Nepal’s economy struggles with import dependence

Nepal’s economy is in the precarious position of being dependent on remittances for its foreign exchange (FX) reserves, and on imports for much of its food, fuel, and consumer goods. This delicate balance was thrown off by the arrival of Covid-19, which disrupted supply chains and saw remittances dry up as borders closed and overseas workers lost their jobs.

Remittances account for up to 30% of Nepal’s gross domestic product, representing $9bn. Prithvi Pande, chairman of Nepal Investment Bank, says the country’s dependence on remittances is one of the biggest risks to its economy. This is compounded by the use of informal channels, through which equivalent sums are sent back to Nepal each year. 

The issue is compounded by companies using remittances as a way of raising their own access to FX. “Businesses can’t transact in dollars freely, which hurts those who want to import, including services,” explains Subash Sharma, CEO of financial software company F1Soft International. “Companies are using informal remittance channels to serve their need for dollars. Hundi, or Hawala, services, which provide informal cross-border remittances, offer consumers better rates than banks, and they then use the funds for imports. Additional funds are settled outside the country and are never reflected in the formal economy.” 

To encourage migrant workers to use the formal banking system, some are devising specific services. Global IME Bank has moved to actively support those that are going overseas to send their funds back home through the official channels and, in turn, increase FX reserves. 

“As a bank, we have established a business centre, processing 500 visas per day and helping travellers to set up bank accounts at the same time,” says Ratna Raj Bajracharya, CEO at Global IME Bank. “They are given a $100 loan on a prepaid card to help them with their initial costs on arrival.”

There are benefits to workers travelling overseas. Alice Brooks, senior economist, Nepal at the World Bank, says: “Besides money, migrant workers also bring back their experiences of working abroad.” 

This idea is echoed by Brajesh Panth, chief of education, Asian Development Bank (ADB), who says the bank understands that the draw of overseas work will continue, so aims to improve the prospects of those leaving Nepal. “The ADB is developing a project on skills development to support workers looking for employment overseas,” he says. “Remittances are such an important aspect of the economy so the plan is to improve their abilities to mid-level skills to help them find better paid employment.” 

FX reserves 

The dependence on funds from overseas can fluctuate, and never more so than during the Covid-19 pandemic, when the sum being remitted annually fell to around $6bn. While this has begun to increase – Nepal Rastra Bank reported reserves grew by $170m in the month to mid-June 2022 – there has been a noticeable impact on the country’s reserves. In the 11 months of the fiscal year to mid-June, the FX level has declined by 19.6%. There are currently around six months of reserves. 

This has raised unfavourable comparisons to the situation in Sri Lanka. However, the general view is that Nepal is far from that situation. Faris Hadad-Zervos, country director for Maldives, Nepal and Sri Lanka at the World Bank, says Nepal’s FX reserve levels are above the International Monetary Fund’s estimated optimal reserve levels of five and a half months of import cover.

But he adds a word of caution. “There is no room for complacency, and now is the time to leverage the challenges of the global environment in order to carry out key macro-fiscal reforms to ensure future resilience and a sustainable growth path,” Mr Hadad-Zervos says. “The issue of import restrictions requires additional analysis regarding the extent of the restrictions before coming to a definitive conclusion. However, over the long term the restrictions may become a drag on growth.” 

Anirvan Ghosh Dastidar, CEO, Standard Chartered Nepal, says: “Reserve issues have been blown out of proportion, but by starting capital controls it will prevent issues arising. The biggest risk is from the energy market due to the rising cost of oil and interest rates.” 

Import restrictions 

In the face of the FX crisis, the government formally banned the import of luxury or non-essential goods, ranging from tobacco products and foreign snack foods, to diamonds, smartphones and large televisions. The ban was due to remain in place until at least the end of the fiscal year in July 2022, but it has been extended to the end of August.

Roshan Kumar Neupane, CEO of NIC Asia Bank, says this dependence on foreign goods has a wide-ranging impact. “Nepal imports NPR1800bn ($14bn) of products, and exports NPR200bn. Imports dwarf our export levels. If it increased, there would be a balance of trade and a balance of payments. We need to replace imported products with domestic produce. This would empower the country across generations. With greater access to tech and credit, this would help expansion.” 

ADB’s Mr Panth adds: “If Nepal produced more green energy, it could move towards electric vehicles and reduce its dependence on fuel imports. There are also issues around food imports. There is some progress on growing produce, but this needs more deliberate support for entrepreneurship.” 

Alternative energy 

Finding ways to reduce the dependence on energy imports is one area in which Nepal may have a solution. Fuel imports account for 14.1% of Nepal’s total imports. Producing electricity domestically would dramatically lower this. 

Energy generation could provide a needed export market. Rajib Maharjan, assistant vice-president at credit rating agency ICRA Nepal, says: “The plan is to export electricity generated through hydropower, as there will be surplus energy generated in the optional period across six months of the year. The national grid is looking at export prospects and diplomatic agreements have been signed with India for around 200 megawatts.”  

Moving towards hydropower would help the country to commit to its carbon goals. At COP26, Nepal pledged to be carbon neutral by 2045. “An increasing part of the conversation is the impact of climate change on the Himalayas and on watersheds, and how it links to Nepal’s hydropower ambitions and the future drivers of growth,” Ms Brooks says. “These watersheds affect billions of people. It is important for the country to address these issues and longer-term trends.” 

Significant work needs to be done to improve infrastructure. Sailesh Subedi, head of rating division at ICRA, says: “The electrification of Nepal is not 100%; the current electricity demand is not reflective of optimum energy consumption by households and industries, and the demand boost can be expected if users develop confidence in the stability and round-the-clock availability of grid energy. For that, work needs to be done to improve the efficiency and reliability of energy supply lines.” 

These projects may help attract investment. Sunil KC, CEO at NMB Bank, says: “The move towards green energy and hydropower is presenting a lot of opportunities. Large-scale projects will help to attract funds to the country and open Nepal up to the international markets.” 

A skilled workforce is needed to operate these facilities, which may create a new area of industry expertise in the country. “Nepal wants to reduce its pollution levels and move towards green energy and transport,” ADB’s Mr Panth says. “There is a lot of potential here to support aspirational youth, but also develop non-traditional roles for women, in particular. A sector which cuts across these issues is developing better science, technology, engineering and mathematics educational programmes and access to university.” 

However, the stumbling block of regulation remains between Nepal’s energy goals and international market access. Mr Dastidar says: “Sustainable finance facilities would be a significant advantage, however under the current rules this is not possible. Instead, the focus is on blended finance. There is a real need to reform. The intent is there, but the pace is slow.”