October 3, 2022, Monday
Nepal 1:37:26 pm

Nepal’s Forex reserve sliding; Inflation starts to bite in Asia

The Nepal Weekly
April 19, 2022

By Arun Ranjit l

Foreign Exchange (forex) is the trading of one currency for another. The forex market is the largest, most liquid market in the world, with trillions of dollars changing hands every day.

Forex is also important when doing transactions between two countries that create a demand for foreign exchange.

In today’s world, the foreign exchange market has emerged as the largest financial market in the world owing to its accessibility, liquidity, and international nature, among a host of other factors.

As Nepal’s trade balance with various countries always seems to be in deficit, Nepal’s only way of generating forex is based mainly on Tourism and Foreign Employment.

However, because of COVID-19 pandemic it has hit not only Nepal but the world as a whole.

As a result, with the advice of the Central Bank of Nepal— Nepal Rastra Bank (NRB), the Government of Nepal has banned imports of non-essential goods, including cars, cosmetics, and gold and other luxury items for the time being citing a liquidity crunch and declining foreign exchange reserves. Nepalese market acutely feltthe scarcity of the US dollar should be taken up seriously.

NRB indicates, since July 2021, Nepal has seen a decline in forex reserves due to the surging imports, declining inflows of remittance and meagre earnings from tourism and exports.

NRB also said that the country’s forex reserves had decreased by 17 per cent to US $9.75 billion. The forex reserves are now only enough to sustain the import of goods and services for 6.7 months. NRB informed adding, Nepal’s FedExwas hit by a slump in tourism during the pandemic.

Thus, the Nepal government has urged Nepalese nationals living abroad to open dollar accounts in banks in the country and make investments amidst the economic crisis in the Himalayan nation.

However, the ministry also said the indicators of the country’s economic health were “normal.”

Economy Bite

The world is facing a surge in inflation, which has accelerated in the wake of Russia’s invasion of Ukraine, imperiling global economies and their post-COVID recovery as the prices of food, energy and services increase rapidly.

As a result, central banks, from South Korea to Singapore, have been pressured to tighten monetary policy, while protests break out across nations like Sri Lanka as its economic crisis deepens.

South Korea’s central bank raised its policy rate to the highest since August 2019 on Thursday in an unexpected move, choosing not to wait for the formal appointment of a new governor before proceeding with its fight against surging inflation.

Inflation in South Korea is expected to hold at decade-highs as Russia’s invasion of Ukraine sends commodity prices soaring, threatening the recovery in Asia’s fourth-largest economy from its pandemic slump.

Japan has seen its currency plummet to a 20-year low against the greenback.

Another strong advocate of low interest rates is Turkish President Recep Tayyip Erdogan.

The Bank of Japan’s balance sheet is increasing once again as it steps up asset purchases to combat yields buoyed by inflation concerns in the U.S. and Europe. Turkey’s central bank on Thursday held the benchmark one-week repo rate at 14% for the fourth consecutive month, even as runaway inflation rose to a 20-year high of 61% in March.

The central bank of Singapore tightened monetary policy for the third time in as many meetings, as inflationary pressure rises under the shadow of Russia’s invasion of Ukraine.

New Zealand raised interest rates by a hefty 50 basis points to 1.5% on, its fourth hike in a row as it seeks to reduce the second-round effects of sharply rising inflation.

Sri Lanka’s foreign exchange reserves have plunged some 70% in the past two years, hitting $1.93 billion at the end of March.

Sri Lanka’s central bank doubled its key interest rates, raising each by an unprecedented 700 basis points to tame inflation that has soared due to crippling shortages of basic goods driven by a devastating economic crisis.

The Central Bank of Sri Lanka’s (CBSL) monetary board raised its standing lending facility to 14.50% and its standing deposit facility to 13.50%.

The heavily indebted country has little money left to pay for imports, meaning fuel, power, food and, increasingly, medicine are in short supply.

Street protests have been held nearly non-stop for more than a month, despite a five-day state of emergency and a two-day curfew.

J.P. Morgan analysts estimate that Sri Lanka’s gross debt servicing costs will amount to $7 billion this year, with a US $1 billion repayment due in July.

Welcome IMF’s RST

Meanwhile, the International Monetary Fund (IMF) has created the Resilience and Sustainability Trust (RST) that will come effective May 1 to build in a long-term perspective and will support developing countries and vulnerable middle-income countries.

The RST will amplify the impact of the US$650 billion SDR allocation implemented last year by channeling resources from economically stronger members to countries where the needs are greatest. The aspiration is to build a Trust of at least US$45 billion in resources.