Is Nepal heeding the warning signs from Sri Lanka’s economic crisis?

Certain indicators show Nepal is heading towards the path of economic mismanagement like that of Sri Lanka.

Bhagirath Basnet

  • Read Time 4 min.

Following the Ukraine war, the price of food, energy and several other commodities has risen across the world, pushing inflation upward and inflicting financial hardships on millions of people around the globe, particularly to the people of the underdeveloped world. In Ukraine alone the prices of daily necessities have increased by 21 percent since last year.

Nepal has already been enveloped with inflation on many fronts, especially the continued price rise of essential commodities such as food,fuel, fertilizers and medicines. The worldwide ripple effects of the war in Ukraine has greatly impacted not only the middle income group but even the higher middle income groups of Nepal. Also, to aggravate the situation, Nepal’s foreign reserves have been decreasing. One of the reasons for decreasing foreign reserves is heavy imports of basic consumable goods—a similar symptom seen before the crash of the Sri Lankan economy resulting in political and economic crisis over there.

It is estimated that the current foreign currency reserves in Nepal is only sufficient to sustain import of goods and services for 6.6 months. According to  Nepal Rastra Bank, during the first 10 months of fiscal year 2021-22, Nepal’s foreign exchange reserves decreased by 21.1 percent to $9.28 billion in mid-May 2022 from $11.75 billion in mid-July 2021. The foreign exchange reserve was 8.2 USD billion in May 2022, compared with 8.4 USD billion in the previous month of the year. Till mid-July 2021, the country had foreign currency reserves sufficient to import goods and services for 10.2 months.

Warnings on the wall

Though the reserve doesn’t indicate a serious situation right now, it is definitely an alarming one. In view of the present economic scenario, it is but natural to be cautious of the possibility of facing economic hardships like that of Sri Lanka in the near future if Nepal doesn’t pay heed to warning signs.

Currently, Sri Lanka is fighting an acute economic and political crisis whereas Nepal is having an eerie quiet uneasy and foggy cloud of mistrust and loss of confidence over the government. On the flip side, people don’t have any hope  with the opposition political leaders either.

Gotabaya Rajapaksa, the former President of Sri Lanka, who brought nearly 30 years of civil war to an end and who was hailed as the hero of the country, fled Sri Lanka after he failed to control the unrest and protests. Sri Lankans allege that implementation of wrong policies, nepotism, favoritism, and, above all, the sprawling corruption, brought down the overall economy of Sri Lanka.

Gotabaya Rajapaksa himself has admitted implementation of some wrong policies, though he claims that the country’s economy was in a precarious condition ever since his assumption of office in 2019. But the general public in Sri Lanka doesn’t buy this statement and accuse him and his cohorts of siphoning off the money from the country. Though a new president has already been elected by the Parliament, no one knows how fast and aptly the economic crisis in the country will be resolved.

Heavy dependency on the import of essential consumable goods, lack of diversification of exportable goods was considered as the main reasons for the present crisis in Sri Lanka. Even many of those exportable items depended on imported raw materials. Sri Lanka became overly dependent on imported goods even for its daily necessities and essential parts of its exporting industries. For example, the country used to even import tea bags for tea industries.

Sri Lanka used to import approximately $3 billion worth of goods, much more than it exports every year. This was responsible for the depletion of foreign currency. Consequently, the country soon failed to pay for imports of basic necessities like food, fertilizer, medicine and fuel. 

While comparing some parallels between Nepal and Sri Lanka, one can find a similar policy approach in importing basic items. Moreover, there was a strong nexus between politicians in power, bureaucrats and business houses in Sri Lanka offering an opportunity to business people to evade all types of taxes thus accruing less government revenues.

Most of the above mentioned indicators are visible in Nepali economy right now. The alleged episode of the outsiders intruding the Finance Ministry and advising the authorities to change the tax rates to benefit certain business people and parliamentary committee giving clean chit to the alleged  minister are the glaring examples of corruption and mismanagement in Nepal.

Nepal has encouraged imports rather than producing goods in the country. For example, once a rice exporting country, Nepal now imports huge amounts of rice. The Department of Customs has reported that Nepal imported 546,000 tons of paddy from August 2020–April 2021, whereas during the same period in the previous fiscal year it was only 247,000 tons.

Nepal’s foreign reserves have been decreasing. This was the symptom seen before the crash of the Sri Lankan economy.

Nepal’s total value of imports by December 2021 remained NRs 160934.50 million and total exports during the same period remained NRs 15930.40. However, after the foreign currency crunch in the country, the government has now banned imports of luxury and non-essential goods, till the end of August 2022 in a bid to stop the country’s foreign exchange reserves from further depleting.

Sri Lanka’s external debt was fairly high. According to the report from Sri Lanka’s Department of External Resources, the government’s total outstanding external debt was $35.1 billion by the end of April 2021.

With regard to foreign debts in Nepal, the data released on November 14, 2021 by the Public Debt Management Office Nepal shows the total outstanding external debts was 7.82 billion US dollars at the end of 2020-21 fiscal year ending in mid-July, with multilateral donors accounting for a majority share of them. These economic indicators speak volumes about the economic state of the country. On the face of it, it won’t be any exaggeration to alert and warn the government to take suitable steps in order to keep the economy afloat and not to let it slide down further.

It may be premature to say that Nepal will immediately face an economic crisis like that of Sri Lanka. But certain indicators show Nepal is heading towards the path of economic mismanagement like that of Sri Lanka.

Bhagirath Basnet is former Nepali ambassador.