August Analysis: Economy and Development

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With Nepal Electricity Association (NEA) reporting a profit of Rs. 16.1 billion in 2021/22, the prospect of reliving Nepal’s trade deficit problem through the expansion of its hydroelectricity sector is promising. Likewise, amid increased exports and investments, India has emerged as a strong energy trade partner. While the annual Nepal Rastra Bank report for 2021/22 shows signs of economic recovery, the closure at Tatopani and Rasuwagadhi border points and extension of import restrictions are likely to induce a shortage during the upcoming festival season.

Timeline of Major Events

DateEvent
August 10, 2022Tatopani border point is closed
August 14, 2022Rasuwagadhi border point is closed
August 18, 2022Nepal’s Investment Board and India’s NHPC sign an MoU to develop Seti hydropower projects
August 30, 2022Import ban on certain “luxury goods” is extended up to October 14

Nepal’s profiting hydroelectricity sector

Kaligandaki Hydropower Project Station. Photo: RSS

Nepal exports electricity during the monsoon when the country’s hydropower plants generate surplus and imports electricity during the dry seasons. While import of electricity has historically exceeded export, the trade deficit has been showing improvement in recent years. As the country’s hydropower potential grows with foreign, private-sector, and government investment, NEA claims that the sector will be able to generate a trade surplus in the coming years. As such, the prospect of relieving Nepal’s trade deficit and foreign exchange reserve vulnerability through the expansion of the country’s hydroelectricity sector and subsequent import-substitution and export-promotion has materialized.

As a country that is entirely dependent on imports for the supply of petroleum products (its largest imports), Nepali economy remains vulnerable to the international market. Owing to international shortages and global inflation, the value of petroleum products imported by Nepal increased by over 90% in 2021/22 compared to 2020/21. This propelled further inflation in the country. By encouraging use of electricity in cooking and transportation through the promotion of electric cookers and electric vehicles respectively, Nepal can reduce its reliance on petroleum products. Further, the expansion of hydropower production can benefit the country through export- promotion. In this regard, South Asia has emerged as a viable region for cross-border energy trade, in particular there is increased interest from Bangladesh and India to import from Nepal.

India’s growing involvement in the electricity sector

The West Seti and Seti River hydropower projects have been in the works since over 50 years ago, having been passed on from one developer to another without completion. The most recent undertaking of the project was by a Chinese hydropower developer, before it was scrapped in 2018 when the Chinese company opted out citing financial unfeasibility. With the Indian investment, the Seti hydropower projects can produce electricity throughout the year and they are aimed to be used to supply electricity to India and Bangladesh. However, since the project has been rejected and unfinished by many developers due to difficulties with profitability and rehabilitation costs, it is unclear if the Indian venture will finish it. Increased investment in hydropower projects, along with NEA’s participation in the Indian Energy Exchange market and talks of government-to- government electricity deal, shows that India can be a strong energy trade partner for Nepal.

Signs of economic recovery

Table 1 presents some of the major macroeconomic indicators included in the report.

Indicator2021/222020/21
GDP at constant prices (in Rs.)2.52 trillion2.38 trillion
GDP per capita at constant prices (in Rs.)85,50581,573
GDP per capita at constant prices (growth rate)4.80%3.20%
GDP per capita (in USD)13721239
CPI (Inflation)6.32%3.60%
Trade deficit (in Rs.)1.92 trillion1.40 trillion
Workers’ remittance (in Rs.)1.00 trillion0.96 trillion

According to the report, a GDP growth rate of 4.8% was observed, an improvement from the previous year’s growth rate of 3.2%. Inflation, however, was almost twice the previous year’s value. While June recorded the highest inflation (year-on-year) with a rate of 8.56%, it stood at 8.08% in July, the final month of the fiscal year, and the annual average stood at 6.32%. The largest inflation was seen in the prices of ghee and oil (26%) followed by transportation (15%).

As for the external sector, Nepal’s annual trade balance was at a deficit of Rs. 1.92 trillion. The foreign exchange reserve shrunk by Rs. 255 billion this fiscal year, despite the last few months adding to the reserve. The decline in foreign exchange reserve is attributable to the global supply disruptions and international rise in prices induced by COVID and the conflict in Ukraine.

NRB’s report shows that there are signs of recovery in regards to the foreign exchange reserve crunch. The number of new registrations for migrant workers increased by 392% while renewed entry increased by 199%; we can thus expect increased remittance income in the future. Remittance income exceeded Rs. 1 trillion, but compared to the previous year, the amount is only a 2.2% increase. Likewise, with fuel prices lowering internationally, and supply chains getting recovering, we can expect that the economy will be eased in the future.

Obstacles to trade

Since the 2015 earthquake, trade with China through the Northern border points has seen frequent disruptions. While export through Tatopani and Rasuwagadhi, the two operational border points, has been completely zero for over 2 years, imports too have been minimal. In the fiscal year 2021/22, total exports to China declined by 20.4%. Due to the closure at both border points, goods headed towards Nepal targeting the festive season have been stranded, and it is unclear if the border will reopen before the festive season. Apart from hampering businesses and transporters operating at the Norther border, this also propels inflation and shortages which affects consumers.

Meanwhile, the embargo introduced by Nepal government on its imports of non-essential goods is also an obstruction to the supply of goods in the country. The import restrictions imposed to curtail shrinking foreign exchange reserve was extended up to August 30 citing lack of improvements in the reserve. As improvements were seen in the reserve, the restrictions from some goods were lifted, but import of automobiles, mobile phones, and liquor is still heavily restricted. During Dashain and Tihar, Nepal typically observes increased consumer demand. This year however, the various trade or import obstacles is set to induce a shortage and propel a higher inflation.

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