Is Nepal staring at economic turmoil similar to crisis-stricken Sri Lanka?

Similar to crisis-hit island nation Sri Lanka, Nepal’s economy in recent seems to be spiralling down as the Himalayan country is facing unprecedented inflation. Noting the depleting foreign exchange reserves, at least three former Finance Ministers of Nepal have predicted that the country’s economy may face a massive blow in the coming days in the absence of prompt government action. In a joint 12-point statement on the ongoing economic situation of Nepal, Bishnu Paudel, Surendra Pandey, and Dr Yubaraj Khatiwada- members of the Communist Party of Nepal (CPN-UML)- have warned that the Kathmandu is dwindling in the edge of a “collapse.”

“The country’s situation is under crisis and moving towards a more critical situation,” the leaders noted during a joint press meet, as quoted by PTI.

However, dispelling the Opposition’s analysis of Nepal’s economy, incumbent Finance Minister Janardhan Sharma has stated that the situation is nothing like Sri Lanka’s. He added the country is in a “slightly better position” than Colombo in terms of production and revenue. He admitted, that although the forex reserves are stressful due to escalated imports of luxury items, Nepal is not burdened with foreign debts like Sri Lanka.

Economic doldrums in Nepal similar to Sri Lanka’s plight

Located in two opposite directions of the Indian subcontinent, both Nepal and Sri Lanka are struggling with similar economic situations, although stemming from widely differing situations. Pandemic, earthquakes, albeit shaky political grounds, and blows to tourism pushed the countries into a deeper abyss.

While both the countries are largely dependent on tourism as a major portion of their revenue, the economic crisis in Sri Lanka emerged from some mismanaged decisions by Sri Lankan President Gotabaya Rajapaksa’s administration between 2019 to 2021. However, for Nepal, it was mostly the political instability last year that escalated the economic situation in the nation. Again, like Sri Lanka, Kathmandu is also relied on the export of limited commodities for forex reserves, in comparison to its heavy import expenditure.

While Sri Lanka plummeted into the crisis after the Rajapaksa regime made huge “ill-advised” tax cuts to reduce its income. Colombo also took stringent measures like banning chemical fertilizers to incline towards more organic produce, which greatly lowered production and subsequently lesser exports. As revenue slashed, Sri Lanka ran out of money to purchase essential imports.

For Nepal, the reduction in forex reserves began in July 2021after the fall of the KP Sharma Oli government, which led to political turmoil in the country. The situation rapidly escalated after imports increased against the declining remittances and earnings from tourism due to the COVID pandemic lockdown. In February 2022, Nepal’s forex reserves depleted from $11.75 billion in mid-July 2021 to $9.75 billion.

“We are concerned about the sustainability of our Foreign exchange Reserves,” said Gunakar Bhatta, spokesperson of Nepal Rastriya Bank, the central bank, as quoted by the Associated Press.

Nepal faces liquidity crunch amid potential economic collapse

According to Chief Investment Officer of WintWealth, Anshul Gupta, Nepal is currently also facing a liquidity crisis. This is due to the doubled rate of loan disbursement compared to the incoming deposits. “To encourage economic revival after the pandemic, the credit-deposit ratio of banks was increased from 85% to 90%. So for every Rs. 100 of deposits, instead of Rs. 85, Rs. 90 of loans could be given out by banks,” he explained. This led to deposits and loans mismatch where loans continued to grow while deposits didn’t grow as much. “Banks have been forced to hike their interest rates to attract deposits but growth hasn’t been significant. (A 3 month FD yields 11% p.a.),” he added.

The aforementioned financial slug led the Nepal government to sack Nepal Central Bank governor Maha Prasad Adhikari on Sunday, who was appointed by ex-PM Oli. The punitive action was taken by FM Sharma apparently for “not doing enough” to resolve the imminent economic crisis. Before terminating him, the country decided to ban the import of luxury items over its liquidity crunch.

One common link between Sri Lanka and Nepal’s crisis?

What the US calls ‘debt-trap diplomacy’ is one common ground in the throes of economic crises that India’s northern and southern neighbours are reeling under. Fabien Baussart, President of the think tank Center of Political and Foreign Affairs, in his op-ed for The Times of Israel had concluded that the Belt and Road Initiative (BRI) of China is the major cause of the economic collapse of Sri Lanka. Beijing’s Belt and Road Initiative (BRI) is a global infrastructure development strategy to invest in nearly 70 countries. Kathmandu on March 26 signed a total of nine MoUs with Beijing under Millenium Challenge Corporation (MCC), however, none under BRI. Despite discussions, wary Nepalese officials have kept away from finalising the implementation of BRI projects saying that they will not accept developments with “strings attached.” Nevertheless, Beijing has been trying to push some projects under BRI after the MCC ratification.

(Image: AP/Shutterstock)