Kathmandu, Aug. 24
The foreign exchange (forex) reserves witnessed exponential
growth to reach US$ 15.27 billion by the end of the last Fiscal Year 2023/24, a
28 per cent jump from US$ 11.74 billion a year earlier.
The forex reserves are sufficient to cover the imports of
goods and services for 13 months, according to the Nepal Rastra Bank (NRB)'s
annual report of Current Macroeconomic and Financial Situation of Nepal.
In 2022/23, when the economic situation in the country was
bleak and the private sector's confidence hit rock bottom in several years, many
governments and the central bank resorted to the rhetoric of a healthy external
sector – increasing remittances and decreasing imports. It meant the inflating
foreign exchange reserves. Even the finance ministers gave reference to the
forex reserves to show their achievement.
Is a sound foreign exchange status an indicator of the healthy
economy of any country? Economists say, "Yes."
Forex reserves are evidence that the country can finance its
imports, repay the loan on time and help its citizens to go abroad for tourism,
education and health services.
Executive Director of the NRB, Dr. Gunakar Bhatta said,
"A good amount of foreign currency reserves also helps the foreign
investors to come to Nepal. It can boost their investment confidence."
Likewise, such reserves provide funds for the government to
support development projects although this is a rare practice in case of Nepal,
according to Bhuvan Dahal, a banker and former President of Nepal Banker's
Association (NBA).
However, the trend of forex earnings is erratic in Nepal. It
has not witnessed a gradual growth trend. In FY 2016/17, Nepal had US$ 10.19
billion forex reserve but it went down to 9.5 billion dollars in 201/19. It hit
9.54 billion dollars in 2021/22 from US$ 11.75 billion in 2020/21.
According to the NRB, the calculation of forex adequacy is
calculated on the basis of the recent trend of foreign currency earning, import
trade and calculation of forex income and utilisation. The country has also
taken into account the potential vulnerability in the income, especially the
inflow of remittance as it is the largest source of foreign currency income.
The current reserves and adequacy have been also maintained
considering the last year's import as well as the Rs. 2 trillion imports about
a couple of years ago, said Dr. Bhatta. If there is an abrupt surge in imports,
the estimation would be reconsidered.
Status of Foreign Currency Reserves against Remittance and
Imports
|
Year
|
Forex Reserve
(US$ billion)
|
Imports Coverage
(goods &
services)
|
Remittance Inflow
(US$ billion)
|
Imports
(US$ billion)
|
|
2023/24
|
15.27
|
13 months
|
10.86
|
11.88
|
|
2022/23
|
11.74
|
10 months
|
9.33
|
12.30
|
|
2021/22
|
9.54
|
6.94 months
|
8.33
|
16.20
|
|
2020/21
|
11.75
|
10.2 months
|
11.2
|
13.10
|
|
2019/20
|
11.65
|
12.7 months
|
7.77
|
10.31
|
|
2018/19
|
9.5
|
7.8 months
|
8.03
|
12.60
|
|
2017/18
|
10.58
|
9.4 months
|
7.25
|
11.95
|
|
2016/17
|
10.19
|
13.2 months
|
6.56
|
9.21
|
|
2015/16
|
9.79
|
16.5 months
|
6.27
|
7.09
|
|
2014/15
|
7.08
|
11.2 months
|
6.19
|
7.65
|
|
2009/10
|
3.59
|
7.3 months
|
3.12
|
5.10
|
Source: NRB's annual CMES reports
Concentration to remittances
As the country massively relies on remittances for foreign
currency earnings, fluctuations in the remittance inflow cause immediate
tension in the external sector management, especially trade financing.
Other sources of foreign currency exchange are export trade,
foreign tourists, Foreign Direct Investment (FDI) and foreign aid (loan and
grant) but they are small contributors in case of Nepal. For example, Nepal
imported goods worth Rs. 1592.98 billion in the last Fiscal Year 2023/24 but
its exports were limited to just Rs. 157.14 billion which is less than 9 per
cent of the total international trade of the country.
Income from the exports is not sufficient to finance the
single largest import of the country – petroleum oil. Last year, Nepal imported
diesel and petrol worth Rs. 214 billion.
Meanwhile, Nepali tourists and students going abroad took foreign
currencies equivalent to Rs. 143 billion in the nine month period last year. Similarly,
Nepal earned less than Rs. 80 billion in tourism income. In FY 2022/23, Nepal's
earnings from foreign tourists amounted to Rs. 88.06 billion while Nepali
citizens spent about Rs. 120 billion on foreign trips and education abroad.
Similarly, the grants to the government of Nepal by foreign
donors has also been declining and the country could receive only Rs. 11.22
billion in grants in 2023/24 against its annual target of Rs. 49 billion as
announced in the budget of last year. In FY 2012/13, Nepal received Rs. 78
billion in foreign grants.
