Nepal’s foreign currency reserve has started depleting over the months this fiscal, as the import bill of the country increased substantially against low export growth, coupled with slackness in remittances growth and foreign investment flow into the country.
The country witnessed depletion in foreign currency reserve to the tune of Rs 30.23 billion in the first seven months, according to the Nepal Rastra Bank (NRB). The country had foreign currency reserve of Rs 1,079.43 billion at the start of the fiscal. The size of the reserve had dropped to Rs 1,049.20 billion by the seventh month (mid-February).
As per the central bank, the current reserve of foreign currency is sufficient to cover the import of goods and services for 9.8 months. However, if it continues to deplete to the point that it becomes insufficient to cover the import of goods and services for eight months, the government would have to adopt some measures to curb the imports, according to central bank officials.
“Continuous depletion of the foreign currency reserve should be a cause of concern for a country like Nepal, which lacks durable sources of foreign exchange earnings,” said Nara Bahadur Thapa, executive director of NRB.
The country has been relying on remittances to make its foreign exchange reserve robust and slackness in growth of remittance could create a risk in macro-economic stability. Remittance inflow grew by merely 1.7 per cent to Rs 401.35 billion in the first seven months, compared to 5.2 per cent growth in the same period of last fiscal. If the foreign exchange reserve continues to drop, the government would have to curb the imports, which in turn will adversely affect the government’s revenue as it is largely import-based.
The countries that have a durable earning source of foreign currency are said to be in a comfortable position if their reserve is sufficient to cover the import for six months.
For Nepal government, however, curbing import by raising customs tariff on luxury goods could be tricky. This is due to the earlier commitments with multilateral organisations, which bar raising customs tariff on the goods they produce.
Still, the central bank, through its monetary policy, can raise the loan-to-value ratio to discourage the import of luxury goods. For instance, NRB had fixed the loan-to-value ratio in automobiles at 50 per cent from up to 80 per cent earlier. However, the monetary policy of this fiscal has raised the ratio to 65 per cent to facilitate the borrowers.
“Even if the import growth trend seen in the first six months continue throughout the year, our foreign exchange reserve is enough to cover the import of 9.8 months, so we are in a comfortable position,” said Thapa, “There is no need for a knee-jerk action on the basis of foreign exchange depletion in the seven months of this fiscal.”
Central bank officials have said that the profit repatriation of telecommunication service provider Ncell is one of the causes for depletion of foreign currency reserve. In January, Axiata, the Malaysian company that had acquired the controlling stake of Ncell from Swedish firm TeliaSonera, had repatriated Rs 40 billion, out of the profit of Rs 72 billion generated between 2012-13 and 2015-16.
Source: The Himalayan Times