Nepal faces constrained import capacity as key sources of foreign exchange earnings dry up

Source: Xinhua| 2020-05-29 17:33:50|Editor: huaxia

KATHMDU, May 29 (Xinhua) -- As Nepal is witnessing a sharp drop in earnings from remittances, exports and tourism due to the impact of COVID-19, the country could struggle to pay import bills next fiscal year which begins in mid-July, Nepali officials and experts warned.

Nepal's central bank said in the quarterly review report of its Monetary Policy 2019-20 released on Tuesday that the remittances, the largest sources of foreign exchange earnings for Nepal, almost halved in the two months since Mid-March this fiscal year.

In the two months, Nepal received remittances amounting to 646 million U.S. dollars from 1.17 billion U.S. dollars during the same period last fiscal year.

Likewise, earnings from exports slumped to 58 million U.S. dollars in the two months since Mid-March against 142 million U.S. dollars in the same period last fiscal. Tourism earnings nosedived to 55 million U.S. dollars this fiscal against 133 million U.S. dollars last fiscal during the respective periods.

"Although massive decline in foreign exchange earnings in the last two months has not hurt foreign exchange reserves badly, there is the possibility of stress on the reserves in the next fiscal year when economic activities are expected to rebound and more imports need to be made," Gunakar Bhatta, spokesperson at Nepal's central bank told Xinhua on Wednesday.

According to the Nepali central bank, the foreign exchange reserves which amount to 9.49 billion U.S. dollar as of mid-April, are sufficient to meet goods and service imports for 9.5 months.

But Bhatta cautioned that adequacy of reserves was due to the reduced import ever since the beginning of the current fiscal year that began in mid-July 2019 and a sharp drop in imports after lockdowns were enforced in Nepal since March 24.

Nepal's imports also declined to 830 million form Mid-March to Mid-April this fiscal from 1.88 billion U.S. dollars in the corresponding same period last fiscal, according to Nepal's central bank.

Central bank officials and other experts don't see early rebound in all three key sources of foreign exchange earnings -- remittances, exports and tourism as the global economy is set for the deepest recession that the world has ever seen since the Great Depression in the 1930s, and international travels are continue to remain restricted due to COVID-19 fears.

According to Bhatta, remittances are expected to decline by 15-18 percent this fiscal year. Given the possibility of a large number of Nepali migrant workers returning home from major destinations in the Gulf region and Malaysia due to loss of jobs, remittances would also decline next fiscal year too.

With the largest source of foreign exchange earnings drying up, Nepal will have little space to grow imports in the next fiscal year, experts said.

"Foreign currency reserves remained in a comfortable situation due to good earnings in pre COVID-19 days," Keshav Acharya, a senior economist told Xinhua on Thursday. "Now, the country could struggle to manage foreign exchanges required to import a large number of medical goods in the worst case scenario of COVID-19."

He said Nepal could struggle to import capital goods such as machineries and construction materials in case the pandemic is over and economic activities pick up because of limited foreign exchange reserves.

Experts said reduced remittances would also hit the lending capacity of banks because remittances are major sources of liquidity in the banks. The banks keep foreign exchange received in the forms of remittances and send the domestic currency in the market.

"The consistent decline in remittances will create a shortage of loanable funds with the banks which will lead to rise in interest rate for the businesses," said Acharya. "This will affect the investment from the businesses affecting jobs."

He said that in the worst case scenario, Nepal needs to be prepared for rationing of foreign exchange for imports and imposing quantitative restriction on the import of certain goods.

The Nepali government has already taken some import restriction measures. In March, Nepali government banned the import of peppercorns, betel nuts, peas, date fruits, and vehicles with price tags of over 50,000 U.S. dollars.

Given the possible contraction in foreign exchange reserves, both Bhatta and Acharya insisted that Nepal needs to take import substitution measures, particularly in the areas where Nepal has comparative advantages.

"We have to increase domestic production particularly in the agriculture sector and try to substitute import of at least essential food items which is worth around 1 billion U.S. dollar," said Bhatta, who is also chief of the research department at Nepal's central bank.

Nepal's annual budget for next fiscal year 2020-21 presented in the Nepali parliament on Thursday has raised "agriculture reform fees" on the import of essential agriculture products, targeting to incentivize domestic production.

"Another option is to increase the use of electricity, which is now available in abundance in the country, to reduce the import bills of fossil fuel," said Bhatta.

Petroleum products have remained the single largest import items of Nepal for long. The Nepali government on Thursday increased the customs duty on the import of diesel, petrol and kerosene, as the measure is expected to encourage more uses of electricity. Enditem