June 2023 Analysis: Economy and Development
Nepal faced a challenging period in FY 2019/20 due to the pandemic but achieved a remarkable turnaround in FY 2020/21 with a record-high remittance inflow of over Rs 1.5 trillion. Strategic measures, increased migrant worker participation, and currency devaluation contributed to this surge, resulting in a significant accumulation of liquidity in banks and decreased lending activities. Nepal's outstanding public debt has reached NPR 21.73 trillion, with NPR 10.99 trillion in domestic debt and NPR 10.73 trillion in external debt. The government plans to raise an additional NPR 4.52 trillion in debt for the next fiscal year. Nepal achieved a significant milestone in its electricity sector during Prime Minister Pushpa Kamal Dahal's visit to India. India's approval allows Nepal to use its transmission line for exporting electricity to Bangladesh, expanding Nepal's market reach and strengthening regional cooperation. Finally, the House of Representatives endorsed the annual budget for the fiscal year 2023/24.
Factors Contributing to Nepal's Record Remittance
In the fiscal year 2019/20, Nepal faced a challenging period as the Covid-19 pandemic disrupted the global economy, leading to a negative remittance flow. However, the subsequent fiscal year 2020/21 witnessed a remarkable turnaround, with Nepal achieving a significant accomplishment by setting a new record in remittance inflow. Over NPR 1005.18 billion poured into Nepal as remittances in the last ten months of the current fiscal year, marking a remarkable increase of 23.4 percent compared to the same period of the previous year.
This remittance surge can be attributed to several well-planned measures implemented by the government and the Nepal Rastra Bank. Recognizing the crucial role of remittances in boosting the economy, Nepal introduced initiatives that incentivized Nepali migrant workers to send more money back home. Extra interest on remittance funds kept in fixed deposits, an increased daily remittance limit, and the provision to open foreign currency savings accounts were among the strategic policies that successfully encouraged more significant remittance inflows.
The increase in Nepali migrant workers seeking foreign employment has led to a rise in remittances. Over 650,000 individuals opted for foreign employment in the first ten months of the current fiscal year, contributing to this trend. Additionally, the devaluation of the Nepali currency against the US dollar played a significant role. The depreciation resulted in higher income for migrant workers when converting their remittances into the local currency, further boosting remittance figures. In mid-May 2023, the buying exchange rate per US dollar stood at Rs. 131.17, compared to Rs. 127.51 in mid-July 2022. These robust inflows have had far-reaching consequences, including a substantial accumulation of liquidity in Nepal's banking system, with deposits at Banks and Financial Institutions experiencing impressive growth of 7.3 percent during the review period.
The interconnectedness between the surge in remittances and the liquidity accumulation in banks is evident. The significant rise in remittances has led to a substantial increase in deposits within the banking system. As stakes grow, banks face a surplus of funds, resulting in a decreased demand for lending activities. Consequently, inter-banking interest rates have also declined as banks seek to attract borrowers and stimulate lending in the face of excess liquidity by decreasing the loan interest rate.
This virtuous cycle demonstrates how the policies aimed at encouraging remittances have strengthened the economy through increased inflows and impacted the financial sector by influencing liquidity dynamics in the banking system.
Nepal's current financial situation is characterized by significant domestic and external debt. As of the end of May in the current financial year, Nepal's outstanding public debt liability has reached a significant milestone, amounting to NPR 2.173 trillion. This substantial figure underscores the challenges and considerations associated with managing and mitigating the impact of the country's growing debt burden. The country's domestic debt stands at NPR 1.997 trillion, while its external debt amounts to NPR 1.735 trillion.
At the beginning of the current fiscal year 2022-23, which started at the end of July last year, Nepal's public debt was recorded at NPR 2 trillion. Over the last ten months of the current financial year, the debt has increased by NPR. 164.48 billion.
The introduction of a deficit budget implies that the public debt will increase yearly, leading to a rise in the government's annual budget's burden of principal and interest payment obligations. The government aims to raise an additional NPR 453 billion in debt to address the budget deficit for the next financial year. Out of this target amount, the government intends to raise NPR 240 billion domestically and NPR 213 billion externally.
In recent economic developments, Nepal's public debt-to-Gross Domestic Product (GDP) ratio has reached 44.79%, up from 22.7% as of mid-July 2017. Considering the size of Nepal's GDP at NRP 4.86 trillion, this ratio signifies a substantial public debt burden on the country's economy.
