Is Nepal heading down Sri Lanka’s path?

The Association of Nepalese Rice, Oil and Pulses Industry on Sunday asked the Ministry of Finance to put up import restrictions on rice and pulses after Nepal's central bank asked commercial banks to stop issuing letters of credit for importing luxury goods, including automobiles.

"Nepal has been importing rice and lentils worth billions," said Subodh Kumar Gupta, president of the association. "The cheaper imports are making Nepal dependent on foreign food."

The trade body's appeal and the central bank directive both came as the country's foreign currency began depleting at a rapid rate, The Kathmandu Post reports.

The drain of the foreign currency has also stoked fears of Nepal reaching a situation like Sri Lanka's.

Imports of transport vehicles and parts amounted to Nepali Rupees 75.95 billion in the first eight months; and Nepal, an agrarian country, imported cereals worth Rs56.93 billion.

Nepal's foreign reserves started dropping after a fall in tourism – a mainstay of the country's economy similar to Sri Lanka – and more remittance driving up government debt.

Meanwhile, the governor of the country's central bank was removed from his role earlier this month without any reason given for the dismissal, the BBC reports.

A week ago, Nepal's finance minister said he was "surprised" the issue was being compared with the crisis in Sri Lanka.

At the time, Narayan Prasad Pokharel, deputy spokesperson at the central bank, told the Reuters news agency that the institution believed the country's foreign currency reserves were "under pressure".

"Something must be done to restrict the import of non-essential goods, without affecting the supply of essential goods," Pokharel said.

He added that importers were allowed to bring in 50 "luxurious goods" if they paid for them in full.

"This is not banning the imports but discouraging them," Pokharel said.

According to the country's central bank, Nepal Rastra Bank, foreign currency reserves fell by more than 16% to $9.59 billion in the seven months to the middle of February.

Over the same period, the amount of money sent to Nepal by people working abroad fell by almost 5%.

Government debt in Nepal has risen to more than 43% of its gross domestic product, as officials increased spending to help cushion the economic impact of the pandemic, Nepal's finance ministry said in a statement at the start of April.

Terming the indicators of the country's economic health "normal", the ministry said, "However, due to some pressures in the external sector, some steps have already been taken to manage imports and increase foreign exchange reserves.

Speaking to the BBC, Alex Holmes, an emerging markets economist at the research firm Capital Economics, said the situation in Nepal appears "much better than in Sri Lanka".

Nepal's foreign currency reserves are double what is considered "a comfortable minimum" and government debt "is not particularly high", Holmes said.

"Of course, things will eventually regress if the current account deficit does not narrow," he added. "But a crisis does not appear imminent."

The unprecedented inflation in Nepal, however, means urgent steps are necessary.

In a joint 12-point statement on the ongoing economic situation of Nepal, Bishnu Paudel, Surendra Pandey, and Dr Yubaraj Khatiwada – members of the Communist Party of Nepal (CPN-UML) – warned that Kathmandu is dwindling in the edge of a "collapse", Republicworld.com reported.

Nepal's incumbent Finance Minister Janardhan Sharma, however, has said that the situation is nothing like Sri Lanka's, adding the country is in a "slightly better position" than Colombo in terms of production and revenue.

He said while forex reserves were stressed due to escalated imports of luxury items, Nepal was not burdened with foreign debts like Sri Lanka.

Nepal's inflation galloped to a 67-month high of 7.14% in March and the World Bank slashed Nepal's growth forecast to 3.7%.

According to a World Bank report titled "South Asia Economic Focus Reshaping Norms: A New Way Forward" released on Wednesday, higher commodity prices in Nepal are spurred by the war in Ukraine.

Transportation prices, construction costs and other consumer prices are rising which will dampen overall demand, the report said.

But the finance minister  has stuck to his guns and repeated that the country would achieve a 7% growth, a claim that economists have termed far-fetched.

Economists say that draining reserves, coupled with the high inflation, has made Nepal's situation quite volatile.

"The situation is alarming," economist Bishwambher Pyakuryal told The Kathmandu Post in a recent interview.

Some economists have termed the current situation a short-term phenomenon driven mainly by global factors. But if it continues, the consequences could be more serious, the report added.

"If we spend one-fourth of our earnings on importing goods in just six months, it will increase business activities to some extent. But the reality is that it hampers economic growth in the long run because of low investment in critical infrastructure projects," said Pyakuryal.

"The country is already in a 'first level' crisis," said economist Min Bahadur Shrestha to The Kathmandu Post. "If the government fails to manage things properly, the economic crisis could deepen."

Nepal's largest import is petroleum products.

As of the first eight months of the current fiscal year, imports of petroleum, iron and steel, and machinery and parts had crossed the Rs100 billion mark, The Kathmandu Post reported.