Impact of COVID 19 on International Trade of Nepal: Transactional and Operational Issues of Banks

The outbreak of pandemic Covid-19 all over the world has disturbed the political, social, economic, religious and financial structures of the whole world. World’s topmost economies such as the US, China, UK, Germany, France, Italy, Japan and many others are at the verge of collapse.

World economy is facing “severe” economic damage from the corona virus pandemic that could be even more costly than ‘2009 Financial Crisis’. Almost all countries of the world have fully or partially locked the country down. A complete global shutdown would not only be harmful to the economy but would affect civilization.  It has questioned ongoing chain of economics and their agency ship.

 World trade is expected to fall by between 13% and 32% in 2020 as the COVID 19 pandemic disrupts normal economic activity and life around the world.

The pandemic is having a noticeable impact on global economic growth. Due to pandemic Covid19, IMF projected that the global economy is projected to contract sharply by 3 percent in 2020. The Organization for Economic Cooperation and Development (OECD) stated that global growth could be cut in half to 1.5% in 2020 if the virus continues to spread. Most of the economists have already predicted about the recession to happen because there is no surety and still no one knows that how for this pandemic fall and how long the impact would be is still difficult to predict.

The World Bank has forecast a sharp fall in the growth rate of GDP in Nepal. The growth rate of Nepal is projected at a range between 1.5 and 2.8 percent in FY 2020 reflecting lower remittances, trade and tourism, and broader disruptions caused by the COVID-19 outbreak. Central Bureau of Statistics of Nepal has projected the growth rate of Nepal to be 2.27% for FY 2019/20.

A country-wide lockdown in Nepal came into effect on 24 March, and is scheduled to end on 18 May. COVID 19 outbreak in the country has affected all sectors in the economy. So, it also has an adverse impact on international trade and its operation.

Nepal is predominantly an import driven economy running huge trade and current account deficits which has threatened our foreign currency reserve and external economic stability. Nepal depends on the neighbors for almost everything—from agricultural seeds to industrial raw materials, from daily consumable goods to medicines and so on.

About 65% of our foreign trade is dependent on India. We import 65% total trade from India, 22% from china and rest from other countries. Out of total export, India covers nearly 57% and its only 3% in China.   Share of import to the foreign trade of Nepal is more than 90% but share of export is less than 10%. As both of the neighbor countries are severely affected, trade with them will be almost disrupted.

Three major areas that are highly affected in Nepal are: Remittance, Tourism and Trade. The effect of corona virus on remittance inflow is disastrous. The downturn in remittance has created severe impact on overall consumption in the country. So, there would be huge decline in aggregate demand for goods and services for next one year.

Consequently, import trade of Nepal would be adversely affected. Remittance inflow in last year was 7.8 billion dollar which is expected to reduce by 20%. Income from tourism sector is expected to decrease by 60% and hence the SME and hotel sector will be badly affected. As large number of citizens are going to be returned back to Nepal, their purchasing power capacity will be degraded and hence weakens the purchasing power. It reduces the purchasing habit of imported luxurious products and hence reduces the volume of import.

Mobility or movement of people within the country might be significantly reduced and hence the demand of petroleum will fall. It reduces the huge volume of import of petroleum. Import is a major source of government revenue. Nearly 40% of total revenue is contributed by foreign trade based tax (specially import-based tax) Import based VAT is almost two third of the total VAT collection. Including two big economies, total international market is badly affected by pandemic.

As Nepal is fully dependent on other countries, there will be high impact on supply chain and import trade Due to disturbance in supply chain, country will be unable to export the goods and services to other countries. As the employment in foreign labor market is expected to cut off, huge population will be shifted back to the rural areas and hence the level of domestic consumption will be increased. This also disturb the mechanism of export.

Due to increased exchange rate, import will be expensive and export will be comparatively cheaper and hence it increases exports and reduces imports.

Based on first nine month data published by department of custom, total trade volume of Nepal in this fiscal year has been reached to 10.11 billion USD which was 11.31 billion USD at the same time of previous fiscal year. So it shows that foreign trade volume of Nepal has been sharply decreased by 6.19%. Likewise up to 9^th month of previous FY, total import of Nepal was 10.61 billion USD which has been declined to 9.82 billion at the same time of this FY. So, there is 7.45% decline in import trade.

The wholesale and retail trade is the second largest contributor to Nepalese economy (14.37%) which is already being affected by drastic downfall in imports from India, China and other countries. During this pandemic situation, there is tremendous decrease in the volume of LC opening. Other mode of international trade like advance payment, documentary collection are also badly impacted. Because of these reasons revenue collection of Nepal government has also been adversely affected.