The increasing ratio of public debt to GDP, combined with a weakening economic growth rate due to low capital formation, poses potential future risks to Nepal's economy. To mitigate these risks, the government must adopt prudent fiscal and economic policies, carefully manage its debt levels, and prioritize strategies that foster sustainable economic growth. Addressing these challenges will be crucial to ensuring the stability and resilience of the country's economy in the years ahead.
During Prime Minister Pushpa Kamal Dahal's recent visit to India, an important milestone was achieved in Nepal's electricity sector. After giving its approval, India has paved the way for Nepal to utilize an Indian transmission line for exporting its electricity to Bangladesh, with just a tripartite agreement left to sign. This development not only opens up a new market for Nepal in the Indian sub-continent but also strengthens its existing ties with India.
During the fifth meeting of the Joint Steering Committee on energy cooperation in Dhaka in May, Nepal, Bangladesh, and India they have reached an agreement for a tripartite agreement. Nepal and Bangladesh agreed to export 40 MW of electricity to Bangladesh, utilizing Indian transmission lines for facilitation. The Nepal Electricity Authority (NEA), Bangladesh Power Development Board (BPDB), and NTPC Vidyut Vyapar Nigam Limited (NVVN) of India will collaborate to finalize the agreement, ensuring successful implementation with enhanced expertise and coordination.
This tripartite agreement signifies the collective efforts and cooperation among Nepal, Bangladesh, and India in the field of energy. It not only strengthens regional connectivity but also demonstrates the commitment of these nations to harness the potential of renewable energy resources and promote sustainable development.
The utilization of an Indian transmission line for exporting Nepali electricity to Bangladesh not only expands Nepal's market reach but also presents an opportunity for further collaboration and partnership among the countries in the energy sector.
Ministry of Finance (MoF) had again found itself embroiled in controversy like last fiscal year regarding the drafting of the annual budget. Critics voiced their concerns over the involvement of an unauthorized individual in the budget-making process by the MoF, casting doubt on the transparency and legality of the proceedings. However, Minister Dr. Ram Sharan Mahat clarified the situation, stating that Ram Krishna Shrestha, a former first-class non-gazetted employee of the customs department, was solely hired to assist in typing the final budget.
Despite the controversy, the House of Representatives endorsed the annual budget for the fiscal year 2023-24 on June 28, 2023. Finance Minister Prakash Sharan Mahat tabled the appropriation bill, which sparked a demand from the main opposition party CPN-UML for a vote division—with the threat of voting against the bill and demanding amendments, the ruling parties, the Unified Socialist Party and the Janata Samajbadi Party, eventually voted in favor of the motion.
With 147 lawmakers supporting the motion and 108 opposing it, the budget was endorsed by a majority in the 275-strong parliament. Despite controversy and differing opinions, this decision signifies a pivotal moment for the fiscal year ahead. It remains to be seen how the budget's implementation will unfold and whether any lingering concerns regarding the unauthorized involvement of Ramakrishna Shrestha will impact its execution.
Timeline of major events
| Date | Events |
| June 2 | Nepal and India sign an initial agreement for long-term electricity trade |
| June 13 | Nepal Bankers Association announces that interest rates on deposits will remain stable while the same for loans will decrease |
| June 28 | The House of Representatives endorses the annual budget of the fiscal year 2023/24 by majority |
Factors Contributing to Nepal's Record Remittance
Inflow and a Liquidity Surge
In the fiscal year 2019/20, Nepal faced a challenging period as the Covid-19 pandemic disrupted the global economy, leading to a negative remittance flow. However, the subsequent fiscal year 2020/21 witnessed a remarkable turnaround, with Nepal achieving a significant accomplishment by setting a new record in remittance inflow. Over NPR 1005.18 billion poured into Nepal as remittances in the last ten months of the current fiscal year, marking a remarkable increase of 23.4 percent compared to the same period of the previous year.This remittance surge can be attributed to several well-planned measures implemented by the government and the Nepal Rastra Bank. Recognizing the crucial role of remittances in boosting the economy, Nepal introduced initiatives that incentivized Nepali migrant workers to send more money back home. Extra interest on remittance funds kept in fixed deposits, an increased daily remittance limit, and the provision to open foreign currency savings accounts were among the strategic policies that successfully encouraged more significant remittance inflows.
