Import of luxury goods opened, relief or pressure on the economy?

21 November, Kathmandu. After about 8 and a half months, the government has decided not to continue the ban on the import of luxury goods. In the cabinet meeting held on Tuesday, it was decided not to continue the import ban on high-end vehicles, mobile phones, liquor and motorcycles after the end of November.

Keeping in view the fact that the demand in the market has reduced and the economy is heading towards recession and it is becoming difficult for the government to meet the revenue targets, the government has removed the restrictions on the import of various items .

The Ministry of Finance and the Ministry of Commerce discussed this at different stages. Now the ban will be officially lifted after the commerce ministry publishes a notice in the gazette. Restrictions on mobile phones above USD 300, diesel and petrol vehicles above USD 50,000, foreign liquor and motorcycles above 150 cc will be removed.

According to a minister, the decision was taken after concluding that the external sector of the economy, which was pushed towards problems, is on the path of recovery.
“There were discussions about not opening up the import of liquor, but after saying that the tourism industry might be affected, the government has come to the conclusion that the ban will be lifted,” the minister said.

International donor agencies are also suggesting the use of monetary instruments with interest rates instead of sanctions.

After demonetisation, the pressure on the external sector of the economy seems to be improving. After the search, the situation has become savable. Foreign exchange reserves have also improved. Due to the increase in remittance inflow, the pressure on the reserves has also reduced. The government concluded that due to all these conditions the external sector of the economy is no longer under much pressure.

With foreign exchange reserves depleting due to increase in imports, the government has adopted a policy to impose a complete ban on the import of 10 types of luxury goods by the end of the financial year 13 Baisakh 2079. While the import of liquor, tobacco, crisps and nuts, food, diamonds, toys of all kinds, TVs and color TVs larger than 32 inches has been opened up, four items remain banned so far.

imbalance in the economy
Steps taken to reform the external sector have brought another kind of problem in the real, government finance and financial sectors of the economy. In a survey conducted by the Confederation of Industries (CNI), there was a high rate of contraction in demand in the market after taking various control policies including import ban.

According to the survey of CNI, in the first quarter of the financial year, the total demand of the country has decreased by more than 28 percent. Due to this, the total business in the market has declined by 25 percent.

The biggest decline in demand was automobiles. Similarly, steel, real estate, footwear, engineering and construction companies were also affected by the zero margin regime.

Demand for the automobile sector decreased by 78 percent, steel by 61 percent, footwear industry by 45.3 percent, engineering and construction companies and small and domestic industry products by 33.7 percent, and 43.3 percent by 43.3 percent. The turnover of these areas has also decreased almost at the same rate.

According to CNI, the average receipt amount has decreased by 22 per cent during this period. Due to the cyclical effect in the market, LCs opened by industries have also come down by up to 50%.

The business of e-commerce companies, which increased demand by 5.5 percent, decreased by 1 percent.

The private sector has been demanding that the reins be loosened to prevent a further drop in professional morale, saying the over-control system has resulted in a huge drop in demand. The CNI survey concluded that two-thirds of investors who had planned to invest and add to it backed out.
In view of the demands of the traders and their own needs, the government has reversed the policy of import ban.

Nepal Rastra Bank is also in favor of gradually lifting restrictions on imports after a quarterly review of monetary policy. Now RBI is preparing to gradually remove the provision of cash margin in imports.

Last Friday, the National Bank removed the cash margin it has to keep on the import of various construction materials. RBI spokesperson Gunakaran Bhatt says the cash margin system will be eased based on the policy taken by the monetary policy review. According to him, the result of strict imports has been seen positively in the economy.

The RBI is also of the view that imports can be kept in place through monetary instruments rather than restrictive ones. Rashtra Bank officials say they are aware that banks should continue to discourage indiscriminate investment in luxury goods imports.

The external sector of the economy is showing improvement after the move to ban imports. According to the bank’s first quarter report, foreign exchange reserves have also improved after research on savings. In the financial year 2077/078, the balance sheet was in a surplus of 1 trillion 2 billion and by the end of the financial year 2078/79, it was in a deficit of 2 trillion 55 billion 26 billion. However, after 14 months in the third month of the current year, there is a surplus of 12 billion 43 crores.

