December 2023 Analysis: Economy & Development
In the fiscal year 2023/24 first quarter monetary policy review, the NRB lowered bank and policy rates to stimulate borrowing, aiming to expand the economy. Real estate loan adjustments aim to revitalise the sector, while eased regulations aid earthquake-affected families in house reconstruction. Axiata's exit from Nepal by selling Ncell's shares to Spectrlite UK Limited has stirred controversy amid suspicions of tax evasion. India's ban on onion exports led Nepal to import from China, highlighting Nepal's reliance on Indian onions.
The Nepal Rastra Bank (NRB)’s first quarter review of Monetary Policy of the fiscal year 2023/24 had several key changes. The prominent change included a reduction in the bank rate from 7.5 percent to 7 percent, and a decrease in the policy rate from 6.5 percent to 5.5 percent, encouraging people to borrow more from the financial institutions. This helps to expand the crunched economy and have a positive impact on the money supply. Furthermore, the NRB aims to keep the average consumer inflation rate below 6.5 percent, but the first three months saw it at 7.50 percent when compared to year-on-year basis, which is driven by higher prices in the food and beverage sectors.
In order to bolster foreign currency reserves, NRB increased the target coverage for imports from 7 to 10.3 months. The arrangement for real estate and share loans, which have been of great interest in recent times, has also been implemented. Adjustments were made in housing, real estate, and share mortgages (loans), lowering the risk burden for loans exceeding NPR 5 billion from 150 percent to 125 percent. Now reducing the risk weight by 25 percent, it is expected to pick up the slumping real estate business.
Moreover, with the view of easing the reconstruction of houses and buildings which got damaged due to the earthquake of November 2023, the NRB through its monetary policy review has eased the ratio between the loan and the mortgage security in the case of housing loans provided to families listed as earthquake victims.
Axiata’s, Ncell’s parent company, exit from Nepal following the sale of shares to Spectrlite UK Limited sparked concerns and controversy in Nepal. Axiata cited increased business challenges in Nepal for the sale, but government officials suspect potential tax evasion motives behind the sell/purchase. Thus, government regulators have been scrutinizing the ownership change, prompting the intervention of Parliament’s Public Accounts Committee. The sale's legality is questioned as it lacked compliance with Nepalese laws, notably without consent from the Nepal Telecommunication Authority (NTA). According to Telecommunication Regulations, 2054 BS, the approval of NTA must be obtained before buying and selling shares of the telecom company. Similarly, Regulation 4 (a) of Nepal Telecommunications Authority Regulations, 2076 BS also indicates that permission or approval of the NTA must be obtained before buying and selling or transferring shares of the shareholder.
Moreover, Axiata’s transaction with Spectrile can be viewed as an aim to evade capital gain tax to the government, which would be higher if the shares were sold at its true market worth. In 2016 Axiata bought 80 percent of Ncell's shares from TeliaSonera for 1.365 billion USD. However, the same was sold to Spectrlite for 50 million USD. In addition to that, Ncell’s capital gains tax dispute has been raging for a long time. The dispute that started after Axiata purchased Ncell from Teliasonera has not been resolved yet or simply sub judice in the Supreme Court of Nepal.
This unexpected exit of Axiata comes as a blow to Nepal's efforts to attract foreign direct investment, especially with an upcoming investment summit in April 2024. The government's goal to showcase Nepal as an investment-friendly destination now faces challenges due to Axiata's departure from the Nepali market.
Following India's decision to prohibit onion exports from December 7, traders in Nepal have turned to importing onions from China. This move comes as India has traditionally been the primary source of onion imports for Nepal. In addition to wheat, rice, and sugar, India has imposed extensive export restrictions on dry onions, as part of measures to control domestic prices leading up to the upcoming national election next year. This has had a significant impact on Nepal, which heavily relies on its southern neighbor for almost all its onion needs. The repercussions of these restrictions are strongly felt in Nepali markets, where any disturbance in the Indian onion supply chain is exacerbated.
Nevertheless, this is not a recent occurrence. In November 2019, the cost of onions surged to a record NPR 250 per kg in the Kathmandu Valley following India's imposition of a ban on onion exports in September of that year, aimed at ensuring an adequate domestic supply. The prohibition resulted in a widespread scarcity of onions across Asia, including Nepal. India once more halted onion exports from September 2020 to January 2021. During times of crisis, Nepal has been reaching out to its northern neighbor for agricultural imports. In the fiscal year 2019-20, Nepal imported 2,646 tonnes of onions from China, amounting to NPR 158.50 million, marking the highest recorded imports, as a response to India's export ban. Likewise, during the first four months of the fiscal year 2020-2021, Nepal imported onions worth NPR 56.19 million from China. After the ban, Chinese onions have been reaching the cities of Nepal.
To truly reduce the burden on consumer prices and ensure a stable supply of onions, Nepal needs to invest in its domestic agricultural sectors. By providing subsidies and incentives to farmers, the government can help Nepal become self-sufficient in agricultural produce.
