In a bid to curtail the forex crisis that is deepening in Nepal, the government banned a list of about 10 foreign imports, including liquor. These items are all considered non-essential or luxury items.
Apart from liquor, the foreign import ban implemented on April 26, 2022, included tobacco products, diamonds, cars, jeeps, and vans except for ambulances and hearses, motorcycles with 250 cc or more capacity, mobile phones worth over $600, TV sets larger than 32 inches, toys, playing cards, and snacks. Later on, the ban was expanded to include mobile phones worth over $300 and for motorcycles with 150 cc capacity.
This ban was set to last till mid-July and upon review was extended on July 17, 2022, till the end of August. Upon another review, the ban was extended further till October 14, 2022. It continues to include liquor, the above-mentioned vehicles, motorcycles, and mobiles . The ban was lifted for the other items.
On October 14, 2022 the ban was again extended till mid-December for the remaining items on the list, including liquor.
Apart from the import bans on these items the Nepali government reduced the working days per week since May 15, 2022. Previously, the Nepali work week included five and a half days of work with seven-hour work days, one-half day, and one full holiday. Now, the working hours have been extended to eight hours and the days were reduced to five days with two full holidays.
The economic crisis in Nepal explained briefly
The Nepali government said these measures were taken to manage threats to the economy due to increased imports leading to decreasing forex reserves amidst the economic crisis in the country. The government hopes that these measures would prevent the economic crisis from deepening to the level of what is experienced by Sri Lanka.
Economic crisis facts
There are three forces that drive Nepal’s economic crisis: decreasing foreign exchange reserves (forex reserves), increasing trade deficit, and increasing inflation.
For example, as a land-locked country, Nepal is reliant on imports. Currently, farmers are facing shortages of fertilizer, which can threaten future food security.
- Decreasing forex reserves.
- Nepal currently has roughly US$ 9 billion of forex reserves. This is only enough for about six months of imports, down from 10 months in mid-2021.
- The gross foreign exchange reserves decreased by 18.9% to US$ 9.54 billion in mid-July 2022 from US$ 11.75 billion in mid-July 2021, according to a statement from Nepal Rastra Bank.
- Based on the imports of 2021-22, the foreign exchange reserves with the banking sector are sufficient to cover prospective merchandise imports for 7.8 months, and merchandise and services imports for 6.9 months, according to the Nepal Central Bank.
- Increasing trade deficit.
- Meanwhile, Nepal’s trade deficit rose by nearly 34.5% on-year to $9.35 billion in mid-March, while forex reserves have fallen below $10 billion.
- Increasing inflation.
- Inflation has also been rising in Nepal, averaging 7.14% in March this year. This was the highest recorded in the last 67 months.
Reasons for the economic crisis in Nepal
Economic experts cite three major reasons in the recent past for the current economic crisis people are facing in the country.
- The Earthquake in 2015,
- The COVID-19 pandemic, and
- The war in Ukraine
In 2015, Nepal was hit by a massive earthquake that took 8000 lives and cost over US$ 10 billion loss in infrastructure damage. To rebuild the country, the government took loans from the Asian Development Bank and the World Bank over the next four years.
Prior to the earthquake, Nepal’s external debt was at US$ 5.2 billion. The debt doubled to US$ 10.2 billion by 2019. Nepal would have been able to pay the debt under normal circumstances, but when the repayment started in 2019-2020 the COVID-19 pandemic hit.
The COVID-19 pandemic led to declining tourism, reduced foreign employment, and reduced exports. Prior to the pandemic remittances sent by Nepali migrants made up about a quarter of the country’s GDP.
Then when Russia invaded Ukraine, Nepal (like many other countries in the world) was hit with rising prices of crude oil and food. Nepal imports most of its essentials, such as fuel, and food, as well as cooking oil. A recent World Bank Report stated that higher commodity prices in Nepal were caused by the war in Ukraine.
The combination of these factors led to an increase in Nepal’s debt to US$ 12.5 billion by 2022, an increased budget deficit, a decline in forex reserves, and rising inflation. All these factors are now deepening the economic crisis that Nepali people are facing.
While the Nepali government has assured that the economic situation is not as dire as in Sri Lanka, since Nepal’s debt burden is far less, financial analysts point out that Nepal does have similar political problems like Sri Lanka.
We also have crony capitalism; corruption is high and there is political instability. That makes it harder to put long-term efficient policies in place,” said Santosh Sharma Poudel, co-founder of Nepal Institute for Policy Research, as per VOA.
Santosh Sharma Poudel, co-founder, Nepal Institute for Policy Research
The need for long-term solutions to overcome the economic crisis
The government has said that the import bans are a short-term measure. Economists agree that while import bans can help in the short-term better policies to tackle the root causes of the economic crisis are needed in the long term.
