Kathmandu: The report ‘Macroeconomic and Financial Situation of Nepal’ published by the Nepal Rastra Bank (NRB) paints a bleak picture of the external sector of Nepali economy. The report shows that macroeconomic indicators related to the external sector are worsening and the economy is in a worrisome stage.
Trade deficit has increased 58.6 percent to Rs 568.6 billion in the four months of the current fiscal year. In the corresponding period last year, the trade deficit had contracted by 12.5 percent.
As Nepal spends a huge amount of foreign exchange on imports, particularly on luxury goods, foreign exchange reserves decreased by 10.9 percent to 10.47 billion in mid-November 2021 from 11.75 billion in mid-July 2021.
The remittance inflow, the major source of foreign currency earnings, also decreased 7.8 percent to 2.63 billion in the first four months, against an increase of 6.4 percent in the same period of the previous year.
According to Nara Bahadur Thapa, former executive director at NRB, Nepal need not worry unless the foreign exchange reserve sustains imports for seven months. “If the indicators fall like this, then it’s a sign of worry,” said Thapa. “But Nepal should not control imports in the name of improving foreign exchange reserves. This will discourage the private sector.”
Despite the number of youths traveling abroad for foreign employment saw a massive increment, the remittance inflow has declined by 7.8 percent.
“The situation is not good. In this fiscal year, the indicators are declining every month. The authorities concerned are mum about the worsening situation,” Economist Keshav Acharya told Nepal Live Today.
Despite the number of youths traveling abroad for foreign employment saw a massive increment, the remittance inflow has declined by 7.8 percent. “This shows the remittance is being sent to Nepal through illegal channels,” said Acharya, adding massive import, especially on luxury goods, and reduced remittance inflow have imposed a risk for the external sector of the economy.
Another problem Acharya pointed out was the inflation rate difference of Nepal and India. The y-o-y consumer price inflation in Nepal in the fourth month of 2020/21 remained 5.32 percent, while inflation in India was 4.91 percent in November 2021.
“In the last few years, the inflation rate was less in Nepal than in India. This meant Nepal-produced goods were cheaper than India-produced goods. Now Nepali products don’t have a market in India,” Acharya added.
According to the update, the current account also saw a deficit of Rs 223.19 in the review period, against the surplus of Rs 19.01 billion. Likewise, the balance of payment (BoP) is also at a deficit of Rs 150.38 billion, against the surplus of Rs 110.65 billion in the same period in the last fiscal year.
“There is a risk that the trade deficit would further increase,” Acharya said.