The country also needs a large sum of money to repay the
capital and interest of the government loans. Last year, the government had
planned to repay the loans amounting to Rs. 307.4 billion and ended up with Rs.
263.95 billion, making it the best performer among the recurrent, capital and
financing expenditures. Financing amounted to 86 per cent of the annual
allocation while the performance of the recurrent budget was 83.43 per cent and
the capital budget could achieve only 63.47 per cent of progress.
Source diversification
The erratic trend in foreign currency reserves and
vulnerability of the single largest source is moderated by the diverse sources
of remittance. According to banker Dahal, Nepal need not panic as the sources
of remittance have expanded while the income of Nepali workers abroad has also
improved.
Of late, Nepalis are employed in high-income jobs in East
Asia, Europe and Australia which has contributed to the growth in remittance.
Likewise, Rajendra Malla, Immediate Past President of the
Nepal Chamber of Commerce (NCC), said that export and tourism are the
sustainable source of foreign currency. "The government needs to devise
effective strategies for export and tourism promotion in foreign countries. It
will have a long-term positive impact on the economy," he said.
Experts also suggested that the government should continue
its efforts to find high-paying labour destinations in developed countries to
sustain the contribution of remittance to the economy.
Catch-22
Nepal is an import-based economy and domestic production is
scanty. Although the country is self-reliant in some products like noodles, chicken
and eggs, cement and steel bars, not only the daily consumption items but also
the capital goods and raw materials are imported from India and third
countries. The country imports food grains from as far as Argentina in Latin
America.
Gradual increases in the per capita income of Nepali people
and growing remittance inflow have pushed the demands to newer heights. Demand
for vehicles, electronic goods including consumer durables, branded clothes and
new varieties of foods has gone up exponentially which has pushed for the
imports growth ultimately impacting the foreign currency reserves.
This trend witnessed a massive surge in the aftermath of the
COVID-19 pandemic. As the annual imports climbed to US$ 16.20 billion in
2021/22 from US$ 10.31 billion in 2020/21, the government and the Nepal Rastra
Bank (NRB) became apprehensive and implemented import control measures on
luxury items including cars and premium brand products.
In 2021/22, the total available foreign currency reserves
were sufficient to cover the imports of goods and services just for 6.94 months
– an all-time low in the last one-and-a-half decades. There were fears about
whether Nepal was on a path to becoming the next Sri Lanka – the south Asian
island nation ran out of foreign currency due to fiscal mismanagement and was
unable to pay even the interest of its foreign loans. It was an economic
debacle.
There is a situation. If the government lets the imports
happen without any restrictions, it is likely to cross the Rs. 2 trillion mark
given its rise to Rs. 1.92 trillion in FY 2021/22. This will have server
repercussions on the reserves of the hard-earned foreign currency. On the
contrary, if the government controls imports, it will lose revenue.
Nepal's experience in the past two years following the
import control measures and consequently a massive fall in imports amidst
subsequent economic recession has shown that the revenue loss is equally
challenging for resource management. Take the example of 2023/24, the
government could mobilise only Rs. 1056.66 billion in revenue – 71.76 per cent
of the annual target of Rs. 1422.54 billion. But expenditures reached about Rs.
1409 billion. At times, the government found it hard to manage funds to pay the
salary of the government employees.
However, Dr. Bhatta of NRB said that revenue management
plans that are based on growing imports cannot be considered good.
Using forex reserves
The country earns around 5 per cent interest on the forex
reserves maintained in domestic and foreign banks. However, the private sector
and the bankers suggest devising methods to mobilise the funds to the projects
that help in capital formation.
"Rather than earning an interest from the funds, it
would be better to mobilise them to the construction- and production-based
projects," said Dr. Bhatta.
Dahal is also of the view that the forex funds should be
mobilised for the infrastructure that are critical for the development in trade
and tourism sector. "The government should find good projects that help to
yield return in the form of tourism and trade development. If we have good
roads and other transportation infrastructure, the number of Indian tourists
will go up immediately," he said.
According to him, hydropower and transmission line projects
could be the alternatives for investment.
However, Dahal is for mobilising the funds in the
development projects through the private sector. "The private sector
should be extended concessional loans to develop such projects.
Government-managed projects have become sick and have witnessed cost and time
overrun," he maintained.
He said that the government and the central bank should not
be apprehensive about import growth. Nepal imports various capital goods, machinery
and raw materials to run its industries as well as the economy and such
apprehension could negatively impact both.
Similarly, mobilising such funds to the foreign joint
venture projects that would promote technology transfer could be more effective
and beneficial to the economy.
Likewise, Malla said that since the country is likely to see
political stability, it is high time to mobilise all available resources.
"Maintaining a sizable cushion, the foreign exchange reserves should be
utilised in increasing national production, sustainable investment and
infrastructure projects," he said.
Published in The Rising Nepal daily on 25 August 2024.
