March 12, 2024
KATHMANDU – Nepal’s foreign exchange reserves are on a record-breaking streak.
The reserves reached Rs1.84 trillion in mid-February, according to the country’s central bank, and are inching towards the Rs2 trillion mark as investment stalls and import contracts.
The accumulation of reserves, mostly pumped by Nepali migrant workers, may have cheered the Pushpa Kamal Dahal-led government, but for economists, it’s a worrying sign.
The accumulation of foreign exchange reserves has both advantages and disadvantages, but it is more of a disadvantage for a country like Nepal which is in a low-growth trap.
“There is a direct link between the economic growth rate and foreign exchange reserves,” said Chandramani Adhikari, an economist.
“We have low growth and in such a situation, high foreign exchange reserves mean we are not investing,” he said. “The more foreign exchange reserves increase, the further our growth rate will decline.”
Economists say growth is achieved through capital investment and labour output.
“As we export labour and buy goods from the money the workers send home, we are a consumption-based economy. So, based on the data—the accumulation of foreign exchange reserves and drop in imports—the implication is, we are not spending,” he said. “This shows the economy has slowed down.”
But if a country has a consistent GDP growth rate, it is a good sign that the economy is stable and hence accumulation of reserves boosts the economic growth rates.
The central bank said in its monthly report that the year-on-year remittance inflows increased by a whopping 21.6 percent to Rs839 billion in the first seven months of the current fiscal year.
The growth has been attributed to ever-increasing migrant departures to foreign lands in search of better income.
In the first seven months of the fiscal year, more than 400,000 Nepalis left the country on work permit visas, according to the central bank data.
The cost of rising migrant worker departures has started to become real and visible, with industries ranging from restaurants to dairy and retail to footwear, all suffering a drop in customers.
Economists say that as over a million young people leave the country each year for foreign jobs, consumption has curtailed.
“Youngsters were the customers of the restaurants, bars and coffee shops. And these eateries were also primarily reliant on them,” Pramod Jaiswal, former president of the Restaurant and Bar Association, who owns Mela Restaurant, told the Post in a recent interview.
Recently, Nepal’s Dairy Development Corporation issued a press statement saying that due to the ongoing economic slowdown, people’s buying capacity has eroded, resulting in a huge pile-up of dairy products in warehouses.
Those involved in Nepal’s once budding footwear sector said that after Covid, Nepal saw a massive youth exodus, and the manufacturers lost their key customers, dampening the growth of the burgeoning industry.
The footwear sector estimates that the average Nepali citizen buys less than two pairs of shoes a year due to the drop in their incomes.
Economist Keshav Acharya said import growth has been gradually declining, which suggests a contraction in consumption, the country’s key economic indicator to fuel growth.
“The government, too, has not been able to spend the capital budget which has affected economic activities,” Acharya said. “No expenditure means fewer jobs.”
As the capacity utilisation of domestic industries is 60 percent, the manufacturing industry is also facing a subdued demand, he said.
“Many businesses, which started laying off workers after the Covid pandemic, are continuing to do so due to low economic activities.”
Most shutters in major market hubs have been closed, the footfall of customers in hotels and restaurants has declined, and even small vegetable vendors are saying that sales have dropped, Acharya said.
Also, in the past two years, problems have been seen in cooperatives due to which depositors could not use their savings, Acharya said. There are problems in microfinance companies as well.
Anarchy is growing in the financial sector as borrowers are openly saying that they won’t repay their bank loans, said Acharya.
Non-performing loans in the banking and financial sector have peaked.
The amount, which should have been injected into the local economy from the banking and financial sector as well as cooperatives and microfinance sector, has withered.
“Even the private sector has not injected money into the economy,” said Acharya. “This also resulted in demand contraction. The private sector confidence has declined. Except in the hydro sector, investment in other areas has dried.”
Rising political instability has had a great impact on the economy.
For instance, Nepal built two international airports to boost tourism income by spending over Rs65 billion, but no international flights go there. Insiders say no one is taking ownership of the project to make the projects financially viable.
Tourism entrepreneurs say successive governments are hiding their shortcomings and as a part of their ‘buck-passing’ strategy, blame geopolitics for the projects’ failure.
According to the Nepal Rastra Bank, the year-on-year imports decreased by 2.3 percent to Rs897.94 billion in the first seven months of the current fiscal year.
The export also declined by 7.07 percent to Rs86.83 billion in the review period.
The foreign exchange reserve is used on imports, including paying foreign loans, Acharya said.
The data of the National Statistics Office shows an economic growth of 3.5 percent in the first quarter [mid-August 2023 to mid-October 2023] of the current fiscal year. This suggests Nepal is growing at a sluggish pace due to a contraction in economic activities.