Slowing remittance growth squeezes BoP surplus

August 27, 2017

The kathmandu Post, 27 Aug 2017

The flow of money into the economy surpassed outflows in the last fiscal year as well, albeit the growth rate of balance between inflow and outflow squeezed due to deceleration in money sent home by Nepalis working abroad and failure to raise exports.

The country’s balance of payments (BoP), which gauges inflow and outflow of funds in the economy, stood at a surplus of Rs82 billion in 2016-17, which ended on July 15, shows the latest Macroeconomic Report of the Nepal Rastra Bank (NRB), the central bank. This indicates flow of money into the economy exceeded outflows by Rs82 billion. This BoP surplus, however, is 56.5 percent lower than in fiscal year 2015-16, when the surplus stood at Rs189 billion.

BoP surplus squeezed in 2016-17 largely due to slowdown in growth rate of funds sent by Nepalis working abroad and country’s inability to increase exports.

The growth rate of remittance income has been decelerating for some time now due to fall in number of Nepalis leaving the country for employment purpose.

The number of workers accepting jobs overseas fell by 4.7 percent in 2016-17, largely because of fewer employment opportunities in Qatar and Saudi Arabia, two of the largest absorbers of Nepali workers.

This caused remittance income growth rate to decelerate to 4.6 percent (to Rs695.45 billion) in 2016-17, as against 7.7 percent in 2015-16. With this, the share of remittance as percentage of gross domestic product (GDP) dropped to 26.8 percent in 2016-17 from 29.6 percent in 2015-16.

Remittance income has so far been fuelling consumption in Nepal. But since domestic production has been shrinking-with contribution of manufacturing sector in GDP falling to 5 percent from the peak of 10 percent in 1996-Nepal has been importing most of the goods to cater to the growing consumer demand.

In 2016-17, Nepal’s imports jumped 28 percent to Rs990 billion due to greater demand for petroleum products, vehicles and spare parts, MS billet and clinker, among others, shows the NRB report.

In contrast, Nepal’s exports increased by mere 4 percent to Rs73 billion. Nepal’s inability to increase exports not only widened trade deficit by 30 percent to Rs917 billion, but prompted current account to slip into a deficit of Rs10.13 billion in 2016/17. This led to contraction of BoP surplus as well.

Another factor that narrowed BoP surplus was 42 percent hike in overseas travel spending to Rs80 billion in 2016-17. Compared to this spending, income from foreign travellers, who visited Nepal, went up by 40 percent to Rs58 billion in the last fiscal year. Also, Rs47 billion left the country in 2016-17 to cover transport costs, which include income generated by foreign airline companies operating flights to Nepal and other expenses incurred to transport goods to the country. These expenses to some extent were offset by 128 percent surge in foreign direct investment to Rs13.5 billion in 2016-17.

Since the country’s BoP surplus widened at a slower pace, the country’s gross foreign exchange reserves expanded by 8 percent to $10.5 billion in 2016-17.

The foreign exchange holding of the banking sector, based on imports of 2016-17, is sufficient to cover the merchandise imports of 13.2 months, and merchandise and services imports of 11.4 months, according to the NRB.