Nepal has been buzzing. From tea shops to leading news portals the talk around the dire economic state of the country has been swirling. Given the rising inflation rates, negative balance of payment (BOP), and Nepal’s depleting foreign reserves, Nepalis are starting to get concerned over the economic standing of the nation, especially after the Sri Lankan economic crisis which followed a similar pattern.
According to Nepal Rastra Bank’s latest macroeconomic and financial situation report, the gross foreign exchange reserves stand at USD 9.45 billion in mid-June 2022, which is a decrease of 19.6 percent from its reserve number in mid-July 2021.
On April 26, 2022, the government banned the import of 10 luxury goods items ranging from chips to cars as a measure to maintain the depleting foreign reserve and to avoid an economic crisis. The ban which was initially supposed to end at July-end has now been extended till the end of August 2022. Before this, the NRB had ordered banks to maintain a 100 percent margin amount while issuing letters of credit (LC) for certain import items. Both measures had been taken by the government to maintain liquidity, forex, and economic indicators of the nation.
While government measures of import restriction have been welcomed by some citizens in the hindsight of the looming economic crisis, it is important to comprehend that these measures are short-sighted and do not provide a sustainable solution to the pertaining problems of the economy. Experiences of the world as well as Nepal suggest that government interventions have a tendency of having a broader impact—often an unintended impact. This intervention in the form of import barriers is no different.
Firstly, the move did not help realize even the primary goal of decreasing the trade deficit of the country. The import in the first eleven months of the current fiscal year increased by 27.5 percent, further increasing the trade deficit to Rs 1577.39 billion.
Secondly, the restrictions have severely impacted other areas of the economy. The price of restricted commodities has increased drastically in the market enabling inflation of other goods and services. Nepal’s year-on-year inflation reached 8.56 percent and the food and beverage inflation reached 7.43 percent in the first eleven months of the current fiscal year. Import ban of products and high margin rates have tampered with prices and availability of products in the market which in turn has either limited consumer choices or barred them from maintaining their living standards.
Rising inflation has a serious consequence on low-income and vulnerable communities, sometimes even pushing them further into poverty. Likewise, the government treasury also witnessed the adversity of restriction. It can be estimated that the revenue of three months generated from the banned goods will be roughly Rs 15 billion. To put matters into perspective, Rs 15 billion is roughly 12.3 percent of the budget allocated for the health sector in FY 2021/22.
Additionally, it is safe to assume that once the restrictions are lifted, consumption of goods would increase drastically. This phenomenon has been observed before when the trade resumed after the COVID-19 pandemic. Due to the increasing demand of foreign goods, post the lift of economic and mobility restrictions during the pandemic the country saw a drastic increase in import spending—which accounted for almost Rs one trillion. The first half of the current fiscal year saw a 51.13 percent rise in imports. The past consumer behavior suggests that a similar rise can be expected again.
Given the adversities, Nepal needs to focus on alternative solutions to prevent an economic turmoil. While the ban on import was imposed as an emergency measure, it is equally important for the government to focus on longer-term solutions like export promotion, foreign direct investment, and tourism development as an emergency measure as well.
Firstly, the government needs to simplify the process of getting approval for export by digitalizing the process and creating an online platform. In a report by the World Bank titled ‘Enabling Business of Agriculture’ Nepal scored four out of seven in the trading food index which measures points on license and membership requirements and phytosanitary certification procedures. In the majority of countries, the time required to meet export compliance is 24 hours and in most European and other developed nations, it is less than one hour.
One of the most effective methods applied by varying nations is to digitize their export procedure. Nepal can use similar tactics to simplify the process of getting a license and meeting trade compliance. Similarly, if Nepal is to develop its trade potential, then it should also perform its homework on developing standard certification and creating its own certification process.
For agricultural goods to compete in the foreign market they should follow standard criteria. However, Nepal has yet not developed a robust system for standardization and certification. It is a vital factor required for Nepal to build its export potential.
Additionally, for Nepal to prosper in terms of export it needs to build on its production capacity. An increase in production can result in increased consumption and export. Under the reeling pressure of economic catastrophe, the government through its recent budget announced that it would create measures to boost domestic production and consumption.
The government announced the commencement of the “Prime Minister Nepali Production and Consumption Growth Program” along with a decade-long campaign in its recent budget. With a budget of Rs 3.45 billion this program intends to grow Nepali production, employment generation, and export. Although the details of the program have not been declared yet the program is said to have given priority to textile, footwear, agriculture and food, forest products, herbs and medicines, construction, and handicraft sector.
While this is a welcome move, the government should also focus on reforming current legislation to make it easier for businesses as well as investors to enter the market. Easing the process of doing business and bringing in Foreign Direct Investment (FDI) could be one of the measures.
Though the government has reduced the threshold limit of Foreign Direct Investment (FDI) through the recent budget it can further explore how FDI entry could be made more efficient by easing the process of bringing it in and reaping benefits. FDI along with investment also brings in technological transfer and exposure to international markets both of which are very essential for the promotion of export. These would facilitate as well as incentivize the industries to improve their production.
Whilst developing holistic policies for trade promotion is not an easy task it is a necessary measure that Nepal needs to prioritize to stabilize the economy, invite foreign currency and develop the nation economically.
This article was originally published on Nepal Live Today by Shreya Subedi on July 18, 2022.