Nepali economy is on the verge of facing a major turbulence, as flow of money sent home by those working abroad is likely to drop in the first quarter of this fiscal year, raising prospects of a further slowdown in consumption and fall in foreign exchange reserves.

 

Nepali banks and financial institutions sold foreign currency worth $927.5 million to the central bank in almost three-month period since the beginning of the fiscal year in mid-July. The banking institutions had sold $1.02 billion in the first quarter of the last fiscal year, according to the Nepal Rastra Bank, the central bank.

 

The stock of foreign currency in banks and financial institutions had dropped in the three-month period of this fiscal year, as remittance inflow is presumed to have shrunk during Dashain, a festival celebrated by majority of Nepalis, which continued from September 21 to October 5 this year.

 

Dashain is the period when the country sees a surge in remittance inflow, as overseas workers send extra cash home to enable family members to celebrate the 15-day festival in a decent manner. Migrant workers generally start sending funds for Dashain a month prior to the festival.

 

Banks and financial institutions sold $415.5 million to the central bank in the one-month period prior to the start of Dashain, according to the central bank. This marks a 25 percent drop compared to the figure of the same period a year ago, when banking institutions had sold $554.1 million to the central bank.

 

The main source of the foreign currency for banks and financial institutions is funds remitted by Nepalis working abroad. A part of this money is used to provide foreign exchange facility, primarily to traders who import goods. The remaining is sold to the central bank. 

 

“The volume of foreign currency sold to the central bank is, thus, a precursor of intensity of the remittance inflow,” said a senior official of the Nepal Rastra Bank, the central bank, ruling out the possibility of a sharp hike in demand for foreign currency by importers. If this statement is any indication, the country’s remittance income will drop in the first quarter of this fiscal year. 

 

Nepal’s remittance income growth rate has been falling for quite some time. But it has not faced a quarterly negative growth in recent years. 

 

“This is certainly not good news for Nepal, where remittance has remained a backbone of the economy for quite some time,” said Shankar Sharma, a senior economist and former vice chairman of the National Planning Commission.

 

Nepal received remittances equivalent to 27 percent of the gross domestic product (GDP) through formal channel in the last fiscal year. Nepalis working abroad had sent more money home through informal channels which was not captured by official records. This implies remittance’s share as percentage of GDP hovers around 40 percent or even more.

 

The money sent home by Nepalis working abroad has played a crucial role in lifting people from the traps of poverty. Remittance income has also pushed up consumption, which accounted for almost 90 percent of GDP in the last fiscal year. 

 

Fall in remittance income is, thus, expected to reduce private consumption. Yet consumption will not remain anemic, as demand for many commodities, like petroleum products, does not subside even when money circulation drops. Also, demand for construction materials is expected to remain high in this fiscal year, as post-earthquake reconstruction works are gathering pace.

 

These are indications 

 

that imports will continue to surge in the coming days, pushing up demand for foreign currency to settle bills of goods brought in from abroad. This poses a threat to the economy, because Nepal is not expected to generate as much earnings in foreign currency because of fall in remittance income. This is expected to exert pressure on the country’s foreign exchange reserves.

 

Nepal’s foreign exchange reserves contained $10.6 billion in mid-August. This war chest, according to the central bank, is sufficient to cover merchandise imports of 14.2 months, and merchandise and services imports of 12 months.

 

“The country’s foreign exchange reserve is in a comfortable position at the moment,” said Sharma. “But we should remain cautious, as continuous slowdown in foreign reserves accumulation will create an alarming situation.” Nepal had faced a full-blown financial crisis in late 1985 after foreign exchange reserves depleted to around $40 million, which was hardly sufficient to finance a week’s merchandise imports.

 

The possibility of the country facing an eerie situation of 1980s cannot be ruled out, as Nepal has not been able to diversify its sources of foreign currency earning.

 

Exports, which give a lift to foreign reserves, have suffered for quite some time. And they are likely to take a drop in the coming days, as Nepali goods may lose competitive edge in India-Nepal’s major trade partner-due to lower tax rates following introduction of goods and services tax regime. Also, tourism income, another source that can expand foreign reserves, is unlikely to surge in the coming days, as Nepal has not been able to build new international airports to bring in more tourists and diversify tourism destinations. On top of that, the flow of foreign direct investment, which stood at Rs13.5 billion in the last fiscal year, has remained negligible.

 

“Nepal must speed up reforms to boost exports, capitalise on tourism stock that the country has and attract more foreign investment,” said Sharma. “If corrective measures are not taken on time, out dependence in remittance will continue to grow, which will take a toll on the economy.”

 

Nepal must reduce its dependence on workers’ remittance because the number of people leaving for foreign job destinations has fallen for three consecutive years. Lately, number of workers leaving for Qatar, one of the largest recipients of Nepali labourers, has also dropped sharply because of an economic blockade. In the first two months of the current fiscal year, the number of workers leaving for Saudi Arabia, another major foreign employment destination, has also fallen, as the country has started cutting back on public spending due to low international oil prices.

 

It took almost two years for Nepal to feel the repercussions of the 2007-08 global financial crisis. Considering this, it could be said Nepal will get hit by economic troubles currently facing Gulf countries-where big chunk of Nepalis are working-in around two years’ time. Nepal must buckle up fast, as the clock has started ticking.