Hefty trade deficit due to capital expenditure does not worry Nepali government

Nepal’s massive trade deficit as of first four months of the current fiscal year that began in mid-July has not worried Nepali Finance Minister Yubaraj Khatiwada.

“Let’s not see the trade deficit in number alone. Let’s also see what types of goods we are importing,” Minister Khatiwada said while addressing a function organized by a group of Nepal’s economic journalists last weekend.

This Himalayan country’s deficit expanded by 40.3 percent to 454.47 billion Nepali Rupees ($4 billion) during the first four months, according to Trade and Export Promotion Center (TEPC), a trade promotion body under Nepal’s Commerce Ministry. It is the result of importing goods worth 483.75 billion Nepali Rupees against exports of just 29.28 billion Nepali Rupees.

Amid a ballooning trade deficit, Nepal faced a balance of payment deficit of $316.2 million in the first three months of the current fiscal year.

Foreign exchange reserves also declined by 5.2 percent to $9.56 billion despite a surge in remittances, Nepal’s main source of financing imports, according to Nepal’s central bank.

“Trade deficit has grown because we have bought commercial planes. But, we need planes to bring more tourists to Nepal. We plan to develop 10,000 megawatt hydropower projects in the next 10 years. For this, we have to import two thirds of the total materials needed to develop the hydro projects. They may contribute to the trade deficit but the country will benefit in the long run,” said the minister.

TEPC data supports his assertion. During the first four months of the current fiscal year, iron and steel products and machinery occupied the second and third positions after fuel, which has long topped the chart of imports.

There has also been a surge in imports of raw materials of industries such as crude soya bean oil, palm oil, cotton and wool, according to TEPC data.

Nepali economists said the huge portion of imports like construction and other raw materials suggest that industrial production and construction activities are picking up in the country.

“The import of industrial raw materials and construction materials are obviously a good sign for the Nepali economy as it shows investment in Nepal has been growing and the economy has become dynamic,” Shankar Sharma, a senior economist, told Xinhua recently.

He also gave credit to the stable political environment after last year’s elections in Nepal as it helped boost business confidence.

The import of industrial raw materials and capital goods contributed to Nepal’s overall imports even in the last fiscal year 2017-18.

The import of industrial supplies and capital goods drove the overall import growth due to ongoing post-earthquake reconstruction, increased infrastructure investment and an uptick in industrial activity, the World Bank said in its Nepal Development Update released last month.

This in turn led to the global lender to conclude that Nepal is moving forward to investmentdriven economic growth from consumption-driven growth fueled by remittance, in its report.

“Gross investment is expected to drive expansion as the Nepali government has emphasized engaging the private sector and raising low level of FDI,” it said. Currently, FDI is less than one percent of Nepal’s GDP, according to the report.

As Nepal aims to become a middle-income country by 2030, a shift from remittanceled and consumption-based growth, to one that is driven by investment and production is a must, the report has pointed out.

Nepali economists however caution whether Nepal has already entered the phase where the economy is being driven by investment.

“We have to see whether the economy would grow by at least 5-6 percent in the next few years because the modest growth rate seen in the last two fiscal years is also due to good monsoon and post-earthquake reconstruction activities,” said Sharma.

Nepal is aiming at a growth rate of 8 percent in the current fiscal year as the government declaring the current fiscal year as the foundation year for the history of economic prosperity.

There is also reason to be optimistic as Nepal ended the chronic problems of load shedding and labor unrest contributing to creating a conducive environment for investment.

The author is a writer with the Xinhua News Agency. The article first appeared on Xinhua. opinion@globaltimes.com.cn