Unlike Sri Lanka, Nepal is witnessing an uptick in tourism and remittances and the Himalayan nation may survive current financial crisis

Nepal is currently experiencing a credit shortage due to the liquidity problem. Nepal witnessed a similar situation last year also. The credit deposit ratio of nearly all banks has surpassed 90 percent, preventing them from lending money to clients. During this time span, deposit interest rates have shot up. This is despite the fact that deposits are insufficiently substantial. The government is unable to utilise its budget as planned, which has a severe impact on the flow of funds into Nepal's economy.

The current financial crisis in Sri Lanka has set off political uncertainty and conflict in the island nation. It is considered "debt-trapped" and unable to service the international debt obligation. In this backdrop, some Nepalese economists are pessimistic about Nepal's economy and compare Nepal's predicament to that of Sri Lanka. However, financial indicators show that Nepal will not face a situation as dire as Sri Lanka on account of following reasons:

n             The government and Nepal Rastra Bank have already taken proactive financial measures to stabilise Nepal's foreign currency reserve

n             Nepal's current currency reserve can cover imports for approximately six and a half months, which is a slightly alarming foreign currency position but is not cause for concern if certain financial measures are taken

n             Nepal's foreign debt is not at an alarming level, and its repayment of foreign loans can be met from its current foreign currency reserve. In addition, Nepal has taken out a foreign loan with a nominal interest rate and with a longer repayment period, which ensures that it will not run out of foreign exchange reserves immediately.

n             Over the past two months, remittance inflows have begun to increase. This is anticipated to continue in the coming days as a result of COVID-19 relaxation in overseas markets, the lifting of movement restrictions in the majority of countries, and the significant increase in outbound Nepali migrant workers in recent years, which will strengthen remittances.

n             The tourism industry has begun to recover, which is another key source of foreign cash for Nepal. To address Nepal's trade deficit, the government and central bank have imposed import restrictions.

However, there is a need to separate luxury items that will have an effect on foreign currency reserves.

Foreign liquors: Despite being a luxury item in Nepal, tourists are likely to prefer the flavour of alcohol they are familiar with, even during their stay in Nepal. So, in a sense, easing the prohibition on alcohol imports could actually help to increase the foreign currency reserve.

Non-essential and necessary items: Permanent categorization of essential and non-essential items is required to address the trade imbalance and preserve foreign currency reserves.

Electric vehicles: Due to the growing demand for fossil fuels, electric vehicles must be encouraged in order to save considerable amounts of foreign currency. In the coming years, the reliance on petroleum products must be diminished. In the foreseeable future, Nepal's economy will continue to rely heavily on remittances sent home from abroad.

Since more than four million Nepalis work abroad and the number continues to rise, this has been the country's primary source of foreign money. As a result of Covid-19, the tourism industry has also made improvements. However, the foreign currency they create for the country should not be wasted on the import of luxury items.

Major hydro projects are being connected to the national grid, which can help the nation earn foreign money by exporting excess energy to its neighbours. The hydro energy sector can be utilised to boost the country's foreign currency reserves. The agriculture sector is another sector with the potential to add to Nepal's foreign currency reserve by exporting organic commodities around the world.

Lastly, the export of unique Nepalese handicrafts and handmade ornaments can contribute to the country's foreign currency reserves. The latest MCC Nepal agreement aims to boost the supply of electricity and reduce transportation costs in Nepal by improving road connectivity. These investments will aid the Nepalese government in providing essential services to its citizens, facilitate the movement of goods around the nation, and provide new opportunities for private investment.

In addition, the MCC Nepal Compact will boost the availability of power and reduce the cost of transportation, which will help in spurring  investment, accelerating economic growth, and reducing poverty. With the 500 million dollar project funding supplied by the United States, the MCC accord would pave the road for development in Nepal. Recent pledges by the United States to give Nepal a donation in installments and international financial institutions, namely the World Bank, the International Monetary Fund, and the Asian Development Bank, also committing to provide grants to middle-income countries may improve Nepal's financial conditions, including its foreign exchange reserves.

(The author is Director, Indo-Pacific Consortium, New Delhi.)