[This blog post is adapted from Nepal’s Macroeconomic Update, August 2013, published by the ADB. Here is a previous blog post on real sector, fiscal sector and monetary sector.]
EXTERNAL SECTOR
Exports
Export performance has continued to be sluggish. Merchandise exports (fob) registered a decline of 2.9% in FY2013 in US dollar terms, down from a growth of 6% in FY2012.[1] Exports in FY2013 totaled $981 million, down from $1 billion in FY2012, reflecting weak export demand as well as the continued decline in competitiveness arising from the rising costs of production, power shortages, and political uncertainties. Overall, merchandise exports declined to 5.1% of GDP in FY2013 from 5.3% of GDP in FY2012.
The top five exports to India were pulses ($64.1 million), raw jute ($56.5 million), rice barn oil ($32.8 million), stone and sand ($46.9 million), and polyester yarn ($43.9 million. Meanwhile, the top five exports to other countries were woolen carpets ($69.3 million), readymade garments ($35.2 million), pulses ($30.5 million), pashmina ($18.9 million), and tanned skin ($11.5 million). While the export of agriculture and processed goods is increasing, garments and manufacturing are decreasing (Figure 29).
Figure 1: Top five exports to India and third countries ($ million) 
Source: Nepal Rastra Bank
Imports
Merchandise imports (cif) in dollar terms grew by 10.8%, up from 4.5% in FY2012. Of the total imports of $6.2 billion in FY2013, 19.6% was oil imports. In US dollar terms this is equivalent to $1.2 billion, higher than value of the country’s total exports. In FY2012, oil imports accounted for 20.3% of total imports. The high quantity of oil imports reflects the rising demand for petroleum products largely due to the persistent and long hours of power cuts and the depreciating Nepali rupee. Overall, merchandise imports increased to 32.2% of GDP in FY2013 from 29.6% of GDP in FY2012.
The five top imports from India were petroleum products ($1,222.3 million), vehicle & spare parts ($300 million), steel billets ($254.5 million), medicine ($152.2 million), and other machinery and parts ($137.1 million). Top imports from other countries were gold ($297.9 million), telecommunication equipment ($153.9 million), crude soya oil ($121.2 million), silver ($100.2 million), and other machinery and parts ($92.8 million).
Figure 2: Top five imports from India and third countries ($ million) 
Source: Nepal Rastra Bank.
Remittances
Remittance income has continued to grow with increased labor migration reaching $4.9 billion (25.5% of GDP) in FY2013, from $ 4.4 billion (23.4% of GDP) in FY2012. Growth of labor migration (those who obtained permits from the Department of Foreign Employment) was 17.9%, higher than the 8.4% growth in FY2012. However, remittance inflow growth decelerated to 11.3% from 26.6% in FY2012. The country received $4.9 billion in workers’ remittances in FY2013, up from $4.4 billion in FY2012. Despite the growth of migrants, the growth of remittance inflows declined partly because: (i) the relatively high wage offering countries such as South Korea and Japan slashed demand for Nepali workers by 24.8% and 17.1%, respectively; and (ii) the demand for Nepali workers in Israel, Lebanon, Afghanistan, Bahrain and Qatar, among others, also fell.
Figure 3: Remittances (% of GDP) and number of labor migrants 
Source: Department of Foreign Employment and Nepal Rastra Bank.
A total of 453,543 migrants left to work overseas in FY2013 (daily average of 1,243 migrants), up from 384,665 in FY2012 (daily average of 1,054 migrants). Malaysia, Qatar, Saudi Arabia and the United Arab Emirates have remained the top destinations for Nepali migrants. These destinations combined account for over 85% of total overseas labor migration (Figure 32). As a share of total migration, labor migrants to Malaysia increased from 25.6% in FY2012 to 34.6% in FY2013, largely because of the relatively attractive pay packages offered by Malaysian companies, especially in the industrial and plantation sectors. Consequently, the growth of remittance inflows is expected to be higher in FY2014.[2] In FY2013, the surge in workers’ migration to Malaysia and other countries more than offset the decline in the number of migrants to the countries listed above.
Figure 4: Destination-wise distribution of labor migrants 
Note: Migrants to India are not included as they do not require employment permits.
Source: Department of Foreign Employment.
Balance of Payments
Although the country’s external situation continues to be stable, it weakened somewhat in FY2013. Overall, the balance of payments surplus declined to $786.5 million (4.1% of GDP) in FY2013 from $1.6 billion (8.6% of GDP) in FY2012. The year saw a widening of the trade deficit to $5.3 billion (27.1% of GDP) from $4.6 billion (24.3% GDP) in FY2012. The surge in the trade deficit coupled with the deceleration of remittance inflows (growth of 11.3% in FY2013 as against 26.6% in FY2012) sharply lowered the current account surplus of $941.3 million (4.9% of GDP) in FY2012 to $651 million (3.4% of GDP) in FY2013. Both the capital account and financial account registered a significant decline (by 30.8% and 47.8%, respectively) in FY2013. Foreign direct investment registered a decline of 9%, totaling $103.6 million, down from $113.9 million in FY2012. Gross foreign exchange reserves increased from $5.0 billion in FY2012 to $5.6 billion in FY2013, sufficient to cover 10.1 months of import of goods and non-factor services.
Figure 5: External sector (% of GDP) 
Source: Nepal Rastra Bank; NRM staff estimates.
Exchange Rate
The Nepali rupee has been continuously depreciating against the US dollar since October 2012, closely following the currency movement of the Indian rupee, to which it is pegged (Figure 34). Overall, the Nepali rupee depreciated by 25.7% between 15 July 2011 and 15 July FY2012 and a further 7.2% between 15 July 2012 and 15 July 2013.
The concerns over the economic slowdown in India, its large current account deficit, and the continued economic woes in the Euro Zone along with concerns over the curbing of quantitative easing by the US Federal Reserve Bank have triggered the weakening of the Indian rupee. The NRB has little traction on exchange rate movements. The sharp depreciation of the Nepali rupee has a number important macroeconomic implications: (i) weaker financial health of Nepal Oil Corporation due the persistent gap between its import costs and selling price, (ii) increased overall import bill as Nepal’s imports are relatively price inelastic, leading to a wider trade deficit; (iii) increased inflation as higher import prices get reflected in retail prices; (iv) increase in Nepal Electricity Authority’s payments to independent power producers whose prices are denominated in foreign currency, and (v) increase in debt service payments. On the positive side, remittance inflows will increase as migrant workers will have more incentives to remit money back home.[3] Similarly, exports could rise to some extent (but subject to recovery of external demand and increase in domestic industrial capacity utilization, which stands at around 60%).
Figure 6: Daily nominal exchange rate (NRs per $) 
Source: Nepal Rastra Bank.
[1] The exchange rate used is the average of monthly rates. It was NRs 72.1, NRs 80.7 and NRs 87.7 per dollar in FY2011, FY2012 and FY2013, respectively.
[2] Note that it could still be lower than the 26.6% growth in FY2012.
[3] It may be noted that almost 80% of remittances flowing to households is used for daily consumption and just 2.4% in capital formation.
