How did the current state of foreign exchange reserves come about? – Online News

There is a direct link between imports of goods and services and foreign exchange reserves. If the amount of foreign exchange flowing regularly in the country is not enough to pay for the goods and services imported into the country, it has to be paid from the foreign exchange reserves. In this case, the foreign exchange reserves are declining. Table no. Such reserves seem to be declining as the regular inflow of goods and services from within the country has not been able to pay for imported goods and services. Examining the data, it is seen that it has been declining since December.

In the Fiscal Years 2076/77 and 2077/78, due to the reduction in imports due to COVID-19, the foreign exchange reserves did not have to be spent much. Also in a country with informal foreign trade like ours, that kind of trade was significantly reduced during Kovid’s time.

On the other hand, foreign exchange reserves remained satisfactory due to the increase in remittance inflows at that time. As the economy has become more active in recent times, both the volume and percentage of import trade have increased. Due to the above situation, the capacity to support the import of goods and services gradually declined for 18.8 months in December, 2072 BS.

Analyzing the declining trend of the country’s foreign exchange reserves, it is seen that it has started declining not only since the beginning of this fiscal year but also some time ago. If the current situation had not started in the case of Kovid, it would have appeared two years ago. In the case of Kovid, the impact of the global embargo adopted to prevent and control it, as well as the domestic embargo and quantitative restrictions on certain items, had a direct impact on imports. As a result, the problem that has arisen now is a reversal of time. This is also explained by the data in the table.

Table-1

Foreign exchange reserve (monthly) trend
Fiscal year Mid-month Total foreign exchange reserves (NRs billion) Total foreign exchange reserves (USD million) Month to support imports
Object Goods and services
2076/77 Pus 1096 9692 9.6 8.4
January 1096.7 9640.3 9.7 8.5
Fagun 1136.5 9595.7 10 8.8
Chaitra 115.9 9493.2 10.7 9.5
Baishakh 1235.3 10250.2 12.2 10.8
June 1306.5 10792.7 13.3 11.7
Ashadh 1401.8 11646.1 14.4 12.7
2077/78 Shravan 1436.7 12017.9 17.3 15.6
Bhadra 1433.7 12197.3 16.5 14.9
Asoj 1470.3 12553.5 15.6 14.1
Karthik 1506.1 12648.5 15.4 14
Mansir 1474.3 12544.4 14.4 13
Pus 1493.8 12775.8 13.9 12.6
January 1462 12574.4 13.1 11.9
Fagun 1436.5 12366.9 12.5 11.3
Chaitra 1433.3 11963.9 11.9 10.8
Baishakh 1390.8 11869.2 11.4 10.3
June 1365.6 11710.2 11.1 10.1
Ashadh 1399 11752.6 11.2 10.2
2078/79 Shravan 1353.8 11424.6 9.3 8.3
Bhadra 1307 11142.9 8.6 7.8
Asoj 1319.3 10983.4 8.6 7.8
Karthik 1244.8 10471.5 7.9 7.2
Mansir 1214 10025.9 7.5 6.8
Pus 1165.8 9886.3 7.2 6.6
January 1173 9749.2 7.4 6.7
Fagun 1171 9578.7 7.4 6.7
Chaitra 1167.9 9611 7.4 6.6
Baishakh 1146.9 9276.7 7.3 6.6

Source: – Nepal Rashtra Bank

From the Fiscal Year 2074/75, there was easy access to credit in the banking sector and interest was also cheap. Although some economic activities were taking place in the stock market as well as some consumer goods and pharmaceutical businesses during Covid’s time, other economic activities were almost at a standstill. As the infection rate of Covid-19 gradually decreased, so did economic activity. In this context, cheap interest rate refinancing was made available through banks and financial institutions with the objective of making the economy run smoothly. This seems to be the case today as imports have increased. It is clear that the competitive trend of the banking sector and the business community has created this situation through the growth of letter of credit and other means of payment.

Dr Shalikram Pokharel
Author Dr. Pokhrel

At the same time, it is doubtful that the refinancing, concessional refinancing and cheap interest rate loans for the agricultural sector obtained by the industry and business owners and their associates for the refinancing of industry and business have gone into unproductive and especially import activities. It is clear that the foreign exchange reserves have come under great pressure as the volume of imports has gone out of control due to lack of proper utilization of such concessional loans.