Timeline of Major Events
| Date | Events |
| December 1, 2023 | Axiata concludes sale of Ncell, existing from Nepal. |
| December 7, 2023 | India put a halt on export of Onions. |
| December 8, 2023 | NRB published the first quarterly report of the Monetary Policy 2080/81 (2023/24). |
1st quarter review of Monetary Policy
The Nepal Rastra Bank (NRB)’s first quarter review of Monetary Policy of the fiscal year 2023/24 had several key changes. The prominent change included a reduction in the bank rate from 7.5 percent to 7 percent, and a decrease in the policy rate from 6.5 percent to 5.5 percent, encouraging people to borrow more from the financial institutions. This helps to expand the crunched economy and have a positive impact on the money supply. Furthermore, the NRB aims to keep the average consumer inflation rate below 6.5 percent, but the first three months saw it at 7.50 percent when compared to year-on-year basis, which is driven by higher prices in the food and beverage sectors.
In order to bolster foreign currency reserves, NRB increased the target coverage for imports from 7 to 10.3 months. The arrangement for real estate and share loans, which have been of great interest in recent times, has also been implemented. Adjustments were made in housing, real estate, and share mortgages (loans), lowering the risk burden for loans exceeding NPR 5 billion from 150 percent to 125 percent. Now reducing the risk weight by 25 percent, it is expected to pick up the slumping real estate business.
Moreover, with the view of easing the reconstruction of houses and buildings which got damaged due to the earthquake of November 2023, the NRB through its monetary policy review has eased the ratio between the loan and the mortgage security in the case of housing loans provided to families listed as earthquake victims.
Ncell’s share fiasco
Axiata’s, Ncell’s parent company, exit from Nepal following the sale of shares to Spectrlite UK Limited sparked concerns and controversy in Nepal. Axiata cited increased business challenges in Nepal for the sale, but government officials suspect potential tax evasion motives behind the sell/purchase. Thus, government regulators have been scrutinizing the ownership change, prompting the intervention of Parliament’s Public Accounts Committee. The sale's legality is questioned as it lacked compliance with Nepalese laws, notably without consent from the Nepal Telecommunication Authority (NTA). According to Telecommunication Regulations, 2054 BS, the approval of NTA must be obtained before buying and selling shares of the telecom company. Similarly, Regulation 4 (a) of Nepal Telecommunications Authority Regulations, 2076 BS also indicates that permission or approval of the NTA must be obtained before buying and selling or transferring shares of the shareholder.
Moreover, Axiata’s transaction with Spectrile can be viewed as an aim to evade capital gain tax to the government, which would be higher if the shares were sold at its true market worth. In 2016 Axiata bought 80 percent of Ncell's shares from TeliaSonera for 1.365 billion USD. However, the same was sold to Spectrlite for 50 million USD. In addition to that, Ncell’s capital gains tax dispute has been raging for a long time. The dispute that started after Axiata purchased Ncell from Teliasonera has not been resolved yet or simply sub judice in the Supreme Court of Nepal.
This unexpected exit of Axiata comes as a blow to Nepal's efforts to attract foreign direct investment, especially with an upcoming investment summit in April 2024. The government's goal to showcase Nepal as an investment-friendly destination now faces challenges due to Axiata's departure from the Nepali market.
Nepal looks North for Agricultural Imports
Following India's decision to prohibit onion exports from December 7, traders in Nepal have turned to importing onions from China. This move comes as India has traditionally been the primary source of onion imports for Nepal. In addition to wheat, rice, and sugar, India has imposed extensive export restrictions on dry onions, as part of measures to control domestic prices leading up to the upcoming national election next year. This has had a significant impact on Nepal, which heavily relies on its southern neighbor for almost all its onion needs. The repercussions of these restrictions are strongly felt in Nepali markets, where any disturbance in the Indian onion supply chain is exacerbated.
Nevertheless, this is not a recent occurrence. In November 2019, the cost of onions surged to a record NPR 250 per kg in the Kathmandu Valley following India's imposition of a ban on onion exports in September of that year, aimed at ensuring an adequate domestic supply. The prohibition resulted in a widespread scarcity of onions across Asia, including Nepal. India once more halted onion exports from September 2020 to January 2021. During times of crisis, Nepal has been reaching out to its northern neighbor for agricultural imports. In the fiscal year 2019-20, Nepal imported 2,646 tonnes of onions from China, amounting to NPR 158.50 million, marking the highest recorded imports, as a response to India's export ban. Likewise, during the first four months of the fiscal year 2020-2021, Nepal imported onions worth NPR 56.19 million from China. After the ban, Chinese onions have been reaching the cities of Nepal.
To truly reduce the burden on consumer prices and ensure a stable supply of onions, Nepal needs to invest in its domestic agricultural sectors. By providing subsidies and incentives to farmers, the government can help Nepal become self-sufficient in agricultural produce.
CESIF Nepal