KATHMANDU, July 16: Nepal’s balance of payments (BoP) turned negative in the last two years on soaring imports and a fall in the net inflow of foreign direct investment (FDI).
According to the 11 months’ report on the Current Macroeconomic and Financial Situation published by Nepal Rastra Bank (NRB) on Thursday, the country’s BoP registered a deficit of Rs 15.15 billion in the first 11 months of the current fiscal year compared to a surplus of Rs 179.37 billion in the same period of the last year. As of mid-July 2020, the country had a BoP surplus of Rs 282.41 billion.
The BoP records a country’s financial transactions with the rest of the world under three subheadings — current account, capital account and financial account. It is the major indicator to show a country’s net balance in terms of the foreign currency reserves.
The current account, which is one of the main components of BoP for Nepal, registered a deficit of Rs 293.97 billion in the review period compared to a deficit of Rs 62.59 billion in the same period of the previous year. The current account involves the net value of trade in goods, trade in services, transfers and income from abroad.
Nepal’s foreign income has not been able to sustain expenses as imports have exceeded exports by a wide margin, resulting in a trade deficit of a whopping Rs 1262.11 billion in the first 11 months of the fiscal year 2020/21 that ended on June 14. The trade deficit rose by 24.6 percent during the period.
Despite remittance earnings rising by 12.6 percent to Rs 870.94 billion, the exaggerated import bills exerted pressure on the country’s foreign currency reserves. Nepal also faced a net loss of Rs 58.10 billion from the service trade. In the review period last year, the net loss under this heading was only Rs 1.23 billion.
Likewise, the amount of net FDI that the country received during the review period also went down by 13.4 percent to Rs 16.20 billion.
With an expanding BoP deficit, the foreign currency reserves decreased 2.6 percent to Rs 1,365.65 billion as of mid-June 2021. According to the central bank, the foreign currency reserves will be sufficient to finance merchandise imports for 11.1 months.
Keshab Acharya, former economic advisor to the Ministry of Finance, said the pressure on the foreign currency reserves could affect national pride projects that need a large amount of money to purchase equipment from abroad. “It may also affect the country’s capacity to repay foreign debt and sink the country into a debt trap in the long run,” Acharya said.