Nepal’s remittances, forex reserves drop

Even as Nepal tries to recover from the impact of the pandemic, the country’s economic indicators released this week by the central bank show dismal performance in the first two months of the fiscal year.

The report by the Nepal Rastra Bank shows that Nepal’s foreign currency reserves fell to $11.1 in mid-September, 6.6% below the figure for last year, this is enough to pay for only 8 months of total imports.

Even more worrying is that overseas remittances that had held steady despite the pandemic for the past two years have now started declining. Nepalis abroad sent home Rs155 billion in the past year, which is 6.3% below the same period last year.

Despite the pandemic, remittances had risen by 8.1% in fiscal year 2019-2020. Experts attributed that to overseas workers sending money home as the economic crisis hit families back home, and not necessarily due to higher earnings.

The concurrent decrease in foreign currency reserves to finance Nepal’s imports, mainly of petroleum, food and other commodities, is seen as an indicator of an impending economic crisis. The main reason for the current downturn is shrinking remittances, which prop up Nepal’s economy.

Indeed, compared to 2019-2020, the past year has seen a steep 76% increase in imports to a record Rs352 billion, mainly due to a rise in the import of petroleum products, gold, silver and other items, according to Rastra Bank figures.

Even though exports went up by 115% in the same period to Rs44.4 billion, it did not put much of a dent on the trade deficit which has risen to Rs270 billion in the past two months of the fiscal year. This represents a 71% increase in the trade gap compared to last year.

The growing asymmetry between imports and exports means that the country’s balance of payments situation is now Rs83.4 billion in the red — up from Rs38.7 billion in July.

With the alarm bells ringing, the government has drastically reduced the amount of money Nepalis can officially exchange before traveling abroad from $1,500 to $200-500. This week, further austerity measures were announced, including a ban on the purchase of vehicles for official use.

The negative trend in economic indicators could not have come at a worse time. Just as the country was recovering from the economic impact of the pandemic, it was hit by extreme rainfall this month which killed more than 110 people across the country, and destroyed up to one-third of the country’s ready to harvest rice crop.

The Ministry of Agriculture estimates that nearly 90,000 hectares of rice fields were severely damaged by the unseasonal post-monsoon rains, and paddy losses will amount to more than Rs8 billion. Lumbini Province is said to have suffered the worst, with more than half of the initially reported damage nationwide.

The unprecedented destruction comes just as farmers and officials were optimistic about a healthy rice harvest because of a healthy monsoon season. Rice is such an important component of Nepal’s economy that it will impact on the GDP, economic growth, and have a knock-on effect on the trade deficit because more rice will now need to be imported.

Last year Nepal produced 5.6 million tonnes of rice from 1.4 million hectares of paddy fields, up 1.3% from the previous year. However, rising income levels of Nepalis has also meant that rice consumption is growing, and the country had to import Rs 51 billion worth of rice last year, compared to only Rs23 billion in 2019.

Analysts say the sharp increase in rice imports cannot be attributed only to rising consumption, explaining it by the rise in demand from Nepal’s breweries and the dramatic rise in domestic beer consumption.