Balance of payment of Nepal
The balance of payments account is a systematic record of all the transactions of a country’s inhabitants with the rest of the world over a given period of time. All transactions must be recorded somewhere. The IMF publishes a Balance Of Payments manual to standardize all balances of payments, and it contains the rules about which transactions are allowed.
A favorable balance of payments usually implies a surplus which means that more funds are flowing in than leaving. Every transaction is recorded twice, once as a credit and once as a debit. A key point to remember about the balance of payments account is that the value of all the transactions must sum to zero. The balance of payments account consists of the following components:
• Current Account
• Capital Account
Current Account
The Current Account includes all transactions which give rise to or use up national income.
The current account has four components:
• The balance on goods, which records exports and imports of physical, relocatable merchandise. The export of betel nut, for example, brings in a credit, while the import of cars creates a debit.
• The balance on services, which records transactions relating to the provision of non-physical items such as transport, travel and insurance.
• The balance on investment income, which records dividends and interest payments that Nepalese earn on assets held overseas, and also payments to foreign residents on assets held in Nepal.
• The balance on current transfers, which records transactions relating to the provision of goods, services, cash or other items of value between residents and non-residents that are intended to be used for consumption in the short term and for which there is no payment. A good example is the money that immigrants may send to relatives in their home country.

Capital Account
The shortfall in Nepal’s current account is financed by borrowing in international capital markets, selling assets or incurring liabilities to foreign residents. Such flows, along with those relating to foreign assets bought by Nepalese, are recorded in the financial account.
When foreign residents buy more assets in Nepal than Nepalese buy abroad (as has been most often the case), more capital flows into the country than out. Then a net surplus is recorded on the financial account.
Three main kinds of flows figure in the financial accounts:
• Direct investment, which is a lasting and significant interest in a business in another country. Such investments are stable in the sense that investors are unlikely to pull their money at short notice.
• Portfolio investment, which includes transactions in stocks and bonds where the investment does not allow the investor to have any influence on the operations of the foreign business. Such investments are sensitive to changes in investor sentiment.
• Reserve assets, which are financial assets that can be bought and sold only by monetary authorities (central banks, such as Nepal Rastra Bank) and include a country’s official reserves of foreign exchange.
• Other investment, which is a residual category that includes trade credits and private holdings of foreign currency.

Zero balance
In theory, a country’s balance of payments must add up to zero, since any deficits (or surpluses) on the current account are funded by inflows (or outflows) recorded in the financial and capital accounts. In practice there is not normally a zero balance because of small errors in the varied sources used to compile the figures. So an amount called a ‘net error’ or ‘residual’ is inserted to ensure that the balance of payments does indeed balance (add up to zero).

Analysis of balance of payment
Annex 1: Foreign Trade

6.4 The total export has increased by 5 percent and has reached Rs. 51.1 billion in the first eight months of current fiscal year 2012/13. Such export had increased by 14.1 percent and reached Rs. 48.6 billion in the same period of the previous year. On a monthly basis, the total export in March of the current fiscal year grew by 5 percent as compared to the export in February of the same fiscal year. In the review period, the share of export and import in foreign trade has been 12.4 percent and 87.6 percent respectively.

Chart 1: International Trade

50000.00 40000.00 30000.00 20000.00 10000.00 0.00
-10000.00 -20000.00 -30000.00 -40000.00 -50000.00 export import trade balance

Export

Of the total export in first eight months of fiscal year 2011/12, export to India increased only by 2 percent as compared to 14.5 percent increment in the first eight months of the previous year. Likewise, export to other countries has increased by 11.2 percent in the review period as compared to 13.5 percent increment recorded in the same period of the previous year. The export to other countries that grew by 5.6 percent in US Dollar term in the review period of previous year has declined by 0.4 percent in the same period totaling US Dollar 203.6 million.

Export of few commodities like GI pipe, jute bags, wire, ginger and garments to India has recorded an increase while export of lentils, leather and processed leather goods with other countries has also been increased. Of the total export, the share of export to India is 65.2 percent while that of other countries stands at 34.8 percent.

Import
The total import of goods during the review period totaled Rs. 360.6 billion recording a growth of 22.1 percent as compared to 16.6 percent growth and totaling Rs. 295.24 billion during the same period of previous year 2011/12. Such higher growth in imports in the current fiscal year as compared to the corresponding period of the previous fisal year is attributable to the higher growth of goods import from India and other countries. Reviewing the monthly records, the total import of goods in April of this year has declined by 1.1 percent in comparison to import of goods in the month of March. Of the total imports in the review period, import from India recorded a sharp rise of 24.2 percent in comparison to 12.0 percent rise in the same period of the previous year. Likewise, the growth rate of imports from other countries that stood at 26.3 percent in the review period of the previous year has now reached to 18.2 percent during the same period of the current fiscal year. In US Dollar term, growth in imports of goods from other countries in the review period remained to 6.5 percent totaling US Dollar 0.41 billion as compared to growth of 16.8 percent in the same period of the previous year. Imports especially of petroleum products, vehicles and their spare parts, cement, rice, medicines and other equipment from India have increased while imports of readymade garments, pipes and pipe fittings, silver, equipment for telecommunications and MS wire rods from other countries have also been increased. Of total imports, the shares of India and that of other countries stood at 65.9 percent and 34.1 percent respectively.

