According to the recently released quarterly report of Nepal Rastra Bank (NRB), BOP, which calculates the difference between money coming into a country and the money leaving the country, registered a record Rs 19.45 billion deficit. It was a surplus of Rs 7.7 billion during the same period last year. [break]
According to NRB data, trade deficit, which is regarded as the major factor fuelling BOP deficit, touched Rs 73.77 billion -- 48.6 percent more than last year, thanks to a rapid 30.4 percent rise in imports and a decline of 16.8 percent in exports.
Apart from vehicle and oil imports, gold import -- that recorded a whopping 225 percent increase in a year to Rs 14.16 billion -- is one of the main contributing factors behind the swelling trade deficit. According to an estimate, most of the gold imported to Nepal ends up in India due to difference in customs duty on gold imports. Sources said the government is soon to revise the customs rate on gold imports to make it equal to the Indian rate.
Nepal´s customs duty on gold is Rs 130 per tola (11.664 grams) whereas India imposes 2 percent customs duty. This means gold in Nepal is cheaper by Rs 550 than in India. NRB data further shows that import of petroleum products and vehicles also jumped 90 percent and over 300 percent respectively during the period.
In past years also Nepal experienced BOP deficit for some time but the fundamental difference then and now is the growth rate of remittance income used to be stronger than that of the trade deficit, thus enabling the country to finance the deficit, said Finance Secretary Rameshore Khanal.
"The current challenge, however, is that the trade deficit registered a record expansion of 48 percent while remittance income grew just 11 percent during the period," Khanal added.
He said the swelling BOP deficit is putting pressure on the pegged exchange rate between the Nepali and Indian currencies, adding quickly that any attempt to readjust the peg would be suicidal in that it can push the already high inflation beyond control.
The widening BOP deficit, coming mainly from the accelerated trade deficit, has started generating pressure for adjusting the exchange rate through devaluation of the domestic currency and readjustment of the fixed exchange rate with the Indian currency.
The best way to correct the trade deficit is to curb imports by limiting the rapidly expanding domestic consumption.
"This can be done either by raising customs or the prices of state-controlled commodities. However, since revision of customs is not possible in the middle of the fiscal year, the best way is to raise the prices of state-controlled commodities like petroleum products," Khanal said.
Earlier, the central bank had changed its credit policy to check rapidly increasing consumption by raising interest rates on lendings. Nepal Rastra Bank officials hope that rise in the interest rate will help squeeze consumption.
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