Remittances are the life line of Nepali economy as they provide a cushion to foreign reserves and help finance imports. At household level, remittances have helped consumption and build-up of human capital.
However, during the recent months, the gap between remittances and imports is widening creating pressure in foreign reserves. Foreign reserves of the country declined from Rs. 1470 billion in mid-October 2020 to Rs. 1319 billion in mid-October 2021. Declining reserves and increasing imports has pushed the foreign reserve adequacy of the country from the imports of goods and services of 7.8 months from 14.1 months a year ago. (NRB, 2021).
Source : NRB (2021)
Declining reserves has called the attention of the government, policy makers as well as economists in the recent months. There is a risk of a structural tending of falling reserves if imports continue to pick up in the medium term. As shown in the chart below, foreign adequacy reached as high as 15.6 months of imports of goods and services and is continuously declining thereafter. Likewise, foreign reserves reached the highest point of Rs. 1506 billion in mid-November 2021 and has followed a downward trend.
Source : NRB (2021)
It seems that the policymakers need to come forward
with concrete measures to manage imports and promote exports and tourism industry as a sustainable source of forex reserves in case remittances cannot support the imports. If the current trend persists and policymakers ignore the pressures created in currency account balance, balance of payments and foreign reserves, Nepal may face a structural problem in the external sector as faced in the 1980's.
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