By TON Sri Lanka

The symbols of economic disaster like Sri Lankan are looming in the feeble economic horizon of Nepal. An economic crisis similar to Sri Lanka is inevitable in Nepal, if ignores its early symptoms. There is rising assumption that the Nepali economy may crumble like in Sri Lanka as the country's foreign exchange assets have shriveled and inflation has soared with rising fuel prices.

For the first time since the 2000s, foreign exchange reserves have fallen to around $9 billion, which is hardly sufficient to fund imports for six months, down from 11 months. At the same time, price increases has hit an all-time high of 8.56 percent with the employment rate remaining as unsatisfactory as usual. Therefore, there is no reason to disregard the suspicions outright.

Before investigating into this phenomenon, it is relevant to comprehend how Sri Lanka landed in its worst economic disaster ever. Realities and figures made available by the World Economic Forum show that, like Nepal, Sri Lanka depends disproportionately on a handful of export products such as tea, rubber and readymade garments.

Earnings from tourism and remittances contribute substantially towards the net income of foreign currency. But because the product base for exports is thin and earnings from tourism and remittances often remain motionless, the country often meets balance of payments crises which stress its foreign exchange assets.

Since Sri Lanka depended on limited sources of foreign currency to finance its import growth, and foreign debt-aided development activities took place aimlessly, the island nation was often at the mercy of International Monetary Fund loans to meet the foreign exchange gap resulting from a rapidly growing trade deficit and debt servicing.

To date, Sri Lanka has received IMF loans 16 times, and all loans were based on conditions of tight fiscal and monetary policies, reduced domestic subsidies, and depreciation of the national currency to make its exports cheaper.

Unfortunately, Sri Lanka's latest IMF loan in 2016 accorded with the start of its economic collapse. As a result, it affected not only development but also added a debt weight denominated in foreign currency. Adding to this calamity, a series of events in the following years added to bitter the economy. It all start with a sheer failure in tourist influxes due to the Colombo bomb blasts in 2019 which was followed by the coronavirus pandemic in 2020. The government's illogical decision to cut taxes in 2021 only deteriorated the disaster.

Most astonishingly, the government barred the ingress of chemical fertilizers to preserve foreign currency and declared the country's farming to be 100 percent organic. The decision to prohibit chemical fertilizers and the change to organic farming showed ill-conceived as it abridged agriculture output and production, forced the country to ingress more food. The move also harmfully affected the production and exports of tea and rubber, which worked as a vital basis of foreign exchange.

Subsequently, the country progressively confronted augmented heaviness on foreign exchange reserves, forcing it to take import control measures. Import controls produced inflation to point 17 percent early this year, making a scarcity of foods, fuels, and medicines. Eventually, for the first time since its independence from Britain, Sri Lanka defaulted on its outside debt payment in May 2022, declaring South Asia's once affluent economy bankrupt.

Having observed the Sri Lankan debacle, one can be convinced that there are early signs of the Sri Lankan economic disorder in the Nepali economy. Like Sri Lanka, Nepal's trade imbalance problem is gradually getting severe. The country's trade deficit has surged to an all-time high of almost Rs1, 600 billion since the beginning of the current fiscal year.

At the same time, the balance of payments, which usually enjoyed a surplus, had faced a shortfall of nearly Rs300 billion as of the end of the last economic year. As a consequence, the Nepali money has denigrated continually, leading to soaring price levels. The steep increase in food and fuel prices is the most salient.

However, for a small and import-oriented economy like Nepal, which relies on limited and untrustworthy bases of foreign currency, it is difficult to absorb the tremor from high imports. However, given the country's external financial liabilities and the ratio of external debt to gross domestic product (GDP), Nepal is in a comfortable position to manage the crisis.

Nepal's external debt to GDP ratio is around 21 percent, compared to over 40 percent in Sri Lanka, accumulating debt obligations of about $51 billion in 2022. There are symbols of post-pandemic recovery, Nepal has ways to fend off economic contingencies.

However, despite the options available to address the structural feebleness to avert the economy from further deterioration, Nepal is floundering in odd policies and wasting resources in politically motivated surplus development schemes.

One of the reasons for Sri Lanka's crisis was investments in redundant development projects looking for foreign exchange conquered mainly by international sovereign bonds. The country also illogically presented haphazard programme targeting the problem of trade imbalance and foreign exchange shortages without success.

Thus, if the series of Sri Lankan economic incidents is any lesson for Nepal, it is essential to cope with the early symbols of the monetary adversities without deferral. Since the cause of the present economic difficulty lies in the country's severe trade shortfall problem and declining foreign exchange reserves, interference in outside trade should be given precedence.

Though, there is no possibility of taking radical steps to control imports due to the country's over-dependence on imports and poor domestic manufacturing. Nor can it expect to see a miracle in exports which are inactive.

There is no dearth of policy options. Regarding imports, there is a possibility of optimum tariff, which maximizes welfare instead of measures that illogically control imports and only help to raise inflation. The government can provide incentives that encourage innovation and entrepreneurship in exports instead of direct subsidies, which are mainly discriminatory and ineffective.

At the same time, Nepal needs to discourage development projects, particularly those that amass debts in foreign exchange with a very long development period. Whether dry ports or mega airports and fast tracks or railway tracks, any decision on investment in development projects must purpose to balanced regional progress that contributes to overall production. Political benefits at the cost of financial sagacity should be rejected by any means in this regard otherwise, Nepal will predictably face an economic crash like in Sri Lanka.