Reserve position for FY 2023-24 not looking good

The reserve position as reported in the Budget Report for FY 2023-24 stands at USD 689 million  (mn) adequate to cover for 14 months of essential imports.

Gross international reserves at the end of FY 2021-22 stood at USD 833 mn, sufficient to cover 15 months of essential imports. However, overtime, with the widening of the current account deficit and lower financial inflows, there was drawdown on reserves.

The reserve position for FY 2022-23 is estimated at USD 689 mn adequate to cover 14 months of essential imports.

In the medium-term, with the moderation in imports and implementation of export promotion efforts, the reserve position is expected to improve.

The Constitution mandates to have a minimum foreign currency reserve that is adequate to meet the cost of not less than one year’s essential imports.

To conserve the dwindling reserve, the government put in a moratorium for vehicles, where all the import of vehicles were banned except for utility vehicles, heavy earth moving machines and agriculture machineries from 19 August 2022.

The vehicle moratorium was further extended in the early months this year, from 18 February for another six months. According to the notification from the Ministry of Finance, this was done so after careful consideration of the foreign reserves position and essential imports mandated by the Constitution.

Although the reserve is enough for 14 months with the reserve position expected to improve, the Prime Minister on 26 May, his monthly meets with the representatives of the private sector, shared that phase two of the moratorium could come anytime.

According to the Prime Minister, the RMA alerts the government three months in advance, if the projected reserve position is expected to hit the Constitutional requirement.

Upon the warning, the Finance Ministry will forecast the reserve position and if the reserve position is expected to see no improvements and touch the critical period’s value, the Phase Two Moratorium will put into effect.

The Phase Two Moratorium proposes to suspend construction loans, and put a ban on the import of furniture, processed meat and food items, junk foods, alcohol, and LED TV.

A Royal Monetary Authority (RMA) on 9 June notified the Financial Institutions (FIs) on the temporary moratorium of new housing and hotel construction loan. The circular mentioned one of the reasons for the moratorium to be in view of the broader concerns regarding outflow of foreign currency.

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