Similarly, the total foreign exchange reserves which stood at 13 trillion 99 billion 30 million at the end of June 2078 fell to 12 trillion 15 billion 80 million at the end of June 2079. However, due to increase in the value of dollar in the month of October of the current year, the foreign exchange reserves have reached 12 trillion 46 billion 22 billion as compared to June. The central bank has estimated that this foreign exchange reserves can cover 8.3 months of imports of goods and services.

After the import ban took a severe hit to customs revenue, the finance ministry was anyway in favor of opening up imports. Since not only customs duty but also value added tax was affected, the finance ministry said such a situation would deal a major blow to the public finance sector of the economy.

The government’s conclusion is that the ban has caused a double whammy to revenue as smuggling of liquor and mobile phones has increased.

According to the ministry, till December 19 of the current financial year, the government has earned two trillion 98 billion rupees (22 percent) from the revenue. While in the last year, three trillion 77 billion rupees (33 percent) of revenue was collected during the period under review. Officials say that the situation of revenue collection has also created a situation where the burden of imports cannot be removed.

They claim that the ground is now ready for easing the control-oriented measures taken to balance the external sector to prevent further problems in government finances and the real sector. They say that the end of the ban will provide relief from the uproar caused by the reduction in market demand and government revenue.

external pressure
However, the National Bank and government officials are of the opinion that the past mistake of easing imports from all sides at once should not be repeated.

In the past, the government and the National Bank were under pressure when the economy faced problems due to failure to take appropriate steps in external sector management.
Even now, there are differences between the National Bank and the government over the balance of managing one sector of the economy while managing another.

Economic stability is one of the prime goals of any country. Under economic stability, the main responsibility for maintaining price stability, external sector stability and financial sector stability is generally given to the central bank, while the government’s fiscal policy and the central bank’s monetary policy play a role in maintaining overall economic stability. Work as complementary policies to others.

External sector stability refers to a situation where trade and other financial transactions with foreign countries reduce volatility.

That is, external sector indicators such as the exchange rate, current account deficit and foreign exchange reserves should remain in balance. If the transactions with the external sector are in a large deficit, problems may appear in the stability of the external sector due to the lack of foreign exchange reserves in the country. It is also affecting the domestic economy. To maintain the balance with the external sector, the Nepal Rastra Bank manages the exchange rate and external reserves.

In the past, due to lack of proper management, foreign exchange reserves were affected and measures ranging from ban on imports were taken. However, the national bank fears that if all restrictions on imports are relaxed at once, another problem will arise.

RBI fears that if flexibility is adopted to open the ban on luxury items, the same problem in foreign exchange reserves will be repeated after March 2077.

As there is some improvement in the liquidity position, the liquidity position has also started easing. However, looking at government finance management going forward, as policy arrangements to manage imports of certain commodities are gradually being eased, it appears that pressures on liquidity and interest rates will ease for some time. will continue,’ said the National Bank in its monetary policy review.

Dr. Prakash Kumar Shrestha, head of the Economic Research Department of the National Bank, says that even if the government opens imports, the cash margin, bank rate and policy rate in LC will remain the same as before. They argue that the cash margin and interest rate should be reconsidered only after analyzing the impact of opening up imports on the external sector.

Through the quarterly review of monetary policy, the national bank has attempted to address the issue of interest rate hikes raised by the private sector. RBI expects the interest rate to balance if the spread rate is reduced by 0.4 percentage points between the interest rate that banks borrow and pay on deposits. But there is no flexibility in opening the import ban. Instead, the National Bank has suggested reforming the macroeconomic structure to increase domestic production.

The growing dependence on imports for consumption, production and government revenue shows that the country’s internal production system is weak. As a result, maintaining internal and external balance in a sustainable manner is challenging. In the monetary policy review, the Central Bank said, ‘If the interest rate is kept low, it will put pressure on foreign exchange reserves and liquidity, and if it is kept high If kept, government financial management and industrial business will be affected.

Source: OnlineKhabar

Himal Sanchar