With two key sources of foreign currency—remittance and exports—suffering, the country’s economy is heading towards turbulent times.

The remittance declined for three consecutive months of the current fiscal year, and growth has remained sluggish at the end of first half. Exports also witnessed a considerable drop. The remittance inflow during the review period increased by just 3.9 percent to Rs 275.95 billion against the rise of 34.4 percent in the corresponding period last fiscal.

Likewise, the country’s exports declined by 3.9 percent to Rs 43.39 billion as opposed to the rise of 15 percent in the review period last fiscal. On the other hand, imports surged by 13 percent to Rs 378 billion. “Remittance has glossed over the weakness of Nepal’s economy,” said Rameshwar Khanal, former finance secretary.  “Otherwise, the country would have obviously face economic crisis with the current level of export earnings.” The country’s export- import ratio remains 1:10 as of the first half of this fiscal.

According to Khanal, if the remittance inflow decreases or stagnates and exports also decline, there will be pressure to devalue the currency which will fuel inflation. “The high price rise in goods will encourage people towards hoarding, leading to artificial scarcity of goods in the market which will invite economic crisis,” he said.

The decline in remittance has coincided with a massive smuggling of gold, which has occupied the domestic bullion market while formally-imported gold by the banks remains unsold.

Suspecting the use of remittance in gold smuggling, Nepal Rastra Bank has even proposed that the government reimburse  commission to the migrant workers for remitting money home to encourage them to use formal channels.

Remittance has long been the main source of import financing. Measures to boost exports and lower the dependancy on remittance have failed to deliver expected results. Having failed once to attain an export target of Rs 100 billion by the end of 12th plan (fiscal 2012-13), the government reset the same target for the 13th plan (2013-2016).

Former Commerce Secretary Purusottam Ojha said the government policy itself was “misguided” which is evident from the fact that the government has given cash incentives for exports to countries other than India even as the southern neighbour accounts for two-thirds of Nepal’s total exports.

Currently, the government offers 1-2 percent cash incentive to exporters on 30 goods with at least 30 percent value addition. The facility is applicable to exports to countries other than India.

However, Khanal believes that export incentive would not make any difference in Nepal’s capacity to exports. “As long as the cost of production and transport remains high with uncertainty of timely delivery of goods, increasing exports substantially remains a big challenge,” he said.

The first half of this fiscal saw overall exports dip on the decline in exports to India. Nepal’s exports to India decreased 8 percent  in the review period as lesser amount of goods such as cardamom, jute, zinc sheet, copper wire, among others, were shipped to the neighbouring country during the period.

Besides low export capacity of Nepal, Ojha pointed out, exports to India suffered also due to quarantine-related problems and various taxes imposed by state governments in India against the spirit of trade treaty between the two neighbours.

Published on: 22 February 2015 | The Kathmandu Post