Never before has Nepal, a Himalayan country with a population of 29 million people, faced such a serious economic crisis as it does today. On the external front, the country is in a crisis due to dwindling remittances, a widening trade deficit due to exceptional import growth, skyrocketing balance of payments imbalances, and dwindling foreign exchange reserves. On the home front, prices of basic goods have skyrocketed, and banks have refused to offer loans for most economic ventures.

Because of some of these economic issues, many Nepalis are concerned that the country is moving on the same route as Sri Lanka, where the pre-economic crisis symptoms were as distinct as they are in Nepal today.

However, Janardan Sharma, Nepal’s finance minister, who is merely a politician, and has no background in economics, has rejected the existence of any severe economic crisis in the country. Pressure is mounting on him to resign due to his failure to handle the economic situation.

Janardan Sharma has accused Maha Prasad Adhikari, the governor of Nepal’s central bank, of “incompetence, leaking secret information, and failing to execute his duties” in an attempt to shift attention away from himself. Adhikari was consequently suspended.

This created doubts about the government’s commitment to maintaining the independence of the country’s central bank. Janardan Sharma’s decision to suspend Maha Prasad Adhikari was annulled and he was reinstated to his post only when the supreme court intervened.

The squabble between Janardan Sharma and Maha Prasad Adhikari is an indication of the country’s economic woes. According to recent figures, the country’s inflation rate has risen to 7.14 percent, owing to increases in transportation and construction expenditures. Furthermore, the 41.77-point drop in the stock exchange rate has damaged investor confidence.

Because of the liquidity crisis, banks and financial institutions have found it increasingly difficult to make loans to productive industries such as agriculture, tourism, manufacturing, and energy. In the fall of 2021, banks extended $2.5 billion in loans, but this dropped to just $142 million at the beginning of 2022.

Furthermore, the World Bank cut the predicted pace of economic growth from 7% to 3%. The impact of the war in Ukraine, which has increased the costs of fuel and various agricultural products, has had a significant impact on the country’s economic growth rate. In the previous fiscal year, the country bought oil worth $2.27 billion, but imports have increased to $2.40 billion.

Despite its reputation as an agricultural country, Nepal has increasingly imported food grains over the years. In comparison to the previous year, Nepal’s imports of agro and food items from India increased by 38.9% in 2020–21. The country bought 1.2 million tonnes of rice for $402.91 million in 2020-21.

The trade imbalance increased to $9.5 billion in the first eight months of the current fiscal year as a result of the significant increase in imports, which is close to the total budgetary amount of the government of Nepal. Aside from that, the country is running low on foreign exchange reserves, which have dropped by more than 18% from $12 billion in the first eight months of the previous fiscal year to $9.6 billion in the same time of the current fiscal year 2021–22. At a time when the country is in desperate need of foreign money to pay its debt, with a debt service ratio of $333 million, the current level of foreign exchange reserves, which can only continue imports for nearly six months, is a cause for alarm.

To address the economic crisis, Nepal’s government accepted a $659 million grant from USAID for the development of infrastructure, such as roads and energy transmission lines, over five years. Furthermore, traders are prohibited from obtaining letters of credit to import luxury products such as automobiles and cosmetics.

In addition, the government is exploring a two-day weekend strategy to reduce oil demand and consumption. As if that wasn’t enough, the government cut gasoline spending by 20% for government agencies, ministries, and public corporations. The administration has also called on the Nepalese diaspora living abroad to open dollar accounts and invest in the country.

Only time will tell how effective the Nepalese government’s actions to solve the economic crisis would be in addressing the issue, which is worsening by the day. Though some of the government’s efforts may cut imports and, to some extent, control the outflows of depleting foreign exchange reserves, there is concern that they may have an impact on revenue collection. Because the country only possesses a few exportable commodities, increasing exports in the short term is a remote possibility.

As a result, the government’s sole options are to seek foreign direct investment, revitalize the tourism industry, and implement the Millennium Challenge Corporation pact to boost foreign exchange reserves. Diplomatic missions in other countries, particularly in developed countries such as the United States, the United Kingdom, Australia, Japan, South Korea, Canada, and Europe, should be encouraged to engage with the Nepali diaspora to encourage them to send money to Nepal through the banking channel and invest in productive sectors. If this is done, Nepal can avoid becoming like Sri Lanka, which is experiencing a serious economic crisis due to depleted foreign exchange reserves.