Now, this is the time to think and grab the opportunities created by this Covid 19 outbreak. Unfertile land of Nepal is expected to be cultivated by citizens returned from foreign employment. Import substituting industry might be promoted. Import of petroleum, vehicles  and other luxurious product will be significantly reduced. Due to increased exchange rate, import will be expensive and export will be comparatively cheaper and hence it increases exports and reduces imports. As the trade deficit contracted because of lower imports, the current account deficit will be narrowed by significantly.

Transactional and Operational Issues of Banks

COVID 19 outbreak also has an adverse impact on trade operation of banks and financial institutions. Most of banks and financial institutions have remained opened as an essential service owing to a directive from government. Government has classified banks and financial institutions as essential service providers which are opened during the period of lockdown.

So, they are providing essential banking service to their clients in line with directive from NRB. Most of the banks in Nepal are lacking well tested and robust Business Continuity and Crisis Management Plan to ensure the continuity of banking service to their clients. The staff members providing services from branches to the clients adhere to the recommended safety measures such as Social distancing, use of mask and sanitizers. The clients and staffs are screened for temperatures while entering the branches.

Many branches of government banks operate government transactions. So, they remain opened in every day and other branches are open on need basis. So, bank branches operate in everyday with reduced operating hours. All most all head office departments have been operating effectively by keeping minimum numbers of staffs. Trade finance department of most of Nepalese banks have been centralized. So they perform trade operation centrally.

Nepal Rastra Bank already has issued 9 points circular to all BFIs. Banks have been asked to needful arrangements to provide draft, TT,LC and Bank Guarantee among other services to ensure supply of essential goods in the market. So, they have been providing continuous trade finance services like TT and LC to their clients even in this pandemic situation. All the banks are providing trade services during this time but safety measures is very important. So, there is big issue in the safety measures. All the banks must pay much attention for the safety of staffs and clients. As most of the banks do not have robust technology infrastructure which supports work from home, trade finance staffs are providing trade services physically working from office. Thus, technological support has been one of the major challenge.

How is NRB Responding?

NRB has issued a circular to the banks regarding restriction of certain items like vehicle that costs more than USD50000.00, Black Pepper, Beans, Nutmeg, Dates, and Alcohol drinks which are fully restricted to import. Likewise NRB also has increased the limit of Draft and TT. Banks are allowed to import medical supplies and medical equipment that cost up to 1 lakh without taking BCI and without keeping 10% retention during this pandemic situation.

Therefore, working modality on receiving a documents from nominated bank via email and considering its authenticity is major challenge in the time of increased cybercrime.

ICC has published a guideline on working modality of trade finance operations. With this reference, the central bank has also issued a circular where we are allowed to make payments in case of scanned documents received in an email from nominated bank followed by authenticated swift message. However, those applicants/importers whose goods have not arrived are hesitant to agree this clause.

Besides, all the risks arose from this mechanism should be borne by the applicant and applicant bank as well. And unless, all the related parties agree upon this, it has been difficult for banks to move forward. Even if the parties agree upon it, issues regarding delivery and examination of documents, liaison with applicants, document examination period, and definition of a banking or business day are yet to be properly assessed.  Article 35 of UCP 600 puts risk on the issuing bank.

Therefore, working modality on receiving a documents from nominated bank via email and considering its authenticity is major challenge in the time of increased cybercrime. Likewise copy documents that are endorsed by banks are acceptable for Kolkata Consulate General Office and our Custom offices during this pandemic situation in order to release the consignments. However, this has created a major hassle to our clients/ importer as releasing goods on copy bill of ladding is requiring lots of documentation and it is becoming time consuming.  While some shipping companies are still asking for original documents to be endorsed. So, proper guideline regarding releasing goods via copy bill of lading is yet to be come.

Conclusion

Trade Finance moves toward digitization. Trade finance has long been in need of a move way from paper documentation. Full Digitization and creation of specialized ecosystem will be single most efficient approach to reduce trade cost on a global scale, which will benefit all countries impacted by COVID 19. The crisis has opened the door for enhancing our technological infrastructure and look intro broader aspect of trade finance operation risks. We believe that this is the time of effective coordination with all the stakeholders of trade operations and thereby smoothen the trade transaction.

(Mr. Kandel is currently working at Nepal Bank Limited as a senior manager/ head of Trade Finance Department)