In a recent decision, the Nepali government has chosen to end a seven-month-long import ban on what were categorized as “luxury goods.” This move is part of Nepal’s efforts to meet a condition set forth by the International Monetary Fund (IMF), particularly in anticipation of a new government formation.
The Cabinet meeting on Tuesday confirmed that the ban would be fully lifted, starting from December 16. A minister disclosed this development, stating, “The cabinet meeting has, in principle, approved the lifting of the restrictions.”
The initial import restrictions were implemented in April due to concerns over the rapid depletion of Nepal’s foreign currency reserves. These measures included requiring importers to maintain a 100 percent margin for opening a letter of credit. Subsequently, on April 26, the government imposed an embargo on 10 categories of products considered luxury items, encompassing items such as mobile phones valued at over $600 and motorcycles with engine capacities exceeding 250cc. These restrictions were later intensified, with mobile phones over $300 and motorcycles over 150cc also being prohibited.
On August 30, the government began to ease these restrictions, permitting the import of items like diamonds, large televisions, toys, cards, snacks, and tobacco. However, bans on automobiles, mobile phones, alcohol, and heavy motorcycles remained in place until December 15.
Notably, the IMF and economists alike criticized the extension of import bans, as it was seen as detrimental to trade and the overall economy, contradicting the principles of a free market economy. The IMF delayed the second installment of a $400 million loan to Nepal until February 2023 due to the country’s failure to meet certain conditions. Nepal had already received the first installment of $110 million.
Nepal faced economic challenges, including chronic current account deficits and vulnerability to external economic shocks, particularly in the aftermath of the Russia-Ukraine conflict, which disrupted global supply chains and led to soaring prices.
However, Nepal’s financial situation has improved over time, and the IMF has appreciated the government’s initiatives to address declining foreign exchange reserves while expressing concern over the import bans.
Automobile dealers have been among the most vocal critics of the import restrictions, citing significant negative impacts on their businesses. Dhruba Thapa, the president of the Nepal Automobile Dealers Association, revealed that more than 75 car showrooms had been forced to close, with an additional 70 on the brink of shuttering.
In January, the IMF granted Nepal a $395.9 million extended credit facility, designed to mitigate the impact of the COVID-19 pandemic on health and economic activities, protect vulnerable groups, maintain macroeconomic and financial stability, and support sustainable growth and poverty reduction. Under this agreement, the IMF was set to provide approximately $55 million in its second disbursement.
The COVID-19 pandemic had a substantial adverse effect on Nepal’s economy, with a severe second wave of infections in 2021 disrupting economic recovery. Nepal’s economy contracted by 2.1 percent in 2019-20, and the IMF predicted a partial recovery with 2.7 percent growth for 2020-21 and a further growth of 4.4 percent in 2021-22. The recovery of key sectors like tourism and services, which drive economic growth, is expected to take time. Imports have also surged following a sharp decline in 2020, contributing to a substantial current account deficit.
As per data from the Nepal Rastra Bank, the country’s foreign exchange reserves are currently sufficient to cover goods imports for 9.6 months and goods and services imports for 8.3 months. The balance of payments remained at a surplus of Rs12.43 billion, with gross foreign exchange reserves standing at $9.48 billion during the first quarter of the fiscal year ending in mid-October.
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