The balance of payments, which was Rs. 282.41 billion in FY 2076/77, had decreased to Rs. 1.23 billion in FY 2077/78. In the Fiscal Years 2076/77 and 2077/78, the decline in imports due to KOVID mainly affected the informal market and increased remittance inflows, leaving the foreign exchange reserves at a satisfactory level. Following that fact, as the imports increased, the balance of payments surplus of Rs. 282.41 billion was reduced to Rs. 1.23 billion in 2077/78. Since then, the pressure of foreign exchange reserves on the economy has been increasing.

Foreign exchange reserves in the economy have been declining due to pressure on imports as the economy, which has been weakening due to covid, has started moving. Foreign reserves stood at Rs. 1493.8 billion in December, 2077 BS, Rs. 1462 billion in January, Rs. 1436.5 billion in February, Rs. The foreign exchange reserves, which had increased slightly to Rs. 1399 billion in July from the formation of the new government, gradually declined to Rs. 1307 billion in September. In September, foreign exchange reserves increased from Rs. 1307 billion to Rs. 1319.3 billion in comparison to the previous month.

With the outbreak of the Russian-Ukrainian war, foreign exchange reserves appear to be declining, with few months to go.

Although the government has shown initiative in recent times, the pressure on external sector stability and foreign exchange reserves has been increasing. In order to maintain the stability of the external sector, the efforts made for the stability of the country by the stakeholders in any country alone will not be enough.

At first glance, there are two main reasons for the decline in foreign exchange reserves.

First, the economy, which had been sluggish in the past under Kovid, began to move. There was a demand for more credit in the economy. The inability to manage credit in return led to an increase in both the volume and value of imports. In such a scenario, imports become more expensive and foreign exchange reserves come under pressure. As a result, it has directly affected the country’s balance of payments.

Table: 2

The country’s balance of payments situation

Fiscal year After the search, Rs. Note
2077/78 1.23 billion Savings
2076/77 282.41 billion Savings
2075/76 -67.40 billion Deficit
2074/75 0.96 billion Savings
2073/74 82.11 billion Savings
2072/73 188.95 billion Savings
2071/72 145.04 billion Savings
2070/71 127.13 billion Savings
2069/70 68.94 billion Savings
2068/69 131.63 billion Savings

Source: Nepal Rashtra Bank

Second, the international price chain: The war between Russia and Ukraine had a negative effect on the supply chain. Due to this, the increase in the prices of petroleum and other consumer goods has made the prices of transportation more expensive. This seems to have had a direct impact on foreign exchange reserves.

In this regard, the Government of Nepal has made public the budget for the Fiscal Year 2079/80. This budget seems to have given utmost importance to the agricultural sector to make the agricultural production self-reliant by increasing the domestic production and promoting the export by substituting, discouraging and managing the imports. The budget has come to declare the year of National Campaign for Agricultural Production with the slogan of transformation of agriculture sector and increase of employment, end of absolute poverty and economic prosperity. The budget has been passed to bring in programs such as Kisan Pension Fund, Government Program with Farmers, Seed Ensuring Campaign for Food Security, Consumption of Own Product, Make in Nepal and Made in Nepal, a local level special product.

In addition, there is a lot of potential for production, consumption and export in the country to promote agriculture, industry and hydropower and service sector.

Provision has been made to promote various aspects such as clinker, cement, steel, footwear, treated water, ginger, cardamom, turmeric, sugar, herbs, information technology based services with high export potential and to provide cash subsidy of up to 8 percent on such items.

At the same time, looking at the nature of imported goods in Nepal, especially informal economic activities and extreme luxuries and Nepal’s economy does not seem to be much needed. It seems necessary to discourage that.

At present, the pressure of foreign exchange reserves is increasing. In such a situation, all stakeholders should focus on implementing the budget effectively rather than blaming each other. The pressure of balance of payments and balance of payments should be managed. The need of the hour is to move forward in a coordinated manner in a timely manner towards maintaining stability in the macro-economy.

(The author is a banking and financial sector advisor to the Ministry of Finance.)

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