Ukraine crisis hits Nepal economy hard

Nepal has been experiencing moderate inflation in the past six years. It rose to 7.11% in November but came down to 5.66%. However, the NRB estimates that the inflation rate could reach double digits this year. The monetary policy for the current fiscal year had set a target of limiting the inflation rate to 6.5%. 

Former Executive Director of NRB, Nara Bahadur Thapa, says that there is indeed a risk of double-digit inflation. “Consumers have been hit hard again by inflation, with the poorest and most vulnerable bearing the biggest burden,” he adds. 

On the other hand, rising prices of petroleum products and raw materials in the international market will also increase the production cost of Nepali industries. This means a higher cost of development projects, which in turn will force the government to increase the budget allocation for such projects.

This worsening war also has far-reaching consequences for Nepal’s balance of payments deficit which will widen in the coming months, putting more pressure on foreign exchange reserves. 

In recent months, Nepal’s foreign exchange reserves have been depleting fast with imports exceeding earnings. Nepal has lost about 23% of its foreign exchange reserves in the last year.

In January 2021, Nepal had enough foreign exchange reserves to import goods and services for 12 months and 18 days at $12.77 billion, primarily due to reduced consumption during the pandemic.

But as the Covid-19 subsided and imports rose again, its foreign exchange reserves dwindled to $9.88 billion by January this year, enough to pay for only six months and 18 days worth of imports. 

In the same period, Nepal’s balance of payments deficit stood at Rs241 billion, which is a record high. Such a sharp decline in foreign exchange for a country like Nepal, which does not have a reliable and sustainable source of hard currency earnings, spells disaster. 

As commodity prices rise in the international market, Nepal will also have to pay more for the same amount of goods. As of February, the import volume of petrol has increased by only 24% as compared to the same period last year, but due to the increase in the price in the international market, Nepal has to pay 110% more. 

Likewise, the import volume of diesel has increased by 10%, yet the cost of its import increased by 84%. While the import volume of coal decreased by 3%, the amount to be paid increased by 38%. 

Even though the import volume of iron and steeel products remained the same as last year, the price to be paid by Nepal has increased by one-third. 

Nepal has already incurred Rs1 trillion in trade deficit in the first seven months of this fiscal year. While the country spent Rs11.47 trillion in importing goods, it has exported products worth only Rs131 billion. 

In response, the NRB in recent months has been deploying various measures to discourage imports. But it is ineffective in the face of international price hikes for commodities. Even if Nepal drastically reduces imports, it will not be able to reduce the amount it is due. 

Another major impact of this will be felt in the power sector. Nepal Electricity Authority (NEA) has been importing 600MW of electricity from India. But due to the increased price of coal and supply bottleneck, India has started cutting 200MW that it has been providing to Nepal at a concessional rate. Moreover, Rs3 per unit that Nepal has been paying India has now increased to Rs7. 

If India further cuts power export due to an energy crisis, Nepal risks going back to electricity rationing. Although the installed capacity of Nepal’s electricity generation now exceeds 2,000MW, it falls to one-third during the dry winter months when river flows is low. The rest has to be augmented with imports from India. 

Translated by Sonia Awale from the Nepali original at himalkhabar.com

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