Banks to ‘discourage’ traders from opening Letters of Credit for luxury goods

Banks to ‘discourage’ traders from opening Letters of Credit for luxury goods

Gross foreign exchange reserves had plunged by 16.2 percent to Rs1.17 trillion as of mid-February 2022, down from Rs1.39 trillion in mid-July 2021. Nepali banks said they would follow the central bank’s “verbal directive” to "discourage" traders from opening Letters of Credit (LC) to import non-essential goods in an effort to stem the outflow of the country’s rapidly depleting foreign exchange reserves. Ballooning imports in recent months have led to massive amounts of foreign currency going out of the country, pushing the balance of payments into the red and raising concerns of a crisis, officials said.

According to bankers, they have not received a formal communication to this effect from the central bank.

“But acting on Nepal Rastra Bank’s instructions, we have discouraged the opening of LC for non-essential goods,” said Anil Kumar Upadhyay, president of the Nepal Bankers’ Association

“We have not restricted the opening of LC to import essential goods or production-oriented and agricultural products,” he said.

Imports jumped by 42.8 percent to Rs1.14 trillion during the first seven months of fiscal 2021-22, against an increase of 0.01 percent last year.

Purchases of petroleum products, medicine, crude palm oil, crude soybean oil, transport equipment, vehicles and parts, among others, have increased sharply.

According to Nepal Rastra Bank, the balance of payments showed a deficit of Rs247.03 billion in the review period against a surplus of Rs97.36 billion in the same period of the previous year.

The current account recorded a deficit of Rs413.86 billion in the review period, up from a Rs104.39 billion deficit in the same period of the previous year.

Gross foreign exchange reserves had plunged by 16.2 percent to Rs1.17 trillion as of mid-February 2022, down from Rs1.39 trillion in mid-July 2021.

"The central bank’s decision to restrict imports of luxury goods temporarily is intended to avoid a probable economic crisis, considering the current economic indicators," said Gunakar Bhatta, spokesperson for Nepal Rastra Bank.

“We have not directed banks to open LC for any particular goods,” he said.“The central bank is trying to control imports to conserve foreign exchange reserves to avoid a financial crisis,” said Upadhyay, who is also the CEO of Agricultural Development Bank.According to the central bank, an immense portion of bank loans has gone into paying for imports, so the country is short of money to finance economic activities needed to recharge the economy devastated by Covid-19."If imports maintain this pattern, it will put stress on the country’s foreign currency […]

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