Nepal does not have strong economic ties with Russia or Ukraine, but the war between these two countries has damaged the already weak economy of the Himalayan nation.
Soaring fuel and food prices caused by the conflict are hitting Nepal’s economy, which has already been weakened by a pandemic-induced loss of tourism, falling remittances, a growing trade deficit and the depletion of foreign exchange reserves.
Even before the war, the country’s financial health was not sound, said Roshee Lamichhane, assistant professor at Kathmandu University. Lamichhane points to declining tourist arrivals and foreign investment, among other issues. “And the ongoing conflict has made it even worse,” she told DW.
Nepal on the way to an economic crisis?
The Himalayan nation of 29 million, sandwiched between giants China and India, depends solely on imports to meet its fuel needs. With world crude prices rising following Russia’s invasion of Ukraine, the state oil monopoly, Nepal Oil Corporation, was forced to raise prices for petroleum products.
The prices of other staples like food, soybeans and palm oil as well as iron have also increased, making life much harder for many Nepalese.
Annual inflation based on consumer prices accelerated to 7.1% in mid-March, a five-year high, from an average of 5.18% over the past three years.
Rising prices and a soaring import bill have had a negative effect on the trade deficit and the value of the national currency, raising fears that it could lead to a balance of payments crisis, which occurs when a country is unable to pay for its imports or service its external debt payments.
The trade deficit rose 34.5% year-on-year to 1.160 billion Nepalese rupees ($9.5 billion, 8.8 billion euros) in the first eight months of the financial year, costs import increased.
Nepal’s gross foreign exchange reserves fell to $9.75 billion in mid-February, down 17% from mid-July last year at the start of its financial year, Reuters reported. . Current reserves are estimated to be sufficient to support imports for approximately six months.
Meanwhile, remittances from abroad – which account for up to a quarter of Nepal’s GDP – fell 5.8% to $4.53 billion between mid-July and mid-February, according to central bank data. Nepal is the fifth most remittance-dependent economy in the world, with estimates suggesting that there are around 3-4 million employed Nepalese migrants globally.
In a bid to save foreign currency reserves, authorities this month imposed restrictions on imports of luxury goods such as cars, gold and cosmetics.
But Lamichhane is skeptical of the long-term effectiveness of the move. “It can be useful to improve foreign exchange reserves in the short term. But it is not a sustainable way to solve the problem,” she said, adding that the country must increase local production and trade. .
Central Bank chief’s suspension draws criticism
Officials say Nepal’s GDP growth target of 7% for the financial year to mid-July will likely be missed.
“The current problems are the cumulative result of our failure to invest in wealth creation,” Govind Raj Pokharel, former vice-chancellor of the National Planning Commission, told DW. “Since the economic reforms of the early 1990s, successive governments have failed to invest in wealth creation and have instead relied on the easy flow of remittances and import tariffs to keep our economy running.”
Meanwhile, Prime Minister Sher Bahadur Deuba’s government has suspended central bank governor Maha Prasad Adhikari and appointed his deputy as acting chief.
The government accused Adhikari of leaking sensitive information and formed a panel to investigate the charges against him.
But this decision has drawn strong criticism from some observers and opposition parties.
“The impeachment of the governor at this critical time is a tragedy,” Bishwambher Pyakurel, a prominent economist and former board member of NRB, said in a public address recently. “It’s not good for the country’s financial stability.”
This view is shared by Pokharel, who said Deuba chose the wrong approach to the situation.
He argued that the government should have first concluded its investigation into the charges against Adhikari before taking action against him.
Not comparable to the economic turmoil of Sri Lanka?
Nepal’s economic difficulties have drawn comparisons with Sri Lanka, which has been hit by severe economic turmoil in recent weeks.
The island nation, which has seen mass protests and calls for the resignation of President Gotabaya Rajapaksa, has embarked on a path of sovereign default amid onerous external debt and a shortage of reserves. exchange.
Despite comparisons with the current situation in Sri Lanka, Nepal is not going down this road, said Pyakurel, who previously served as Nepal’s ambassador to Sri Lanka.
“The situation is still manageable if we receive a little more remittances and foreign tourists, and if we are able to increase our exports and local production,” he said.
Edited by: Srinivas Mazumdaru