Explained: Why Nepal is staring down the barrel like Sri Lanka

By Anish Kumar | First Published Apr 21, 2022, 9:23 AM IST

Economic activities in both countries are driven by the tourism sector and Covid-19 pandemic has made the situation worse for India's two neighbouring countries.

With Nepal feeling the pinch of dwindling foreign reserves, the government has now appealed to its diaspora to send money home through banking channels so that the balance of payments could be maintained.

The character of Nepal's economic woes is similar to that of Sri Lanka. Economic activities in both countries are driven by the tourism sector and the Covid-19 pandemic has made the situation worse for India's two neighbouring countries.

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The tiny Himalayan country's foreign reserves have reduced by more than 18 per cent to $9.6 billion from $12 billion in just eight months. With this, the country could only purchase the merchandise goods for around six months.

What is the current situation and reasons for the economic crisis?

The main sources of Nepal's foreign currency earnings are remittances from migrant workers abroad and revenue from the tourism sector. Due to the worldwide Covid-19 pandemic, both sources have dried up. That has crippled the Himalayan nation for over two years now.

As per the Nepalese government statistics, its remittances dipped by three per cent to $5.3 billion between mid-July 2021 to mid-March 2022, against a rise of 5 per cent in the same period in the previous year when Coronavirus was at its peak in the country.

Dr Utsav Kumar Singh, Assistant Professor at Delhi University's Shaheed Bhagat Singh College, said: "Nepal crisis was very much expected as the World Bank had speculated about it in its global economic prospect report in January 2022. The report identified the looming crisis emerging due to macro-economic imbalance, rising income inequality reciprocated into unexpected uncertainty."

Though the tourism activities have picked up but the influx of tourists is still below the pre-Covid-19 level. As per locals in Nepal, it would have gone up had Russia and Ukraine not taken place. The war between the two countries has prevented European footfall in Nepal.

"The Russian invasion amplified the crisis for the global growth prospect, still contending with Covid-19," Dr Utsav Singh said.

In a bid to manage the situation, Nepal's central bank has raised interest rates.

Nepal Rastriya Bank spokesperson Gunakar Bhatta said that the rates have been increased to discourage people from purchasing luxury items from foreign countries and strengthen foreign reserves.

The country's economy started deteriorating days after a political turmoil in the Himalayan country led to the fall of the KP Sharma Oli government.

Why is it an opportunity for India?

Talking to Asianet Newsable, Senior Assistant Professor at South Asian University Dr Dhananjay Tripathi said that the economic crisis in Nepal is at the initial stage.

"It is a fact that the forex reserve has gone down and the war between Russia and Ukraine has led to an escalation in fuel prices. The Nepalese foreign minister has said that the situation is not like that of Sri Lanka," he said.

Nepal has not sought any assurance and if they do India should definitely help them as it did before and with other countries, he added.

Nepal's prime minister was in India a few weeks back and a lot of positive developments have taken place between the two neighbours. It should be continued the way India has helped Sri Lanka and other countries in the past, Dr Dhananjay Tripathi said.

Dr Utsav Singh said that in the present circumstances, the role of the Indian government becomes important as its two neighbours are facing the worst economic crisis.

"It is expected from the Indian government to expand the Line of Credit to Nepal as part of financial assistance to meet the challenges of economic crisis," the Delhi University professor said.

Is Nepal going the Sri Lankan way?

Nepal is paying a high cost for oil import, which constitutes 13 per cent of the total import. The surge in fuel prices has had a cascading effect on the price of commodity goods.

Like Sri Lanka, Nepal is also an import-dependent country. The world has seen the devastation of the Sri Lankan economy, Now Nepal's economy is crumbling.

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