The central bank to curb luxury imports in a context of declining foreign exchange reserves

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With the surge in imports endangering the external sector of the economy (international transactions), the Nepal Rastra Bank has suggested that the government control imports of luxury goods, a senior central bank official said.

The official who requested anonymity because he is not authorized to speak to the media told the Post that they had suggested that the Finance Ministry take certain steps to discourage the importation of luxury items given the growing deficit in the balance of payments and the decline in foreign exchange reserves.

“During a briefing to the Ministry of Finance on October 25, we recommended certain import control measures. But we did not specify which products should be subject to such restrictions because it is the government’s job, ”the central bank official said.

The country’s imports jumped 63.73 percent to 478.52 billion rupees from exports worth 65.05 billion rupees in the first quarter of the current fiscal year, according to the customs department .

With the drop in remittances and tourism revenues, the first and second largest sources of foreign exchange, respectively, foreign exchange reserves fell sharply in the first two months of the current fiscal year.

Remittances decreased 6.3% to 155.37 billion rupees and tourism receipts amounted to only 2.7 billion rupees during the period. While foreign direct investment rose 24.6 percent to 3.04 billion rupees, growth is still insignificant against a backdrop of massive increases in foreign exchange spending on imports, according to the central bank.

At the end of fiscal year 2020-21 in mid-July, Nepal’s foreign exchange reserves stood at 1399.03 billion rupees ($ 11.75 billion), which was sufficient to finance imports for 10.2 months.

Over the next two months, foreign exchange reserves declined from nearly 100 billion rupees to 1,306.95 billion rupees ($ 11.14 billion) in mid-September. That’s enough to finance just 7.8 months of imports, according to the central bank. Monetary policy for the current fiscal year 2021-22 aims to maintain sufficient foreign exchange reserves to finance at least seven months of imports. Any further depletion of foreign exchange reserves could cause problems.

Basudev Adhikari, former executive director of the central bank, told the Post earlier this week that reserves close to the minimum threshold set by the central bank suggest the situation has reached a “critical zone”.

“In such a situation, the central bank should carefully consider its overseas payment commitments associated with letters of credit for the next two to three months,” he said. “If there are large amounts to be paid, then restrictive measures such as quantitative limits on certain products should be imposed or the amount of foreign exchange allowed to companies should be reduced.”

In April last year, authorities imposed restrictions on the importation of foreign alcohol, luxury vehicles costing more than $ 50,000, betel nuts, peas, peppercorns and dried dates. , in an attempt to save foreign currency, following fears that Nepalese migrant workers in overseas work destinations could lose income due to the pandemic.

“We introduced restrictions on imports last year and it can be done this year also given the sharp increase in imports going on,” the central bank official said.

Finance ministry spokesperson Ritesh Shakya said they were closely monitoring import figures, including the most preferred import items. “But the ministry has taken no decision on which imports to control,” he said.

According to him, the ministry recently increased tariffs on the importation of silver. In accordance with the government decision, import duties on the precious metal have been set at Rs 107 per 10 grams.

As remittances did not decline as expected and foreign exchange reserves also remained in a comfortable position, the government lifted restrictions on various dates, starting in October of last year.

In March of this year, the government authorized the import of peas, betel nuts, dried dates and pepper until mid-July by setting quantitative limits for each item: 1,225,290 tonnes for peas. , 227,270 tonnes for betel nuts, 41,995 tonnes for dried dates and 140,082 tonnes for pepper.

But since the start of the current fiscal year, neither import licenses have been issued nor quotas set for these products. At the end of last month, the Department of Commerce, Supply and Consumer Protection wrote to the central bank asking it not to provide any foreign currency to traders for importing these items.

“Even though the massive imports are a cause for concern, the time has also come for foreign subsidies and loans, especially the emergency credit from the International Monetary Fund which will be received shortly and this could increase our foreign exchange reserves,” said Bam Bahadur Mishra, MP. governor at the central bank.

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