July Analysis: Economy & Development 

The Nepal Rastra Bank (NRB) has adopted a new, flexible monetary policy to bolster the economy while maintaining financial stability. Key measures include lowering the policy rate to 6.5%, reducing the deposit collection rate to 4.5%, and increasing the wide money supply limit to 12.5%. The central bank aims to achieve 6% economic growth and keep inflation at or below 6.5%. Additionally, the NRB will review risk weights in non-productive sectors and establish a separate regulatory body for cooperatives. Nepal reiterates its habit of bulk spending at the end of fiscal year. Indian ban on non-basmati rice exports affects Nepal's market, causing traders to exploit the situation and rising the price of rice.

 Timeline of major events

 

Date	Events
4th July	Nepal Oil Corporation decreases the price of all petroleum products
17th July	The government has implemented the Automated Pricing System (APS) for petroleum products effective from July 20
20th  July	India banned the export of non-basmati rice
23th July	Nepal Rastra Bank (NRB) announces a new monetary policy.

 

Nepal Rastra Bank Implements Flexible Monetary Policy

The Nepal Rastra Bank (NRB) has cautiously implemented a new, flexible monetary policy on July 23, 2023. This policy aims to keep inflation at or below 6.5% while also achieving 6% economic growth. In order to accomplish this, the central bank plans to implement monetary management measures in order to preserve stable economic circumstances and stop price pressure brought on by excessive monetary expansion. In order to maintain financial stability, NRB has set a target loan growth rate of 11.5%.

The NRB has reduced the policy rate from 7% to 6.5% for the fiscal year 2023/24. This is a significant move, as it will likely lead to lower interest rates across the economy. The bank rate, which is the rate at which the NRB provides liquidity to banks, has been kept unchanged at 7.5% suggesting a stable interest rates of government bonds and securities.

The NRB has also slashed the deposit collection rate from 5.5% to 4.5%, which will help to reduce the cost of lending for banks, leading to lower interest rates for borrowers. Additionally, the NRB has increased the wide money supply limit from 12% to 12.5%. This suggests that the central bank is confident in the health of the economy and is willing to allow more money to circulate.

The NRB has also committed to reviewing the risk weight in non-productive sectors, such as real estate, share mortgages, and vehicles. This could lead to an increase credit flow in these sectors. NRB aims to establish a separate regulatory body for cooperatives to curb the malpractices in cooperative governance and also promote microfinance mergers.

Overall, the monetary policy for the fiscal year 2023/24 is a mixed bag. On one hand, the reduction in the policy rate and the increase in the wide money supply limit are positive signs that the central bank is willing to stimulate the economy. On the other hand, the decision to keep the bank rate unchanged suggests that the NRB is concerned about inflation.

Bulk spending at the end of the fiscal year

Nepal has a recurring pattern of bulk spending at the end of the fiscal year. This practice involves the government hastily utilizing a significant portion of its allocated budget in the final weeks or days before the fiscal year closes. Over the last fiscal year, the government spent a substantial amount, with a total expenditure of NPR 1400 billion by June 13, 2023. On the final month of the fiscal year the government spent NPR 2.2 trillion indicating an average spending rate of approximately NPR 7.86 billion rupees per day in the last month of the fiscal year.

Despite the significant spending in June, the overall capital expenditure for the last fiscal year stands at only 16 percent of the total allocated budget. The practice of spending large sum of money at the eleventh hour raises serious questions about the efficiency and effectiveness of the expenditure. Furthermore, in the last five fiscal years around 30 to 40 percent of the budget is spent on capital expenditure during the final month of the fiscal year. The government bodies are compelled to spend the allocated funds within the fiscal deadline. As the fiscal year draws to a close, remaining funds face potential limitations due to the "use-it-or-lose-it" budget policy. This can lead to hurried and less strategic expenditure decisions. The transition of Nepal into a federal democratic republic has not improved this spending behavior. The persisting trend of last hour budget spending calls for better financial planning and resource management.

Prices of Rice likely to rise

The Indian government's decision to ban the export of non-basmati rice has created ripples in Nepal's rice market. Traders have responded by increasing the price of rice, causing concern among the populace. The ban, which came into effect on July 20, was enacted by the Department of Commerce of India in an attempt to control rising food prices and ensure sufficient availability of non-basmati rice in the domestic market.

In the last fiscal year 2022/23, Nepal imported only 208.9 million kilos of rice worth 14.44 billion rupees from India. Although the Indian government had imposed a 20 percent tax on rice exports from September 2022, the Nepalese government was able to secure a tax exemption on rice up to 600,000 metric tons per year, allowing the import of rice from India under this quota.

Despite these measures, the ban on rice exports by India could have significant repercussions for Nepal. The immediate concern is the potential rice shortage, leading to soaring prices as traders scramble to meet demand. Moreover, with Indian rice off the market, traders in Nepal are capitalizing on the situation, raising prices and engaging in grey market. Adding to the concerns, the festive season is on the horizon, and the ban's timing could potentially inflate the costs of festive celebrations.