February 7, Kathmandu. By Kushal Basnet
Nepal was hit by a massive earthquake in 2015 followed by an Indian embargo months after. Before the country could fully recover from the damage caused by the quake, the Covid-19 pandemic happened. The ensuing global travel restrictions halted the country’s tourism sector, a source of foreign currency.
The United Nations World Tourism Organisation (UNWTO) has predicted the international tourism industry will return to the pre-pandemic state in 2024. Air traffic data tells that the number of tourists travelling to Nepal started returning to the pre-pandemic levels in October last year, resulting in a record high number of annual international air passengers. Those are optimistic indicators of the rebouncing tourism sector of Nepal. However, data from Nepal Rastra Bank (NRB) sheds a different light on the historical role of tourism in Nepal’s economy: a decline in foreign currency contribution from about 30 percent in the 1970s to about six percent in the eve of the pandemic. And the return of tourism to the pre-pandemic levels is unlikely to make a significant stride in foreign exchange earnings from the industry.
The steep decline in the tourism industry’s foreign currency contribution would imply crippling of the economy. Thanks to the migrant workers, remittance has absorbed pressure to keep up the foreign currency reserve.
NRB’s latest macroeconomic and financial situation report notes that foreign currency reserve of the country currently stands at 13.69 billion US Dollars, sufficient to finance merchandise imports of 14.5 months and merchandise and services imports of 12.1 months. The strengthening of the foreign exchange reserves is fuelled by the increase in remittance by 25.3 percent to 733.22 billion rupees (5.53 billion US Dollars) in the first half of the current fiscal year that ended in mid-January.
In first half, the country saw a massive trade deficit of 693.2 billion rupees (-521.242 billion US dollars), with a total export worth 74.97 billion rupees (563.73 million US dollars) compared to import worth 768.17 billion rupees (577.615 billion US dollars). With low hopes of a drastic foreign exchange reserves boost from the tourism sector, strong remittance inflow has helped neutralise the deficit.
Liberalisation of Nepali economy in the 1990s fuelled he rise of foreign employment. The contribution of remittance to GDP increased from 1.5 percent in the 1990s to about a quarter in the recent years. But latest trend indicates that remittance can contribute much more to the economy. The focus of migrant workers is gradually shifting from India, Malaysia and Gulf countries to Europe. Nepalis historically targeted India, Malaysia, and Gulf countries for foreign employment owing to a relatively lower cost and easier processes. The increase in labour approvals for high-income countries indicates the further strengthening of remittance inflow in the coming years.
Much of the remittance inflow diverts to keeping up the consumption. Critics often outline the social costs of remittance: separation from friends and family. Government is yet to establish a sustainable alternative to reliance on remittance. Amid a cooperative crisis, for now, Nepal’s economy takes a sigh of relief.