This is a short-term measure taken to prevent the economic condition of the country from going bad,” said Narayan Prasad Regmi, Joint Secretary, Ministry of Industry, Commerce and Supplies, as per, The Economic Times.
Narayan Prasad Regmi, Joint Secretary, Ministry of Industry, Commerce and Supplies
Nepal’s import restrictions are a good short-term measure to shore up the country’s fiscal position,” said Kalpana Khanal, Economist, as per The Economic Times.
However, the government should prioritize long-term measures to boost foreign investment and export earnings,” she added.
Kalpana Khanal, Economist
Various industries which are facing import bans have brought up the problems they are facing, specifically in terms of the upcoming festival season which usually sees a rise in sales of many items including mobiles, TVs, and jewellery. Economic experts say that in the long-term import bans are not sustainable and can destabilize the economy.
From liquor import ban to comprehensive and ambitious alcohol policy
The alcohol industry has also been quick to criticize the ban because multinational alcohol giants are afraid their private profits might be ill-affected. For example, in 2020, Nepal imported $5.58 million in hard liquor, becoming the 142nd largest importer of hard liquor in the world. In the same year, hard liquor was the 228th most imported product in Nepal and the imports are primarily from India ($2.64 million), Singapore ($1.76 million), United Arab Emirates ($786,000), the United Kingdom ($169,000), and Malaysia ($140,000).
The sustained liquor import ban despite alcohol industry lobbying shows that the government understand that alcohol is not an ordinary commodity. The government recognizes that people and communities in Nepal are currently facing a heavy alcohol burden. This burden includes a 376% increase in deaths caused by alcohol between 1990 and 2016.
The long-term solution to prevent and reduce alcohol harm is to improve alcohol policies and to implement a comprehensive and ambitious agenda for alcohol la reform. Improved alcohol policies will aid economic recovery of Nepal. Communities in Nepal have long been calling on the government to improve alcohol policies.
Alcohol taxation can help Nepal through domestic resource mobilization
Raising alcohol excise taxes is the single most high impact and cost-effective policy solution recommended by the World Health Organization (WHO) to protect more people from alcohol harm.
As Movendi International has reported alcohol taxation has triple-win benefits.
- Domestic resource mobilization
- Alcohol taxation generates government revenue for financing development and health promotion, such as NCD prevention – a major political priority in Nepal.
- Reducing alcohol’s health and development burden
- Alcohol taxation reduces population level alcohol use and thus reduces the overall public health, social and economic harm caused by alcohol – such as violence against children and women.
- Prevention of alcohol initiation and health promotion
- Alcohol taxation helps maintain high-levels of alcohol abstention rates in low- and middle income countries, like Nepal.
Nepal can use these positive effects to bolster its revenues to overcome the current economic crisis. At the same time improving alcohol taxation will help Nepal reach its SDG targets.
Reducing and preventing alcohol harm itself can reduce the health burden on Nepal’s economy. Added to this the government can generate revenue to finance development and health promotion.
Alcohol taxation is a win-win-win measure for public health and the economy of Nepal specifically in recovering from the COVID-19 pandemic.
Evidence indicates there is massive untapped potential in using alcohol taxation for domestic resource mobilization in low and middle-income countries:
- A study of 42 high-, middle- and low-income countries found that raising excise duties on alcohol to at least 40% of the total retail price would increase tax revenue in these countries by 80% to US$ 77 Billion.
- Expressed as a proportion of total current spending on health, it is low-income countries that have most to gain (additional receipts would amount to 38% of total current spending on health).
Movendi International has published two special features dedicated to exploring the potential of alcohol taxation.
Sources
The West Australian: “Nepal bans luxury item imports amid crisis“
The Economic Times: “Nepal bans foreign liquor and TVs to avert forex crisis”
South China Morning Post: “Nepal bans car, alcohol, tobacco imports as it fast runs out of cash“
Ambrosia: “Nepal bans import of liquor, among other items, to rein in economic crisis“
The Kathmandu Post: “Import ban on liquor and mobile sets may be lifted for festivals“
All India Radio: “Nepal: Govt extends 81-day-old import ban on goods till August end“
Maritime Gateway: “Nepal Govt’s Decision To Extend Import Restrictions Draws Flak“
Macau Business.com: “Nepal extends import ban on vehicles, liquor products“
Nepal Minute: “Four sectors hit hard by Nepal’s import ban“
India.com: “Economic Crisis in Nepal: Will Kathmandu Witness a Fall Like Sri Lanka?“
VOA: “Nepal Second South Asian Country to Grapple with Economic Woes“
