Nepal’s foreign currency dilemma: Import restrictions and petroleum products

If Nepal aspires to increase its foreign currency reserves, a more prudent solution would be to direct effort towards decreasing use of petroleum products and promoting use of petroleum substitutes.

Prakash Maharjan

  • Read Time 3 min.

It is a well-known fact that Nepal’s economy has been enduring a crisis for quite some time now. The popular opinion today is that the import restrictions imposed by Nepal has helped the economy sustain as it reduced the balance of payment deficit and provided some respite to foreign currency reserves of the country. But, truth be told, the import restrictions also created a huge dent in the economy and exacerbated the ongoing crisis.

The import ban on luxury goods that lasted for nearly nine months was lifted on December 16, 2022. The decision to revoke the ban was followed by a prodigious dip in government revenue. As of November 16, 2022, the total government revenue, customs duty, VAT, and excise duty declined by 19.80 percent, 34.10 percent, 15.50 percent, and 9 percent respectively.

Nepal’s revenue can barely fund the recurrent expenses today. Furthermore, it has equally affected the private sector. Ban on import of cars alone has cost more than 8000 jobs and 100 auto dealer companies. What is appalling is that, as if to no purpose, the bans have only marginally increased Nepal’s foreign currency reserves, and the difficult road to economic stability still lies ahead.

Where did Nepal falter?

It is apparent that the rising imports have adverse effects on foreign currency reserves of a country. However, despite a complete ban on luxury items the foreign currency reserves of Nepal experienced only a marginal increase. This implies that import of these items did not have significant bearing on the reserves.

The declining foreign currency reserves of the country was actually attributable to the rise in import of petroleum products amidst rising prices of the same. As per the Macroeconomic and Financial Situation Report, Nepal’s import of petroleum products increased by 25.9 percent in the first four months of this fiscal year, when compared to that of previous fiscal year, and its share of total imports stood at 18.5 percent. It indeed accounts for the largest portion of Nepal’s import.

The government should implement regulations that encourage the usage of electricity while not increasing consumer costs.  

Thus, if Nepal aspires to increase its foreign currency reserves, a more prudent solution would be to direct its effort towards decreasing the use of petroleum products and promoting the use of petroleum substitutes. The trump card that Nepal has to reduce the dependency on petroleum products is its increasing electricity production.

Moreover, a recent study concluded that there is a positive correlation between change in oil prices and the change in consumption of electrical appliances. This suggests that, rise in prices of petroleum products would encourage individuals to switch to electrical appliances, as it is the most easily available substitute. Surge in Nepal’s import of electric vehicles prior to import restrictions also hints towards the likelihood of the finding.

Therefore, the government should implement regulations that encourage the usage of electricity while not increasing consumer costs. In Nepal, the consumers have mainly substituted the use of petroleum products with electricity for transportation, cooking, and illumination purposes. So by providing tax incentives for importing  or using energy-efficient equipment and its complementaries, the government can further increase the electricity consumption and decrease costs associated with it.

The tax incentives can lower the price of energy-efficient appliances, and make it competitive in the Nepali market. Likewise, to further encourage the usage of electric vehicles, the government can also provide additional incentives in the transportation sector, such as tax credits and refunds for businesses and individuals that use electric vehicles to perform their daily functions.

The recently announced cash rebate in New Zealand, whereby the electric vehicle owner is liable to receive a rebate if they buy electric or hybrid cars, and the tax credit system in the United States, where electric vehicle owners are liable for a tax credit of up to $7,500, or similar programs could also be implemented in Nepal.

While the government of Nepal has also initiated different programs to promote the use of electricity, its implementation has remained subpar. For instance, the different incentives provided to promote the use of electric vehicles have been repeatedly impacted by the inconsistent policies of the government. Thus, it is important for the regulations and programs to be consistent to attain the desired results. 

Reducing dependence on petroleum products is only a partial solution to declining foreign reserves. In the longer term, Nepal needs to focus on reforms that promote Foreign Direct Investments (FDI) in the sectors that provide opportunities for exports. For this purpose, Nepal needs to make policy and institutional reforms to ease the process of bringing in FDIs, and improve the institutional efficiency to facilitate the same.

Prakash Maharjan ​​is a researcher at Samriddhi Foundation, an economic policy think tank based in Kathmandu. The views expressed in this article are the author’s own and do not represent the views of the organization. [email protected]