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Sri Lanka is currently in the worst economic crisis since its independence as the economy has gone bankrupt and its population is out on the streets in protest. However, Sri Lanka is not the only country in economic turmoil. Nepali people fear Kathmandu may suffer the same fate as Colombo.
A foreign exchange crisis is brewing in Nepal as the country's foreign exchange reserves have fallen 18.5%, from $11.75 billion in July 2021 to $9.58 billion in March 2022. According to experts, these reserves are sufficient for paying import bills only for the next 7 months or so.
The main reason for such a decline in reserves is Nepal's dependence on imports. Nepal imports a wide variety of goods, ranging from food to petroleum, and automobiles to metals. Nepal is also highly dependent on foreign remittances i.e. money sent back home by Nepali citizens. It is the fifth most remittance-dependent country in the world.
Moreover, Nepal, like Sri Lanka, had a heavy dependence on tourism. The country earned about $700 million (around 8% of the country's GDP) via the tourism and hospitality industry in 2019. More than 1 million Nepali people were employed in the industry, several others were connected indirectly. In 2020, the country received its lowest count of tourists.
Last week, Nepali transporters held demonstrations and halted the loading and unloading of petroleum products in revolt. Transport officials and taxi drivers' unions have also increased the prices of transportation claiming fuel is getting costlier. It is also being reported that the Nepal Oil Corporation has hiked the cost of fuel 18 times in the last 12 months. People had to wait in long queues outside petrol pumps. This is a result of the actions of the country's central bank, Nepal Rastra Bank (NRB). The NRB chose to reduce fuel imports by more than half and fired its Central Bank governor.
Moreover, fuel is not the only commodity whose prices are rising. Commonplace food staples like vegetables, grains, and cooking oil have gotten significantly costlier. Certain consumer organizations have said that prices of food items have risen by about 20%, making the lives of the general public extremely difficult.
Annual consumer price inflation has risen to 7.1%, significantly higher than 5.18%, their 3-year average rate of inflation, and a 67-month high. Their trade deficit widened 34.5% YoY to $9.5 billion and remittances received fell 5.8% to $4.53 billion.
The situation is bad but the government is taking steps. The government has urged its citizens living abroad to open dollar accounts in the country. They reduced fuel imports by more than half, curbed non-essential imports, such as vehicles and luxury items, and are in the midst of considering a two-day holiday to reduce fuel consumption. Importers are forced to keep a 100% cash margin in LC accounts to open LCs for import non-essentials.
The Nepal Government has decided to take a loan of $150 million from the World Bank and accept grant aid from the United States Agency for International Development (USAID).
There could be many setbacks, both for India and Nepal. A major part of Indian exports are sent to Nepal and an economic crisis is bound to reduce exports.
-by Aman Agarwal.
This news piece is brought to you in association with jobaaj.com
