- GS-2: India and its neighborhood- relations.
Nepal’s Forex Challenges
Context: In an unusual development, the government of Nepal sacked the head of its central bank accusing him of leaking sensitive information and for failing to perform his duties.
- The decision, which violates the autonomy of Nepal Rastra Bank (NRB), was taken in the backdrop of tense relations between Finance Minister and NRB head over how to address Nepal’s crisis of falling forex reserves.
- It was reported that the country’s forex reserves have plummeted by 18.5% to $9.58 billion in March from $11.75 billion in July 2021. The current forex reserves are enough to pay the government’s import bills only for the next seven months or so.
How bad is the situation?
- Nepal’s economy is highly dependent on imports as the country buys a range of merchandise goods apart from fuel.
- Nepal’s forex reserves situation appears healthy as of now as the country, unlike Sri Lanka, is not burdened by external debt.
- There are, however, concerns that the lower middle income economy is being battered repeatedly by external factors and that may precipitate a crisis sometime soon.
- Nepal which is blessed with one of the finest tourism sectors in South Asia, because of the Himalayan mountain range, suffered during the COVID-19 pandemic as global tourist flow fell.
- This was followed by the global energy crisis caused by Russia’s invasion of Ukraine. This has put extraordinary inflationary pressure on the economy
- It is expected that if current trends continue then double-digit inflation will hit Nepal by June/July 2022 as the current rate of inflation is 7.14%.
- All economic indicators are declining and the real shortfall in forex reserves is because of the decline in foreign remittances which suffered during the pandemic when the Nepalese work force abroad suffered job losses.
- The situation has not stabilised and Nepal’s forex reserves continue to slide. The prevailing weak economic indicators mean that Nepal is spending from its forex reserves faster than it can save.
- Nepal has enough forex for buying merchandise just over seven months. This does not look good as Nepal also has a balance of trade crisis with major partners.
Can the energy scene in Nepal escalate economic woes?
- Nepal’s primary supplier of energy is Indian Oil Corporation (IOC). Nepal Oil Corporation (NOC) pays IOC in two instalments every month, on the 8th and the 23rd.
- The NOC has been in crisis for months as high global prices depleted the company’s savings, prompting it to approach the government for a lifeline.
- The Government of Nepal has agreed to provide NOC the necessary amount to continue supplies from IOC. For the time being sufficient funds have been allocated to NOC to pay IOC for the next instalment.
- However, NOC’s financial status makes it unattractive for banks and as a result the public sector company does not enjoy confidence in the market.
- There is a need to protect NOC from the effects of the current energy crisis in the world which has erupted after the Ukraine crisis.
- Nepal’s history shows that any uncertainty regarding fuel can trigger serious internal problems as was visible during the 2015-16 blockade when disruption of fuel supply from India caused distress in Nepal.
Will the economic situation have an impact on upcoming elections?
- Nepal will hold local level polls on May 13 which will be followed by general elections towards the end of 2022.
- The election process requires considerable financial allocation and Nepal has received support in the past for elections from international donors like the USAID.
- These donors help in carrying out pre-election staff training and logistics that are part of any democratic process.
- But there are uncertainties about such international support because of the difficulties that most of the traditional partners are facing.
- Election Commission of Nepal will require at least 10 billion Nepali rupees for the election process and that will mean diversion of a large amount of resources for the democratic process.
Connecting the dots: