency reserve of the country.
The recent MCC Nepal compact is designed to increase the availability of electricity and lower the cost of transportation in Nepal with better road connectivity.
These investments will help the Nepal government deliver critical services to its people, ease the movement of goods around the country, and open up new opportunities for private investment. A better road network means safer conditions for travelers, less vehicle wear and tear, and lower transport costs for people and businesses.
The MCC compact will help to create a network of smoother, longer lasting, and sustainable roads along the East West Highway.
Roads and transportation infrastructure will improve access to public services like healthcare and schools, lower the time and cost of bringing goods to the market, and facilitate regional and international trade - all of which help drive growth and fight poverty in Nepal.
Furthermore, the MCC Nepal Compact will increase the availability of electricity and lower transportation costs - helping to spur investments, accelerate economic growth and reduce poverty. The MCC compact will be paving the way towards prosperity in Nepal with the US$ 500 Million project grant provided by the United States government.
Recently, America's pledge to give Nepal an installment donation and promises by international financial organisations, namely, the World Bank, IMF and ADB to provide grants to middle-income countries are expected to improve Nepal's financial conditions, including foreign exchange reserves.
Considering the last quarter of the fiscal year, utilisation of the budget expenditure is likely to increase in the coming month.
A version of this article appears in the print on May 23, 2022, of The Himalayan Times.
