April 8: With the decline in inflow of remittance and high trade deficit, the central bank is focused on preparing a strategy to preserve the stock of foreign exchange reserves. 

Nepal Rastra Bank (NRB) has adopted a strategy to prevent the foreign exchange reserves from further declining, fearing that the country will not be able to import medicines, food and other essential commodities if the situation goes out of hand. 

Nepal’s foreign exchange reserves have been under pressure since the beginning of the current fiscal year. In order to increase foreign exchange reserves, NRB facilitated deposit of foreign currency by non-resident Nepalis and also increased the interest rate on savings made through remittance. As the policy did not work, the central bank resorted to a strategy of tightening the screws on areas where foreign exchange is spent. 

Last Monday, NRB called the chief executive officers (CEOs) of commercial banks and instructed them not to open LCs for import of luxurious goods. Earlier, the NRB had twice issued a circular stating that 100 percent cash margin should be maintained for importing 47 different types of goods. Besides, imports of gold and silver were also limited. 

As the policy to tighten imports didn’t have much effect, the NRB verbally instructed the banks not to open LCs for some time. Since the NRB does not have the right to stop the import, it has tried to discourage the banks by verbally urging them not to open LCs. 

Spokesperson of NRB Dr Gunakar Bhatt says that the focus is now on preserving the foreign exchange reserves so that there won't be problems in importing essential goods. “The pressure on foreign exchange reserves has been mounting since the beginning of the current fiscal year,” he said, adding, “We want to stop importing luxury items, including gold and silver, for a while as we might have a problem buying essential medicines.”  

On Tuesday, NRB Governor Maha Prasad Adhikari briefed Finance Minister Janardan Sharma about the state of foreign exchange reserves and suggested that imports of some goods should be stopped for the time being. 

Even though the NRB has implemented cash margin provision, bankers have been suggesting to stop opening new LCs for some time. 

NRB currently has foreign exchange reserves to support imports of goods and services for six and a half months. Until one year ago, there was enough reserve to support a year of import of goods and services. It is said that reaching foreign exchange reserves that support imports for less than six months would be very dangerous to the economy. 

In the monetary policy, the NRB had set a target of maintaining the foreign exchange reserves that would support imports for up to seven months. The country's balance of payments is at a loss of Rs 247 billion. The trade deficit has exceeded Rs 1.15 trillion.