Widening Trade Deficit, Decreasing Remittance
It seems golden days are slipping fast when remittance would cover Nepal’s trade deficit. Recent reports show that now onwards foreign currency earned by Nepali migrant workers abroad will be insufficient to pay for the goods imported from other countries. A recent report citing the Department of Customs stated that Nepal’s trade deficit in the last seven months of this fiscal year had widened almost by 18 per cent compared to the same period last year.
According to the report, Nepal imported goods worth approximately Rs. 658 billion while it exported goods worth about Rs.48 billion in the seven months. On the other hand, both the remittance inflow and number of outbound migrant workers has already declined. The Macroeconomic Report of the Nepal Rastra Bank, the central bank, had in December 2017 showed that inflow of remittance had fallen by 1.4 per cent in the four months, from mid-July to mid-November in 2017, of the current Nepali fiscal year as the country received Rs. 228.95 billion in the period while it had received Rs. 232.1 billion in the same period in 2016.
Given that annual remittance inflow is about 700 billion rupees and that the trade deficit in the last seven months has already exceeded 600 billion rupees and it is unlikely that a 100 billion rupees will suffice for the imports of the remaining five months, it is most likely that for the first time trade deficit will surpass the remittance amount, which will ultimately hit Nepal’s trade capacity hard and make an adverse impact on national economy. It is most likely that the foreign currency earned from tourism, which at present is about 53 billion rupees in a year, will also be insufficient to cover the trade deficit for the current fiscal year.
Decline in remittance will certainly have multiple impact on economy as the share of remittance in nation’s GDP is almost one-third, 32 per cent. Slowdown in remittance will not only decelerate economic activities but also decrease consumption and imports, which will decrease government revenue and affect people’s living standard. Nepal’s national revenue/income is dependent on import taxation. Decrease in remittance will, sooner or later, result in decrease in import and subsequently decrease in national income and drop in the rate of GDP growth.
It is estimated that over 60 per cent households in Nepal receive remittance. According to the report of the 3rd Nepal Living Standard Survey 2010-11, about 55.8 per cent households received remittance. The percentage of households receiving remittance must have increased since then because the number of outbound migrant workers was increasing till 2015. In this sense, remittance is also matter of great importance related to economic activity, living conditions of over three-fifths of the total population.
Economic activity is also dependent on how the government spends annual budget, particularly the capital/development expenditure, in the given country. In Nepal’s case, it is not so encouraging. The mid-term evaluation of the current fiscal year carried out a few weeks back showed that only 23 per cent of development budget was mobilised so far. Of 335 billion rupees allocated for capital expenditure or development budget, only 77 billion have been used in the last seven months. It is very unlikely that the new government which was formed just a month back will be able to spend the remaining 77 per cent of the development budget in the remaining five months. However, 47.6 per cent of the recurrent expenditure (salary for the government employees, officials) was used in the same period. Of 1.279 trillion rupees annual budget, the Government had allocated Rs. 803 billion as recurrent expenditure for this fiscal. Overall only 38 per cent of total budget was found to have been mobilised within the evaluation period whereas it should have been over 45 per cent. The lack of the mobilisation of the development budget in time must have affected job creation, development pace and consumption, and as a result national income.
Nepal has a trade deficit of over 6 billion USD with India, Nepal’s largest trading partner. According to data of the Trade (and Export) Promotion Center, Nepal imported goods worth 6,561,869,841 USD from India whereas it exported goods worth 418, 516,909 USD in 2017. This means Nepal’s trade deficit with India was over 600 billion rupees in the year just passed. Nepal’s trade deficit with China, the northern neighbour and second largest trading partner, is no less disappointing. Nepal imported goods worth 1,271,409,408 USD from China whereas the country exported 22,418,356 USD to China, which means Nepal had a trade deficit of over a billion USD (or over 100 billion rupees) with China in 2017. It should be noted here that Nepal conducts trade with over 94 countries and the countries with which Nepal has wide trade deficit include Japan, South Korea, Indonesia, Argentina, France, Vietnam, and Malaysia. Nepal also has trade surplus with some 18 countries.
Due to weak production base, Nepal has not been able to utilise the zero-tariff facility to certain Nepali products by developed countries. Despite being an agricultural country, the country also imports food grains worth of billion rupees.
Maintaining balance of payment and keeping foreign exchange reserve strong enough will be a tough job for the new government in the face that remittance and foreign currency earned from tourism will fail to cover trade deficit. But there are many options. One good option is to attract foreign direct investment, which will be doubly advantageous. Because of the FDI, the country will get foreign currency and it will also enhance job creation and economic activity due to opening of the new industries. It is good that, as his first decision while assuming the office for the second time on February 15, Prime Minister KP Sharma Oli made it that an industrial park will be built in each and every local level which number 753. If his decision gets fully materialised within next five years, it is expected that most consumer goods presently imported from other countries will be produced in the country, which will ultimately reduce trade deficit.