Forex reserves, BoP to come under pressure

  • quarterly review of monetary policy
- Post Report, Kathmandu
While remittance income grew by 3.2 percent (to Rs171.8 billion) in the first quarter of the current fiscal year, imports jumped 69.1 percent to Rs220.7 billion

Dec 25, 2016-Lethal combination of deceleration in remittance income and hike in imports is likely to exert pressure on the country’s foreign exchange reserves and balance of payments, a latest quarterly report of the Nepal Rastra Bank, the central bank, says.

Remittance income grew by 3.2 percent (to Rs171.8 billion) in the first quarter of the current fiscal year. In the same period last fiscal year, remittance income growth rate stood at 24 percent.

Although remittance growth rate improved to 7.8 percent in the first four months of the current fiscal year, it is still way below 19.4 percent recorded in the same period a year ago. 

Money sent home by Nepalis working abroad has largely been fuelling consumption in the country. Since Nepal produces limited goods, it has to rely on imports to meet consumption needs of people. 

Until now greater inflow of remittance was continuously replenishing the foreign exchange reserves, providing much needed foreign currency to finance imports.

“But the deceleration in remittance income is expected to exert pressure on the external sector, particularly foreign exchange reserves and balance of payments, as imports have continued to rise,” says the first quarter review of the monetary policy conducted for the first time by the NRB. 

Imports jumped 69.1 percent to Rs220.7 billion in the first quarter of this fiscal year. The trend further worsened in the fourth month of the fiscal year, when imports surged by a whopping 87.4 percent to Rs301.7 billion. 

One of the reasons for significant jump in imports this year is trade blockade imposed by India last year which triggered unnatural fall in imports. 

So, a low base of imports in the last fiscal year and normalisation in consumption after the end of the trade embargo have caused import figure to swell this year, NRB officials said.

While imports have leapfrogged, exports have been going up at a slower pace. In the first four months of the current fiscal year, for instance, exports went up by 17 percent to Rs24.5 billion, widening trade deficit to Rs277.1 billion.

The widening trade gap did hit current account in the first quarter of this fiscal year, recording a deficit of Rs2 billion. But recovery was made by the end of the fourth month of the current fiscal year when current account posted a surplus of Rs1.9 billion.

The balance of payments, on the other hand, has remained in the positive territory since the third month of the current fiscal year, while gross foreign exchange reserves grew by 1.6 percent to $9.9 billion in the first four months of the current fiscal year.

“Since macroeconomic indicators appear mixed, the trend needs to be watched carefully in the coming days,” says the NRB report.

Also, what is worrying, as per the report, is the government’s inability to increase spending.

The government has not been able to increase spending, especially capital spending, in a desired manner despite rapid hike in revenue, says the NRB report. As a result, treasury surplus stood at Rs196.6 billion at the end of first three months of the current fiscal year, adds the report.

“As funds are locked up in state coffers, the level of excess liquidity in the banking sector has drastically come down,” the report says. “So, the future direction of public finance will affect direction of monetary policy.”

Published: 25-12-2016 09:06

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