Report on economy

Nepal´s potential Balance of Payments (BoP) crisis seems to have receded, at least for now. According to economic data for the fiscal year 2009/10 compiled by the central bank, the BoP deficit was limited to Rs 2.62 billion. This is good progress given that the BoP deficit was hovering over 23 billion rupees by the middle of the fiscal year. As remittances slowed and imports grew at an alarming rate during the first half of fiscal year 2009/10, it seemed at one point that we would soon exhaust our foreign currency reserves.



It was stupid on our part to keep customs duty on gold and silver imports too low for too long. Because of the low customs duty on gold and silver it became lucrative for businessmen to import these precious metals and re-export them to India. During the past one year alone, Nepal imported gold and silver worth 43 billion rupees, almost 30 billion rupees more than our domestic consumption needs. Though belatedly, the government realized the mistake and raised the customs duty and that eventually help contain the BoP deficit.



There is also another piece of good news in the central bank´s report: robust growth in revenue mobilization. Revenue grew at a healthy rate of 25.4 percent to reach 179.95 billion rupees. This is the second year in a row that the government has realized its revenue target. But there is still a lot of scope for increasing the revenue mobilization rate, as is indicated by the still low revenue-GDP ratio of 15.4 percent. Unfortunately, political instability is likely to drag down this positive trend. The caretaker government has no mandate to change the rates of taxation, and this factor will have an adverse impact on revenue mobilization for the ongoing fiscal year.



The central bank report is not without some bad news, however. Our perennial problem of trade deficit continues to worsen, raising questions about the long term sustainability of the economy. Nepal´s merchandise export continued to decline this year as well-- compared to the earlier fiscal year, exports declined by 9.7 percent in 2009/10. This decline was accompanied by a whopping surge in imports, by 33.2 percent. As a result, our trade deficit (exports minus imports) this year expanded by over 46 percent to reach 317 billion rupees. When a country exports only about one-fifth of what it imports, it automatically raises questions about how sustainable such an economy will be in the long run. If we fail to increase the number of our exportable items, diversify our export destinations and add more value to the exports, the Nepali economy will be in trouble sooner or later. To assume that remittances will keep the economy afloat forever is to quietly await inevitable doom.

Related story

Nepal's informal economy is 41 percent of GDP