External sector remains challenging though country’s internal economy improves

The country’s economy which remained sluggish in the past couple of quarters due to COVID-19 impacts, the Russia-Ukraine conflict, political instability and some other factors is now gradually on track.

As per the recent data shared by Nepal Rastra Bank (NRB), the central bank, the external sector of the country’s economy is in its comfort zone. However, indicators of public finance are not up to the mark. Poor revenue collection, limited capital expenditure, burgeoning recurrent expenditure and increasing public debt are the key challenges that the country’s economy is facing now.

The growth rate is below expectations due to low investment in the areas of capital formation and internal production.

Likewise, the unemployment rate and exodus of youth are unabated.

Despite sufficient liquidity in the banking sector and low-interest rates, the loan demand has not gone up while the market is slow owing to inflation and limited demand from the consumers.

Similarly, the real estate and stock market have fared well. Against this backdrop, RSS has done a comparative analysis of the economic indicators of the country over the past year.

Gross foreign exchange reserves increased 19.9 per cent to Rs 1844.94 billion in mid-February 2024 from Rs 1539.36 billion in mid-July 2023. In US dollar terms, the gross foreign exchange reserves increased 18.6 per cent to 13.89 billion in mid-February 2024 from 11.71 billion in mid-July 2023.

Considering the imports of the first seven months of the current fiscal year, the foreign exchange reserves is sufficient for the import of goods of 14.7 months, and goods and services of 12.3 months while the foreign exchange reserves were sufficient to cover the import of goods of 10.8 months and goods and services of 9.4 months in the same period in the last fiscal year.

The ratio of reserves-to-GDP is 34.3 percent while such ratio was 25.1 percent in the same period of 2023.

The current account is at a surplus of Rs 161.69 billion in the first seven months of the current fiscal year against a deficit of Rs 40.16 billion in the same period of the previous year.

In the review period, the capital transfer decreased 29 per cent to Rs 3.80 billion and net foreign direct investment (FDI) remained positive at Rs 5.18 billion. In the same period of the previous year, capital transfer amounted to Rs 5.35 billion and net FDI amounted to Rs 1.04 billion, according to the central bank.

In the first seven months of the last fiscal year (2022-23), the country’s remittance inflow amounted to Rs 689.88 billion and the figure in the corresponding period in the current fiscal year (2023-24) rose to Rs 839 billion. The rise is 21.6 per cent.

Foreign trade

In the initial seven months of the current fiscal year, Nepal experienced a 7.1 per cent fall in total merchandise exports was amounted to Rs 86.83 billion.

Till the month of Magh (January-February) of the last fiscal year, Nepal exported goods worth Rs 93.43 billion. This year, unlike the previous fiscal year, not only exports but imports have also decreased. In the first seven months of the last fiscal year, Nepal’s import trade amounted to Rs 919 billion and it dropped to Rs 897.94 billion in the corresponding period of the current fiscal year.

Government expenditures

The total expenditure of the government stood at Rs.686.75 billion during the seven months of 2023/24 and compared to the growth of 13.0 per cent in the last fiscal year, government expenditure increased by 2.9 per cent in this period. The recurrent expenditure, capital expenditure and financial expenditure amounted to Rs.509.04 billion, Rs.63.58 billion and Rs.114.13 billion respectively in the given time.

The total government’s expenditure was Rs 667.66 billion in the corresponding period last fiscal year with current expenditure of Rs 531.50 billion, capital expenditure of Rs 66.30 billion and financial expenditure of Rs 69.86 billion.

The data shows that this year, the current and capital expenditures decreased compared to the previous year while the financial expenditures increased.

The budget allocated towards the financial management is being spent for repaying the public debt, including the interest.

Compared to the last fiscal year, there is no notable progress in revenue collection this year. In the seven months of the last fiscal year, the government’s revenue collection (towards taxation) amounted to Rs 464.19 billion and it was Rs 50.5 billion towards non-taxation and in total, the revenue mobilisation was worth Rs 514.69 billion.

In the corresponding period of the current fiscal, the total revenue mobilization of the government (including the amount to be transferred to provincial and local governments) stood at Rs.567.40 billion. The tax revenue amounted to Rs.510.50 billion and non-tax revenue Rs.56.91 billion in the period.

Similarly, the cash balance at various accounts of the GoN maintained with NRB remained at Rs.215.26 billion (including Provincial Governments and Local Government Accounts) in mid-February 2024. Such balance was Rs.65.36 billion in mid-July 2023.

