BY Prof dr. Kamal Raj Dhungel
In a globalised society, foreign exchange (FE) plays a pivotal role in economic development. Without FE, none of the countries worldwide would be able to engage in international trade. The inter-country transfer of goods and services is made more accessible with the innovation of the FE market. This market, commonly known as forex, determines the exchange rates of currencies from participating countries. Participating countries can buy, sell, exchange, etc., based on the relative exchange rate of their currency. Nepal is also a participant in the forex market, enabling it to buy and sell foreign currencies. Nepal's sources of foreign exchange earnings are limited, with the highest contribution coming from the export of services, followed by the export of goods, international tourism receipts, and foreign direct investment. There exists a varying relationship between FE reserves and economic development. The stronger the FE reserves, the more robust the relationship with economic development, and vice versa.
Almost all the countries around the globe are involved in exporting manufactured goods. Primarily, China, Japan, Germany, South Korea, India, Bangladesh, and many others export manufactured goods to countries worldwide. Export earnings play a vital role in accelerating their economic development. The Middle Eastern countries, in particular, rely heavily on oil export earnings for their development. In 2022, the average contribution of export earnings to the gross domestic product (GDP) of 133 countries was 47.15%. Nepal lacks distinctive goods for export. Traditional woven carpets, Pashmina, and various raw materials are among Nepal's export items. Additionally, Nepal exports sand and concrete to India on a significant scale. Unfortunately, the contribution of exports to GDP over the years has not been encouraging. Over an eight-year period (2015-2022), the average contribution of goods exports to GDP stood at 7.55%. The highest and lowest contributions to GDP within that period were 10.2% in 2015 and 5.1% in 2021, respectively. If Nepal can fully harness its hydropower potential, it could potentially increase its export earnings contribution to GDP to the global average level.
Nepal possesses significant potential for the tourism industry to flourish. It is one of Nepal's most promising resources. Natural beauty, biodiversity, cultural and religious diversity, social harmony, and other precious assets make Nepal an attractive destination for tourists. The travel and tourism industry holds substantial importance in the global economy, with a global average contribution to GDP of 7.6% in 2022. However, due to the underdevelopment of these sectors, the tourism industry has not yet made a significant contribution to the Nepali economy. Over the recent period (2015-2022), the average contribution of tourism to GDP stood at nearly 2%. The highest and lowest contributions to GDP within that period were 2.5% in 2017 and 0.7% in 2020, respectively. If Nepal were to fully realise its tourism potential, it could potentially increase its GDP share to match the contribution of the tourism industry to the global economy. However, for the travel and tourism industry to thrive, a stable political environment, coupled with high-quality governance, is essential. Without improvements in overall governance aimed at providing security and harmony, this sector may not experience significant growth.
The contribution of Foreign Direct Investment (FDI) to Nepal's GDP is insignificant. The global average for FDI's contribution in 2022 was 4.23%. Between 2015 and 2022, the average contribution of FDI to Nepal's GDP stood at nearly 0.4%. The highest and lowest contributions of FDI to GDP within that period were 0.6% in 2017 and 0.16% in 2022, respectively. If Nepal were to address its governance issues, including rampant fraud, bribery, and corruption, it could potentially increase the FDI-to-GDP proportion to match the global average in the future.
Undoubtedly, remittances have remained a major source of foreign exchange for Nepal since the beginning of the 21st century. The global average contribution of remittances to GDP in 2022, based on data from 168 countries, was 5.4%. Nepal ranks eighth globally in terms of remittance-receiving countries. Between 2015 and 2022, the average contribution of remittances to Nepal's GDP stood at 24.6%, which is nearly five times higher than the global average. The highest and lowest contributions of remittances to GDP within that period were 27.6% in 2015 and 22.3% in 2021, respectively. The average contribution of remittances to GDP is three times greater than the average contribution of exports, 13 times greater than the average contribution of tourism to GDP, and 63 times greater than the average contribution of FDI to GDP. This substantial influx of remittances has led to increased imports, with the country importing more and more. Exports, on the other hand, remain nominal in comparison to imports. In 2022, exports and imports accounted for 7.6 and 42.6% of GDP, respectively. This shows that imports are six times higher than exports. In this context, Nepal's economy heavily relies on remittances, which increased from 1.5% of GDP in the 1990s to 24.6% in the 2010s, a sixteen-fold increase during the period.
This heavy reliance on remittances carries significant risks as the unproductive sector absorbs the major share of remittances, potentially pushing the Nepali economy towards a crisis. There is also a risk of remittance discontinuity, as it depends on labour demand in the global market. A decrease in labour demand worldwide could make the economy less sustainable and increase the risk of economic failure. To mitigate these serious consequences, the government should develop plans, programs, and policies to channel remittances into productive sectors and create jobs within the country.
(Prof Dr.Dhungel is an Economicist)