The latest update from the central bank shows that Nepal had a balance of payments (BoP) surplus of Rs 2.93 billion in fiscal year 2010/11 after two years of negative BoP. BoP is an accounting record of all monetary transactions between a country (Nepal) and the rest of the world. The reasons for this positive news are an increase in government capital transfers and external loans and decrease in the current account deficit, which came down to to Rs 11.91 billion.
Nepal’s BoP is composed of three sections: Current account, capital account and financial account (there is ‘balancing item’ as well to account for statistical errors). Current account is the sum of balance of trade (exports minus imports of both merchandise goods and services), net factor income (such as interests and dividends), and net transfer payments (such as remittances, foreign aid, and pensions). This is the most important section in the BoP.
Trade deficit increased by 5.4 percent to Rs 330.34 billion during the year (almost two-thirds of it with India). Exports in 2010/11 grew by 6.1 percent while imports grew at a slower rate of 5.5 percent.
Remittance inflows amounted to Rs 253.55 billion, a growth of 9.4 percent over last year´s receipt. A total of 354,716 workers went abroad (an increase of 20.61% over last year). Imports from India increased by 20.5 percent (the previous fiscal year it was 33.7 percent).
FDI inflows amounted to Rs 6.44 billion last fiscal year. A total of 171 joint ventures were approved by the Department of Industry.
The country´s gross foreign exchange reserves increased by 1.2 percent to Rs 272.10 billion in mid-July 2011. The reserves were at Rs 268.91 billion in mid-July 2010.
The annual average inflation remained at 9.6 percent in 2010/11. Despite a 14.7 percent rise in food prices, the annual average consumer price index moderated because prices of non-food items and services grew at a low rate of 5.4 percent. Annual average salary and wage rate index rose by 18 percent in 2010/11.
- Balance of payments: Rs 2.93 billion
- Current account: –Rs 11.91 billion
- Balance of trade: –Rs 330.34 billion (growth of 5.4%; exports grew by 6.1% and imports grew by 5.5%; exports amounted to Rs 64.56 billion and imports Rs 394.90 billion)
- Net transfers (grant, pension, remittance and duty refund): Rs 307.86 billion (growth by 8.9%)
- Remittance inflows: Rs 253.55 billion (growth of 9.4%)
- FDI inflows: Rs 6.44 billion (FDI commitment was Rs 10.05 billion)
- Forex reserve (as of mid-July 2010): Rs 272.10 billion (growth of 1.2%)
- Inflation: 9.6%
- Petroleum import: Rs 75.07 billion (almost Rs 10 billion higher than total export revenue)
- Gold import: Rs 11.35 billion
- Revenue mobilization: Rs 200.79 billion
- Budget deficit: Rs 50.63 billion
While it is good news that BoP is in surplus, there isn’t much to cheer about looking at the positive figure. The fundamentals of our economy have not changed to make a positive impact on economic growth, manufacturing sector and export potential. This is evident from the fact that trade deficit is continuing to increase (though at a bit slower rate). Remittances (precisely net transfers) helped a bit in reducing current account deficit (which came down to –Rs 11.91 billion from –Rs 28.14 billion the year before) and eventually BoP situation. A lot of previously unsettled transfers has taken place, pushing up the BoP account in the positive territory. Inflation has remained sticky at nearly double digit level.The monetary policy for last fiscal year targeted to attain a BoP surplus of Rs 7 billion, which was tagged as ambitious target.
The growth rate of exports was higher than that of imports not because of an increase in manufacturing capacity; it was increasing at this modest rate in previous years as well. The low imports growth last fiscal year was due to curb in gold imports. Again, nothing much to cheer about on this front as well except for the fact that BoP was in the positive territory.
The broader point here that is that despite a marginal increase in exports, which was higher than growth of imports, and balance of payments surplus last fiscal year, we still are in a deep trench. Our economic fundamentals have not changed. The same problems that have been plaguing our exports sector are obstinately persistent. Supply-side constraints such as intermittent blockades, labor disputes, and lack of adequate infrastructures (primarily road transport and electricity) are further eroding our competitiveness. These constraints are mostly exogenous in nature. They are making our exports uncompetitive and are also preventing diversification of exports basket.
That said, some endogenous factors such as the lack of entrepreneurship and innovation in exports sector, the ignorance about the rapidly changing and globalizing market, and the inability to embrace a change in restructuring production, marketing and distribution structures of firms are some of the other factors ailing the growth of industrial and export sectors.
Most of these are non-economic constraints. So, the set of solutions are political consensus on national agenda regarding export and industrial promotion, amicable settlement of labor disputes, and simplification of rules and procedures regarding construction of infrastructures directly related to these sectors. It should be aided by promotion of entrepreneurship in and restructuring of exports sector. Else, our exports and industrial competitiveness will continue to decline, resulting in a widening trade deficit, prolonging of BoP crisis, further slowing down of growth rate, and stagnating employment opportunities.