Image: Google
For most poor countries, building up foreign reserves is like storing grain against a famine. Nepal has stored so much that its granaries are bursting. The central bank holds some $20bn in reserves, enough to pay for 16 months of imports. That is more than double its own stated target and far above the level experts deem prudent. In a turbulent world, this hoard is a cushion against shocks. But cushions can be too soft. Nepal’s problem is not how to scrimp and save. It is how to stop saving so much. Its pile of idle dollars is a puzzle and a waste.
It seems a enviable dilemma. After years of worrying about running out of hard currency, Nepal’s monetary guardians now fret about having too much. The country’s reserves have swelled on the back of burgeoning remittances from Nepalis working abroad. This cash is mostly parked in safe, low-yielding American government bonds. For a nation with creaking roads and legions of unemployed young people, that is a costly form of insurance. Every dollar earning meagre interest abroad is a rupee not building a bridge or paying down debt at home. Prudence is one thing, timidity another.
Other countries have found smarter ways to manage abundance. Take Norway, which salts away its oil riches in a giant sovereign-wealth fund that invests in global stocks and bonds. It earns healthy returns while keeping the money safe from political fingers. Singapore does something similar. The idea is to split reserves into separate pots: one for emergencies, one for longer-term investing. Nepal could try this. But such schemes mean you need robust institutions and a culture of clean, professional management. Does it have them?
Look at Nepal’s state-owned firms and the answer is grim. From hydropower to telecoms and bridges, public projects are notorious for delays, as well as cost overruns and political meddling. A sovereign fund run in that style would just export Nepal’s inefficiencies onto the world stage. The risk is low returns, sure, but outright loss as well. Without a real change in governance, creating a fancy new fund is a recipe for wasting wealth rather than stewarding it.
There are humbler, safer options. Nepal could use some of its excess to pay off foreign debt early. That would save on interest and burnish its credit score. Ghana and Egypt have done this to good effect. Or it could team up with the World Bank or the Asian Development Bank to co-finance infrastructure projects, using the banks’ expertise to impose discipline. It could even just lower its own excessive reserve target, freeing up cash for budget needs. What it should not do is keep stacking dollars in a vault for a rainy day that has already passed.
The hardest thing for a central banker who has spent a career fearing shortage is to accept surplus. But economics moves on. Nepal’s reserves are so big that the real risk is the slow bleed of opportunity cost rather than a balance-of-payments crisis. The money could be put to work if only the state can learn to work competently. For now the pile grows and the roads do not. Sometimes the safest course is also the most wasteful. ■