Inflation     

The rate of inflation has decreased to some extent this year as compared to the previous year. The year-on-year inflation based on the consumer price index until February 12, 2023, was 7.88 per cent, and it is at 5.01 per cent until February 12, 2024.

Service sector  

Net services income remained at a deficit of Rs.37.26 billion in the review period compared to a deficit of Rs.44.36 billion in the same period of the previous year.

Under the service account, travel income increased 44.5 per cent to Rs.45.40 billion in the review period which was Rs.31.41 billion in the same period of the previous year. Under the service account, travel payments increased 49.9 per cent to Rs.104.75 billion, including Rs.66.64 billion for education. Such payments were Rs.69.89 billion and Rs.43.74 billion respectively in the same period of the previous year.

Foreign exchange rate     

Nepalese currency vis-à-vis the US dollar depreciated 1.05 per cent in mid-February 2024 from mid-July 2023. It had depreciated by 3.18 per cent in the same period of the previous year. The buying exchange rate per US dollar stood at Rs.132.56 in mid-February 2024 compared to Rs.131.17 in mid-July 2023.

Deposit Mobilization     

Deposits at Banks and Financial Institutions (BFIs) increased Rs.397.20 billion (7.0 per cent) in the review period compared to an increase of Rs. 253.97 billion (5.0 per cent) in the corresponding period of the previous year.

On a y-o-y basis, deposits at BFIs expanded 14.4 per cent in mid-February 2024. The share of demand, saving and fixed deposits in total deposits stood at 6.2 per cent, 27.4 per cent and 59.8 per cent respectively in mid-February 2024. Such shares were 7.8 per cent, 25.8 per cent and 60.1 per cent respectively a year ago.

The share of institutional deposits in a total deposit of BFIs stood at 36.4 per cent in mid-February 2024. Such a share was 36.6 per cent in mid-February 2023.

Credit Disbursements    

Private sector credit from BFIs increased Rs.197.21 billion (4.1 per cent) in the review period compared to an increment of Rs.148.12 billion (3.2 per cent) in the corresponding period of the previous year. On a y-o-y basis, credit to the private sector from BFIs increased 4.7 per cent in mid-February 2024.

The shares of private sector credit from BFIs to non-financial corporations and households stand at 63.2 per cent and 36.8 per cent respectively in mid-February 2024. Such shares were 64.5 per cent and 35.5 per cent a year ago.

In the review period, private sector credit from commercial banks, development banks and finance companies increased by 4.2 per cent, 3.4 per cent and 3.0 per cent respectively.

In the review period, out of the total outstanding credit of the BFIs, 11.6 per cent is against the collateral of current assets (such as agricultural and non-agricultural products) and 67.6 per cent against land and buildings. Such ratios were 12.2 per cent and 67.3 per cent respectively a year ago.

In the review period, outstanding loans of BFIs to the agriculture sector loan increased by 0.8 per cent, the production sector by 8.8 per cent, the construction sector by 4.9 per cent, the transportation, communication and public sector by 7.4 per cent, the wholesale and retail sector 3.0 per cent, service industry sector 5.6 per cent and consumable sector 6.9 per cent.

In the review period, term loans extended by BFIs increased by 14.0 per cent, cash credit loans by 26.0 per cent, trust receipt (import) loans by 11.1 per cent, real estate loans (including residential personal home loans) by 5.2 per cent, and margin nature loans 11.6 per cent, whereas overdraft loan decreased 42.3 per cent (mainly due to reclassification of loan from the last year) and hire purchase loan, decreased 20.3 per cent.

Interest Rates     

The weighted average 91-day treasury bills rate remained at 3.34 per cent in the seventh month of 2023/24, which was 9.79 per cent in the corresponding month a year ago. The weighted average inter-bank transaction rate among BFIs, which was 5.29 per cent a year ago, decreased to 3.04 per cent in the review month.

The average base rates of commercial banks, development banks and finance companies stood at 9.06 per cent, 11.13 per cent and 12.70 per cent respectively in the seventh month of 2023/24. The average base rate of commercial banks was 10.72 per cent in the corresponding month a year ago.

Weighted average deposit rates of commercial banks, development banks and finance companies stood at 7.01 per cent, 8.26 per cent and 9.45 per cent respectively in the review month. The weighted average deposit rate of commercial banks was 8.41 per cent a year ago.

Likewise, the weighted average lending rate of commercial banks, development banks and finance companies stood at 11.08 per cent, 12.85 per cent and 13.93 per cent respectively in the review month. Such a rate of commercial banks was 13.03 per cent in the corresponding month a year ago.