The central bank said that Nepal’s gross foreign exchange reserves increased 8.9 percent to an all-time high of $12.75 billion in mid-November, boosted by remittances.

Economists, however, have warned that the piling up of foreign exchange reserves is a warning sign of a potential recession.

“As imports are dropping, foreign exchange reserves are increasing. This is a warning sign for our consumption-based economy,” said Nara Bahadur Thapa, former executive director at the Nepal Rastra Bank.

A high level of imports indicates robust domestic demand and a growing economy.

“But if these imports are mainly productive assets, such as machinery and equipment, this is even more favourable for the country since productive assets will improve the economy's productivity in the long run,” said Thapa.

The central bank said that merchandise imports decreased 3.8 percent to Rs512.50 billion.

Imports of readymade garments, MS wire rods, bars, and coils, electrical equipment, textiles, and aircraft spare parts, among others, increased, whereas imports of crude soybean oil, gold, petroleum products, crude palm oil, and MS billet, among others decreased.

According to the Nepal Rastra Bank, its reserves increased 10.8 percent to Rs1.49 trillion in mid-November, from Rs1.34 trillion in mid-July, the beginning of the current fiscal year.

Similarly, the reserves held by banks and financial institutions increased 6.4 percent to Rs205.95 billion in mid-November from Rs193.59 billion in mid-July.

Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies. Foreign exchange reserves are central bank funds used to make sure there's enough foreign currency to pay for imports.

Based on the imports of four months of 2023-24, the foreign exchange reserves of the banking sector are sufficient to cover the prospective merchandise imports of 13.6 months and merchandise and services imports of 11.3 months.

With money piling up in the banks, and imports dropping, it has affected the consumption, the lifeline of Nepal’s economy.

Thapa said consumption is an engine that drives economic growth, particularly for a country where there is low production and export.

“Money comes from abroad as remittance and makes the market vibrant in Nepal,” said Thapa.

“Now consumption is down because young people are leaving the country on a massive scale, which obviously will hit the retail sector.”

Lack of opportunities at home pushed nearly a million Nepalis to try their luck abroad in the last fiscal year.

The out-migration trend has not stopped. In the first four months of the current fiscal year, the number of Nepali workers—both institutional and individual—taking first-time approval for foreign employment stood at 137,475 and taking approval for renewed entry stood at 68,841.

This means more than 200,000 Nepalis already left the country in the first four months.

Their departure, however, has increased the remittance inflows, growing 26.4 percent to Rs477.96 billion in the review period.

Due to the low demand, construction, mining, and quarrying sectors are in the doldrums. Crash in the stock market, real estate, and low business confidence have rattled the economy.

When young people leave the country, its repercussions start to be visible in consumption. People hardly show up in major markets to buy mobile phones, cars, furniture, gold, and clothes.

“The colleges are empty,” said Thapa. “The hospitals are also struggling to remain afloat.” The once-booming restaurants too are struggling to get young customers.

Finance Minister Prakash Sharan Mahat on Wednesday, however, claimed that the country’s economy is on the “right track”.

There is no money in the market. Where is the money going then?

Thapa said money is being spent on smuggling the gold.

Nepal’s infamy as a hub for gold smuggling, which reached a new high back in July after the seizure of 60kg of gold, continues to grow.

“Tonnes and tonnes of gold are being smuggled. This will rattle the economy,” said Thapa.

The borrowings of the banks, too, are not healthy.

Private sector credit from the banking and financial institutions increased Rs99.40 billion, or 2.1 percent in the review period. On a year-on-year basis, credit to the private sector from banking and financial institutions increased by 4.4 percent in mid-November.

The foreign direct investment, too, has slowed.

In the review period, net foreign direct investment remained at Rs3.64 billion.

The central bank report, however, shows that the current account remained at a surplus of Rs96.38 billion in the review period against a deficit of Rs37.79 billion in the same period of the previous year.

The balance of payments remained at a surplus of Rs147.11 billion in the review period against a surplus of Rs20.03 billion in the previous year.

Published on: 15 December 2023 | The Kathmandu Post