High cost of petroleum imports, lower exports and crashing in-home remittances together with a collapse of the tourism sector due to the COVID-19 pandemic has led to a widening of the country’s trade deficit in the first six months of the current financial year.

Nepal’s trade deficit has increased by 46.64 per cent and currently stands at Nepali Rs. 880.49 billion in the first six months of the current financial year. Nepal’s financial year begins on 15 July and this report covers the six months ending mid-January 2022.

According to the foreign trade statistics division of Nepal’s Department of Customs, the export trade has increased by 95.48 per cent to Rs. 118.85 billion during the first six months (mid-July 2021 to mid-January 2022) of the current financial year. Nepal’s exports were worth Nepali Rs. 60.79 billion in over the same period during the last financial year.

But this huge leap in exports was not enough because the country’s import trade too increased by 51.13 per cent to Rs. 999.34 billion during these six months. That led to high trade deficits.

COVID-19 impact on the economy

Petroleum products account for Nepal’s single largest chunk of import expenses. But COVID-19 did not stop the landlocked country from importing petroleum products worth Nepali Rs. 96.71 billion (including diesel, petrol and aviation fuel). Besides, the country also spent Nepali Rs. 29.2343 billion on importing liquefied petroleum gas (LPG) over the past six months.

Nepal’s export earnings come mainly from exports of agricultural commodities – palm oil, cardamom, tea and coffee.

The other major source of income is remittances from migrant Nepali nationals working overseas. That has come crashing in the aftermath of the COVID-19 pandemic. In recent days, Nepal has worked overtime with foreign diplomatic missions to promote its labour exports. Newspapers gave space to pictures of out-going workers queuing up to leave the country and the government announced that it would monitor the seat allocations for subsidised travel on the country’s loss-incurring national carrier.

But the pandemic hurt most when tourists to the Himalayan country stopped arriving. Again, that was due to COVID-19.

Not unexpected

The swollen state of current trade deficits was not unforeseen. In November, the Nepal Rastra Bank (the country’s central bank) stepped in to reverse a foreseeable trend by discouraging the import of what it felt were non-essential goods.

Then, the central bank’s quarterly review of the of the monetary policy had mandated importers to deposit a cash margin to be able to open and operate a letter of credit for goods it categorised as non-essential goods. This was a departure from the previous practices of the lending banks deciding on the cash margins, depending on their assessment of the creditworthiness of the borrowers.

The swelling forex reserves were also anticipated after a review of the first quarter of the financial year that showed that the country’s gross foreign exchange reserves decreased by 6.5 per cent. This, the Nepal Rastriya Bank had said, was due to for three consecutive months to surging imports and a constant fall in the inflow of remittances.