The common concern that encircles the state of Nepal’s balance of payment is ubiquitous, and the prescription it gets does not seem to work. The anecdotes on solving issues surrounding it have done very little; rather these anecdotes have strayed us from adumbrating a new narrative for our economic well-being. While Nepal’s economic growth rate has consistently surpassed the six percent mark in the past three years, the balance of payment tells a contradicting story about our status. While the diagnosis seems easy on paper, getting things right in reality is a hefty challenge.
Why our deficit increases?
Trade deficit, currently, is at the center of political agendas; however, the party-in-power often seems to put an attempt to normalize the situation. The reason behind the trade deficit is also believed to cling onto with our economic growth. However, the complete picture might look a little different. The major reason is our imports. Nepal’s foreign income has not been able to match up for the imports. Nepal’s expense on imports grew by 17.3 percent to NPR 1,299.80 billion ($11.61 billion)[i]. The demand for petroleum products, vehicles/spare parts, garments, electrical goods and steel/iron have skyrocketed. However, items like steel and machinery are used for production and construction works which make it apparent for their demand to go up with the ongoing reconstruction and development works.
But, being heavily dependent on imports for staple food has exacerbated the state of our balance of payment. Developed nations set aside large grants for agriculture which make it impossible for a nation like Nepal to compete on price. Thus, our domestic production suffers. In 2018, Indian Government provided subsidy of NPR 4.7 trillion ($41.98 billion). China, likewise, is the largest grant-provider in agriculture[ii]. Around four months ago, the World Trade Organization (WTO) had ruled that China crossed the set-ceiling on the grants that could be given to farmers[iii]. All of this puts stress on our domestic production while increasing our trade deficit.
Nepali outbound travellers also spend more in comparison with the spending of foreign tourists in the country. The travel expenses incurred by Nepali travellers, migrant workers and students have been on the rise with more people going abroad for various reasons. Outbound services accounted for NPR 182,025.8 million ($1,625.9 million) in the eleven months of FY 2018/19[iv].
What can be done?
While our economy appears ensnared in a vicious trap, our attempts should concentrate on improving some of the integral elements of our economy. We need investments and production, and then only we can replace exports with our domestic products. With time, we may also be able to export more. For example, a few years back our cement market was filled with Indian companies. Hetauda Cement and Udaypur Cement were some of the only companies that could face competition. With some protection from the government by imposing import tariffs, Nepal today is almost independent in cement. This helped reduced trade deficit by a large sum. However, there are cases where such protections have had an adverse effect, as in the recent case of import tariffs on sugar imposed by the government which escalated sugar prices. The government of Nepal also reduced the limit of foreign exchange to USD 1500 per passport for Nepali nationals going abroad, but these curbs are bogus and would do little in the longer-run[v]. The earlier limit was USD 2500. In the last fiscal year of 2017/18, Nepalis spent a total of NPR 79.6 billion ($711 million) in travel which is 40 percent up from two years ago[vi].
The longer-term solution lies in exporting more, but there have only been slight increments in exports over the past 10 years. In the eleven months of 2018/19, we were able to export worth NPR 102,240.5 million ($913.2 million)[vii]. On the other hand, remittance earnings have levelled some portion of the deficits with a large number of workers working abroad. Nepal received a total of NPR 799,016.5 million ($7,137.2 million) through remittance in the eleven months of FY 2018/19[viii].
Some impending tweaks in policies could also be beneficial for the growth of the domestic industry. Clean Feed and Anti-Dumping Act are some of such policies.
While getting to the idyllic setting might seem like a colossal task, there are some positive signs. For the first time in 2018, arrival of tourists crossed the coveted one-million mark. However, the challenge remains on getting them to spend more with the average spending dropping to USD 44, the lowest in seven years[ix]. With Visit Nepal 2020 marked on the calendar, we need to strategize to make this happen. Next year, we will have a surplus of electricity with the completion of the 456 MW Upper Tamakoshi Project. Exporting surplus electricity to countries like India and Bangladesh could further help reduce our deficit. However, if this problem remains unaddressed, it might bring down our economic-engine.
[i] Retrieved from kathmandupost: https://kathmandupost.com/money/2019/07/21/nepal-s-rising-trade-deficit-takes-toll-on-country-s-foreign-currency-reserves
[ii] (2019). Retrieved from Setopati: https://www.setopati.com/opinion/186723?utm_source=facebook&utm_medium=facebook%20boost&utm_campaign=traffic&utm_term=facebook%20boost&fbclid=IwAR1Ch007KS6eZ1_6l07iXWkj8R8_aQuOSVry9p-7gIH8fuzVR_0mE1MFQCc
[iii] (2019). Retrieved from Setopati: https://www.setopati.com/opinion/186723?utm_source=facebook&utm_medium=facebook%20boost&utm_campaign=traffic&utm_term=facebook%20boost&fbclid=IwAR1Ch007KS6eZ1_6l07iXWkj8R8_aQuOSVry9p-7gIH8fuzVR_0mE1MFQCc
[iv] Bank, Nepal Rastra. (2019). Retrieved from https://www.nrb.org.np/ofg/macroeconomic.php?tp=current_macroeconomic&vw=1000
[v] (2019). Retrieved from myrepublica: https://myrepublica.nagariknetwork.com/news/foreign-exchange-limit-for-outbound-nepalis-lowered-to-1-500/
[vi] (2019). Retrieved from myrepublica: https://myrepublica.nagariknetwork.com/news/foreign-exchange-limit-for-outbound-nepalis-lowered-to-1-500/
[vii] Bank, Nepal Rastra. (2019). Retrieved from https://www.nrb.org.np/ofg/macroeconomic.php?tp=current_macroeconomic&vw=1000
[viii] Bank, Nepal Rastra. (2019). Retrieved from https://www.nrb.org.np/ofg/macroeconomic.php?tp=current_macroeconomic&vw=1000
[ix] (2019). Retrieved from kathmandupost: https://kathmandupost.com/national/2019/05/17/more-tourists-are-visiting-the-country-but-they-are-spending-less-money