Trade Balance

Total trade deficit in the first eight months of the current fiscal year has grown up by 25.5 percent totaling Rs. 309.55 billion. Such trade deficit had recorded an increase of 17.1 percent in the same period of the previous year. Of the total trade deficit, deficit with India in review period has risen by 28.8 percent as compared to 11.5 percent increase in the same period of previous year.

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Likewise, trade deficit with other countries in the review period has increased by 19.5 percent as compared to 28.9 percent growth in the same period of previous year. Due to high growth rate of import the export/import ratio in first eight months of the review period has fallen to 14.1 percent from 16.4 percent in the corresponding period of the previous year.

Balance of Payments (BoP) Situation of Nepal
The BoP situation in the first eight months of the current fiscal year recorded a surplus of Rs. 11.78 billion as compared to the surplus of Rs. 81.9 billion in the same period of previous year. During the review period, the current account recorded a surplus of Rs. 9.5 billion while this figure was Rs. 37.51 billion during the same period of the previous year. The reason for such lower current account surplus in the review period is attributable to notable growth in import of goods and services and decreased growth rate in remittance inflow. In US Dollar term, the current account surplus in the review period stood at US$ 107.6 million. Such surplus was recorded as US$ 469.8 million in the same period of the previous year.
Chart 2: Remittance Inflow

40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000
-(5,000)

Currentaccount remittance inflow balance of payments

In the review period, FOB price based goods trade deficit recorded a higher growth rate of 25.4 percent totaling Rs. 297.87 billion as compared to the growth of 16.9 percent during the same period of previous year. During the review period, the net service

income recorded a surplus of Rs. 2.2 billion while such surplus stood at Rs. 11.7 billion during the same period of previous year.
The net transfer income that recorded a growth of 29.7 percent in previous year has increased by 16.8 percent totaling Rs. 299.94 billion in the review period of current fiscal year. The remittance inflow under transfer income that rose by 34.7 percent in the review period of previous year has increased by 22.2 percent totaling Rs. 266.9 billion in the same period of current fiscal year. In US Dollar term, remittance income that recorded a growth of 24.2 percent during the review period of previous year increased by 10.5 percent accounting US$ 3.05 billion during the same period of current fiscal year. Looking at monthly figure, the remittance inflow in April of the review year has grown up by 49.9 percent as compared to that in March of the same year.
Table 1 : Remittance Income 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13*

Rs. in Billion 100.14 142.68 209.70 231.73 253.55 359.55 266.09

Annual Percent Chance 2.5 42.5 47.0 10.5 9.4 41.8 -

Ratio to GDP 13.8 17.5 21.2 19.4 18.5 23.1 -

* First Eight Month data Source: Nepal Rastra Bank During the review period, the amount received in capital account as net capital transfer totaled Rs. 5.16 billion. The capital account surplus stood at Rs. 10.26 billion during the same period of previous year. In the review period, a sum of Rs. 4.82 billion was received in the fiscal account as Foreign Direct Investment (FDI). This figure stood at Rs. 6.2 billion in the corresponding period of the previous year. Other investment assets stood at Rs. 9.12 billion during the first eight months of the previous year while Rs. 14.74 billion is added to it during the review period of the current fiscal year. Likewise, on other investment liabilities side, flow of government debt totaled Rs. 7.08 billion while a principle of Rs. 8.17 billion has been repaid in the review period.

Conclusion
From this analysis of balance of payment of period 2008 to 2013, we conclude that economic condition of Nepal is on average basis. Cause of Nepal adverse balance of payments is increase in imports and decline in exports. Nepal is an underdeveloped county and its real GDP growth is less than other underdeveloped countries this is due to political instability conditions, lack of electricity and huge import of petroleum product from India. So Nepal needs to improve its export mainly with India.

Table 6 (a) : Foreign Trade Situation (First Eight Months)

(Percentage Change)

Description 2008/09 2009/10 2010/11 2011/2012 2012/13*

India 3.7 -3.3 10.1 14.5 2.0

Other Countries 42.9 -16.8 -1.7 13.5 11.2

Import 26.3 41.8 1.2 16.6 22.1

India 12.1 38.0 24.7 12.0 24.2

Other Countries 50.9 46.8 -27.2 26.3 18.2

Description 2008/09 2009/10 2010/11 2011/2012 2012/13*

Trade Balance 30.1 58.6 0.3 17.1 25.5

India 15.6 53.3 28.2 11.5 28.8

Other Countries 53.4 65.0 -30.9 28.9 19.5

Total Trade 24.2 31.8 1.9 16.3 19.7

India 10.2 29.3 22.4 12.4 21.0

Other Countries 49.4 35.2 -24.4 24.4 17.3

Export/Import Ratio 24.9 16.1 16.8 16.4 14.1

India 27.0 18.9 16.7 17.0 14.0

Other Countries 22.3 12.6 17.1 15.4 14.4

Share in Total Export (%) India 60.9 64.4 66.9 67.1 65.2

Other Countries 39.1 35.6 33.1 32.9 34.8

Share in Total Import (%) India 56.3 54.7 67.5 64.8 65.9

Other Countries 43.7 45.3 32.5 35.2 34.1

Share in Trade Balance (%) India 54.7 52.9 67.6 64.3 66.0

Other Countries 45.3 47.1 32.4 35.7 34.0

Share in Total Trade (%) India 57.2 56.1 67.4 65.1 65.8

Other Countries 42.8 43.9 32.6 34.9 34.2

Share of Import and Export in Total Trade Export 20.0 13.8 14.4 14.1 12.4

Import 80.0 86.2 85.6 85.9 87.6

* Provisional

Source: Nepal Rastra Bank