Nepal’s media has been rife with comparisons between Sri Lanka and Nepal.
Madhu Kumar Marasini, Secretary at the Ministry of Finance dispels doubts as Nepalis raise questions about the state of the economy.
Nepali Times: Is Nepal going to be a Sri Lanka?
Madhu Marasini: Nepal’s economy cannot be compared to Sri Lanka. Nepal has historically mobilised enough resources to prevent itself from going bankrupt.
As of January, Nepal has foreign exchange reserves worth Rs11.71 trillion, while the national debt stands at about Rs40.5 billion, which means we are able to pay interest on foreign loans. Whereas, Sri Lanka has Rs7 billion national debt against Rs2 billion in foreign reserves.
The nature of foreign loans taken by Nepal is also different from Sri Lanka, in that Nepal hasn’t taken out large loans or loans with high interest. Moreover, Nepal collects 23% revenue on its GDP, which becomes government spending.
However, what has happened in Sri Lanka has lessons for Nepal, what kinds of loans to take, to what extent tax should be exempt, and the consequences of indiscriminate grants.
Read also: How not to be a Sri Lanka, Editorial
Why doesn’t the government have policies to address foreign exchange reserves, lack of liquidity, and inflation?
Nepalis living abroad sent significant remittances back home during the pandemic, this meant our foreign reserves remained unchanged compared to pre-Covid days not because our exports increased. So when the worst of the pandemic was over and economic activity resumed, imports surged to meet rising demand, putting pressure on our foreign reserves.
At present, we have discouraged the import of luxury goods to reduce the pressure on foreign reserves. Additionally, remittance accounts are now being given 1% more interest, and non-resident Nepalis can open remittance accounts by simply depositing $1,000 virtually.
The hundi remittance network was shut off during the Covid lockdowns. Nepali banks have been encouraged to expand services abroad so that remittance can come through official channels. We are also discussing setting quotas for overseas Nepalis that enable them to obtain shares in companies that facilitate remittances officially.
As far as the liquidity of the banking sector is concerned, credit flow increased although deposits did not go up significantly and has exceeded Rs4.7 trillion, while the size of our economy is Rs42.66 trillion.
Demand for loans increased as economic activity picked up after the pandemic. The refinancing services provided by Nepal Rastra Bank (NRB) also increased loans, whereas concessional loans also saw a significant rise. We have proposed increasing interest rates on loans to reduce demand. Moreover, the local elections have increased public and private spending as well as the budget, which is expected to ease liquidity crises.
It would be better to set up stricter rules for loans now, lest Nepalis have to give up their property and livelihoods to the bank in the future due to bad debts.
Lastly, we have set a 6% inflation target, but that will be challenging to maintain. Because inflation is not just unique to Nepal— it is the result of the disruption of the global supply chain. Demand has grown significantly in the wake of the pandemic, and has been exacerbated by Russia’s invasion of Ukraine— particularly the price of fuel. Rising fuel prices have a domino effect, leading to an increase in transportation and industry costs, as well as commodity prices.
At present, there seems to be little coordination between the Finance Ministry, the NRB, and the National Planning Commission.
The Ministry of Finance, the central Bank and the Planning Commission have been holding discussions to assess the economy and find solutions to problems. We believed increased imports would mean increased economic activity, but our foreign exchange reserves could not sustain that. Additionally, we also could not have predicted global crisis such as Russia’s invasion of Ukraine.
There were other inconsistencies in the economy. For example, there is a widespread misuse of loans, Nepalis have been taking out agricultural loans to invest in real estate. There has been increased spending in luxury goods, and instances of smuggling gold and silver to other countries. This created a perfect storm even as we were working on a long-term economic plan.
Has the government failed to curb the flow of uncontrolled debt?
In retrospect, it would be fair to say that Nepal’s policies regarding credit flow have been liberal to the detriment of the country. Credit flow needs to be controlled, because the increase has not had a positive effect on product expansion or economic growth. There is excessive monetisation in Nepal, which the 2008 global financial crisis taught us is risky.
The agricultural credit that we prioritised and subsidised has been unproductive. Questions have been raised about NRB’s capacity to oversee the payment of such loans. There is a need to increase the capacity to supervise and monitor credit flow.
How will the import control policy be effective when it simultaneously impacts the source of government revenue?
The NRB has urged banks to maintain discipline while distributing loans to make them accountable, and has suggested to tighten the import of luxury goods for the time being, not halt them altogether. The decision whether to stop or continue imports lies with the government, not the NRB.
What is astonishing is that the demand for imports and loans should decrease across the world as interest rates on loans increase, but that has not been the case in Nepal. Which is why we are thinking of employing financial tools and not monetary ones. However, we are trying to find a middle ground, as there is the risk of a double whammy to the economy if both revenue as well as foreign exchange is lost.
Read also: Ukraine crisis hits Nepal economy hard, Ramesh Kumar