By S. Sultan
Nepal ban on automobiles, phones, liquor and some motorcycles will remain until December 15. Nepal is reviewing its seven-month-old import ban on certain products after the International Monetary Fund (IMF) questioned the wisdom of lengthening it since it was hurting trade and the economy. The IMF the global lender said that Nepal should take other monetary measures to deal with its foreign exchange reserve matter.
The Washington-based organization has delayed the second instalment of a $400 million loan to Nepal till February 2023, stating that it had not fulfilled the conditions. Nepal has received $110 million as the first instalment. Although, Nepal has fulfilled all the conditions set by the IMF, when Nepal agreed on the loan. Now the IMF is concerned about Nepal's import restriction policy.
The IMF has stated that such a ban does not have any positive impact on the economy, and the country should take other monetary measures to deal with its foreign exchange reserve issue. Nepal's foreign currency reserve was going down, which compelled the government to impose import restrictions besides ordering importers to keep 100 percent margin amount to open a letter of credit.
The directive issued on April 26 embargoed 10 types of goods described as luxury items, among them mobile sets worth over $600 and motorcycles with a capacity of over 250 cc. Mobile sets costing more than $300 and motorcycles with a capacity of more than 150 cc were banned. On August 30, the government loosened the restrictions, and permitted the import of diamonds, large television sets, toys, cards, snacks and tobacco. The ban on automobiles, mobile phones, liquor and heavy motorcycles will remain in place until December 15.
After the Russia-Ukraine war that upset the global supply system producing prices to rise like never before, Nepal too hurt chronic present account deficits, and was progressively susceptible to exterior financial tremors with hastening foreign reserve reduction. The situation has now improved to some extent. With a mission to promote global economic growth and financial stability and encourage international trade, the IMF has praised the different actions taken by the government to solve the declining foreign exchange reserves, however, it has expressed anxiety over prohibition on imports.
An IMF group visited Kathmandu from April 24 to May 2 to hold deliberations on the initially review under Nepal’s extended credit facility (ECF). The ECF provides financial assistance to countries with prolonged balance of expenses problems. In a statement at the conclusion of the mission, the IMF said, that the team welcomed the authorities' determination to take actions to address decreasing international assets and higher inflation. The team emphasized the need to further tighten monetary policy, including by snowballing interest rates. Taken together with the gradual unwinding of Covid support measures in the banking system, this approach is expected to address decreasing international reserves without the need to resort to import restrictions that could exacerbate inflation and hamper economic growth. The prolong trade restrictions goes against the principles of a free market economy. .
According to Nepal Automobile Dealers’ Association more than 75 car showrooms have been shut down. And another 70 are on the verge of closing. It is also unknown that when the restriction will be lifted. With no vehicle inventory to sell, it is difficult to pay bank interest, employee salaries and the rent. Some 8,000 people in the automobile sector have lost their jobs.
To comply with IMF conditions, Nepal reviewing the import ban policy. According to Finance Ministry officials, the import ban may be relaxed before the extended deadline of mid-December. The IMF has informed the Finance Ministry that they will start the first review on Nepal by November-end to release the second instalment. "The government has also been gradually relaxing the ban.
In January, the IMF permitted a $395.9 million extended credit facility for Nepal. The 38-month funding package has been delivered to Nepal for the Covid-19 response in mitigating the pandemic’s effects on health and economic activity, protecting vulnerable groups, preserving macroeconomic and financial stability, and supporting sustained growth and poverty reduction. As per the agreement, the IMF will provide around $55 million in the second disbursement.
According to IMF, the failure of the tourism and service sectors, which are key drivers for development, will take time to recover. After a sharp drop in 2020, imports have rapidly grown, fuelling a large current account deficit. Economists say they are surprised by the government's decision to prolong the import restriction despite an improvement in foreign exchange reserves.
However, the country's foreign exchange reserves are now adequate to shelter goods imports for 9.6 months, and goods and services imports for 8.3 months. The balance of expenses endured at a surplus of Rs12.43 billion, and gross foreign exchange reserves stood at $9.48 billion in the first quarter of the fiscal year ended mid-October, the central bank said. As an outcome of the import ban, goods imports reduced 16.2 percent to Rs401 billion in the first quarter of the current fiscal year compared to the same period in the last fiscal year. In the last fiscal year ended mid-July, Nepal's imports crossed the Rs2 trillion mark for the first time. The value of imports rose mainly due to global inflation.