Is Nepal heading toward the worst economic crisis?

While indicating that the worst may be yet to come, economists warn that if the government doesn’t work on correcting the course, the Nepali economy might end up in a red zone soon.

Ashim Neupane

  • Read Time 3 min.

Kathmandu: A few days ago, three former finance ministers, organizing a press meet, said that the Nepali economy might face the fate of Sri Lanka if the government doesn’t adopt appropriate measures to keep it stable.

The current situation in Nepal, according to the former ministers, would get worse than Sri Lanka’s if proper measures are not adopted at the earliest.

Following the statement from Dr Yuba Raj Khatiwada, Surendra Pandey and Bishnu Prasad Paudel, the Finance Ministry organized a press meet on Monday to inform the people about the current economic situation of Nepal. 

The main opposition CPN-UML has heavily slammed the government for pushing the economy to the brink. 

As the external sector of the economy is depleting, concerns are being raised from various quarters that Nepal may be on the path to becoming the next Sri Lanka.

The debate has started at a time when Nepal’s external sectors are depleting. The trade deficit is increasing, the remittance inflow is falling, resulting in extreme pressure in the foreign exchange reserve.

According to the central bank, Nepal’s foreign exchange reserve is just enough to finance imports of goods and services for just six months.

Although the indicators are falling, Finance Minister Janardan Sharma said the economy is not under pressure. “There is enough foreign exchange reserve, and indicators are positive,” claimed Sharma. 

However, the central bank reports show the indicators are falling. The gross foreign exchange reserves decreased by 18.5 percent to 9.58 billion in mid-March 2022 from 11.75 billion in mid-July 2021. Likewise, remittance inflows decreased three percent to 5.28 billion in the first eight months of the current fiscal year, against an increase of five percent in the same period of the previous year.

Despite the depleting external sector, Sharma said there is no pressure on the economy. “Some people want Nepal’s economy to become like that of Sri Lanka. But the government will not let that happen,” said Sharma.

According to economists, the worrying factor at the moment is the depleting foreign exchange reserve. The fall in reserve is the result of surging imports and a fall in remittance inflows, they say. The central bank data shows the total trade deficit increased by 34.5 percent to Rs 1160.99 billion during the eight months of 2021/22.

As the external sector of the economy is depleting, concerns are being raised from various quarters that Nepal may be on the path to becoming the next Sri Lanka.

According to economist Chandra Mani Adhikari, the government and the main opposition have started politicizing the current situation instead of properly analyzing the state of the economy.

“The economy is already in a yellow zone, and if the government doesn’t work on correcting the course, the economy might end up in a red zone soon,” said Adhikari. Countering the claim of Finance Minister Janardan Sharma that the economy is in a healthy state Adhikari questioned “if it was true, why did the government ban the import of luxury items?”

The government, amid dwindling foreign exchange reserves, has decided to ban the imports of luxury goods. Likewise, it has also decided to reduce the consumption of fuels by 20 percent in the government offices.

“The economy is already in crisis, and the government itself has decided to ban imports and reduce consumption of fuels. Even in such a situation, the finance minister says that the economy is not in crisis. The government is taking the issue lightly,” he said.

When asked if the economy of Nepal and Sri Lanka can be compared, Adhikari said, “No, absolutely not. Nepal is in a comfortable situation when it comes to foreign loans unlike Sri Lanka. But, if the government ignores the current crisis, it will not take more than four-five months for the economy to enter the red zone.”

In the current fiscal year, the flow of foreign grants and loans has also declined in comparison to previous years. This year, the government is getting just Rs 126 billion as foreign grants and loans.

During a press conference on Sunday, Former Finance Minister Bishnu Prasad Paudel said, “The economic indicators such as inflation, foreign currency reserves, trade deficit and balance of payments are in worrisome condition. But, the government is ignoring the situation.” 

According to Nara Bahadur Thapa, former executive director of the Nepal Rastra Bank, Nepal will not face the fate of Sri Lanka, but the economy is in crisis. “Nepal and Sri Lanka are in different phases. Unlike Sri Lanka, Nepal has been accepting concessional loans. However, Sri Lanka was accepting commercial loans. This is a cushion for Nepal’s economy,” said Thapa. 

The current foreign reserve, according to Thapa, is a major concern for the economy. “The authorities concerned should further ban the imports of luxury goods in a bid to relieve pressure from the foreign exchange reserve. Apart from that, the government should also make policy-level reforms to address the current situation.”

According to him, Nepal in the past had foreign exchange reserves enough to finance imports for 10-11 months. “As the reserve is declining, it’s a real reason to worry. So, there must be policy reforms. But comparing Nepal with Sri Lanka is wrong in many ways,” he added.