Is Nepal next in line for an economic crisis after Sri Lanka?

Like Sri Lanka, Nepal is heavily dependent on tourism and export of limited commodities for foreign exchange reserves that the country needs to meet its import expenditure

FPJ Web DeskUpdated: Thursday, April 14, 2022, 10:45 AM IST
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Nepal Rashtra Bank, the country's central bank | Wikimedia Commons

Sri Lanka is in the throes of a deep economic crisis, with sky-rocketing inflation and depleting foreign reserves. Now, another neighbor of India could be struggling- Nepal. A recent decision by Kathmandu has captured the attention of the world, Nepal has banned imports of luxury items.

Nepal, with a population of around 29 million, is a nation landlocked between India and China. It relies heavily on India for imports of almost all of its essential supplies, including fuel.

Like Sri Lanka, Nepal is heavily dependent on tourism and export of limited commodities for foreign exchange reserves that the country needs to meet its import expenditure.

While some of the measures that the Sri Lankan government took during 2019-21 have led to its current situation, in Nepal, the political crisis last year expedited the economic crisis in the country.

The Nepal government has been trying to prevent the decline of foreign exchange (forex) reserves in the country for quite some time and they have now decided to ban the import of luxury items in order to take care of the problem.

Nepal Rastra Bank spokesperson Gunakar Bhatta explained that the biggest challenge for the government is to maintain the forex reserves properly, according to a report on myRepublica, an English-language National daily newspaper published by Nepal Republic Media in Kathmandu.

"The import of luxury items has been stopped to prevent the decline in foreign exchange reserves due to the rising deficits and high imports," Bhatta was quoted as saying in the report.

Nepal’s annual import bill crossed the trillion-rupee mark for the first time in fiscal 2017-18. This was due to the reconstruction drive following the earthquakes of 2015 and a rise in disposable income as remittance earnings soared.

Three years later, Nepal spent a trillion rupees in just six months to buy foreign goods. This was because of growing demand for foreign goods as the country recovered from the devastating impact of Covid-19.

A high level of imports indicates robust domestic demand and a growing economy. But imports should be of productive goods like machinery and equipment because it will improve the economy's productivity over the long run.

But in Nepal’s case, government statistics show that a hike in the prices of goods is one of the key reasons behind the ballooning value of imports.

In Nepal, foreign exchange reserves have been declining since July 2021 soon after a political crisis in the country led to the fall of the KP Sharma Oli government. Imports have been surging ever since while the inflow of remittances and earning from tourism and exports has declined.

Nepal's biggest forex earners were soyabean oil and palm oil even though Nepal produces only a paltry amount of soyabean and not a single drop of palm oil. Import is export here. It gets the benefit of the SAFTA or the South Asian Free Trade Area agreement.

India is looking to maintain its influence in the region and counter the growing debt-trap initiatives of its eastern neighbour China via cooperative strategies and humanitarian aid, a move aimed to ringfence its strategic interests in the region and also keep the shadow of China away from its other borders.

Nepal’s gross domestic product (GDP) for 2020-21 stood at about $35 billion or over Nepali Rs 4.25 trillion. Its annual import bill crossed the Nepali Rs 1 trillion in 2017-18 for the first time, largely due to massive reconstruction works following the devastating earthquake in 2015.

Nepal's biggest revenue earner is remittances - money sent home by around 3.5 million Nepalis working abroad, mostly working in the Middle East, South-east Asia and India.

Nepalis sent home around $8 billion (£6.14 billion) in 2020, more than a quarter of the country's gross domestic product (GDP).

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