The increase in Nepali migrant workers seeking foreign employment has led to a rise in remittances. Over 650,000 individuals opted for foreign employment in the first ten months of the current fiscal year, contributing to this trend. Additionally, the devaluation of the Nepali currency against the US dollar played a significant role. The depreciation resulted in higher income for migrant workers when converting their remittances into the local currency, further boosting remittance figures. In mid-May 2023, the buying exchange rate per US dollar stood at Rs. 131.17, compared to Rs. 127.51 in mid-July 2022. These robust inflows have had far-reaching consequences, including a substantial accumulation of liquidity in Nepal's banking system, with deposits at Banks and Financial Institutions experiencing impressive growth of 7.3 percent during the review period.
The interconnectedness between the surge in remittances and the liquidity accumulation in banks is evident. The significant rise in remittances has led to a substantial increase in deposits within the banking system. As stakes grow, banks face a surplus of funds, resulting in a decreased demand for lending activities. Consequently, inter-banking interest rates have also declined as banks seek to attract borrowers and stimulate lending in the face of excess liquidity by decreasing the loan interest rate.
This virtuous cycle demonstrates how the policies aimed at encouraging remittances have strengthened the economy through increased inflows and impacted the financial sector by influencing liquidity dynamics in the banking system.
Nepal's Rising Public Debt
Nepal's current financial situation is characterized by significant domestic and external debt. As of the end of May in the current financial year, Nepal's outstanding public debt liability has reached a significant milestone, amounting to NPR 2.173 trillion. This substantial figure underscores the challenges and considerations associated with managing and mitigating the impact of the country's growing debt burden. The country's domestic debt stands at NPR 1.997 trillion, while its external debt amounts to NPR 1.735 trillion.
At the beginning of the current fiscal year 2022-23, which started at the end of July last year, Nepal's public debt was recorded at NPR 2 trillion. Over the last ten months of the current financial year, the debt has increased by NPR. 164.48 billion.
The introduction of a deficit budget implies that the public debt will increase yearly, leading to a rise in the government's annual budget's burden of principal and interest payment obligations. The government aims to raise an additional NPR 453 billion in debt to address the budget deficit for the next financial year. Out of this target amount, the government intends to raise NPR 240 billion domestically and NPR 213 billion externally.
In recent economic developments, Nepal's public debt-to-Gross Domestic Product (GDP) ratio has reached 44.79%, up from 22.7% as of mid-July 2017. Considering the size of Nepal's GDP at NRP 4.86 trillion, this ratio signifies a substantial public debt burden on the country's economy.
The increasing ratio of public debt to GDP, combined with a weakening economic growth rate due to low capital formation, poses potential future risks to Nepal's economy. To mitigate these risks, the government must adopt prudent fiscal and economic policies, carefully manage its debt levels, and prioritize strategies that foster sustainable economic growth. Addressing these challenges will be crucial to ensuring the stability and resilience of the country's economy in the years ahead.
Electricity trade with Bangladesh
During Prime Minister Pushpa Kamal Dahal's recent visit to India, an important milestone was achieved in Nepal's electricity sector. After giving its approval, India has paved the way for Nepal to utilize an Indian transmission line for exporting its electricity to Bangladesh, with just a tripartite agreement left to sign. This development not only opens up a new market for Nepal in the Indian sub-continent but also strengthens its existing ties with India.
During the fifth meeting of the Joint Steering Committee on energy cooperation in Dhaka in May, Nepal, Bangladesh, and India they have reached an agreement for a tripartite agreement. Nepal and Bangladesh agreed to export 40 MW of electricity to Bangladesh, utilizing Indian transmission lines for facilitation. The Nepal Electricity Authority (NEA), Bangladesh Power Development Board (BPDB), and NTPC Vidyut Vyapar Nigam Limited (NVVN) of India will collaborate to finalize the agreement, ensuring successful implementation with enhanced expertise and coordination.
This tripartite agreement signifies the collective efforts and cooperation among Nepal, Bangladesh, and India in the field of energy. It not only strengthens regional connectivity but also demonstrates the commitment of these nations to harness the potential of renewable energy resources and promote sustainable development.
The utilization of an Indian transmission line for exporting Nepali electricity to Bangladesh not only expands Nepal's market reach but also presents an opportunity for further collaboration and partnership among the countries in the energy sector.
Annual budget for fiscal 2023-24 endorsed
Ministry of Finance (MoF) had again found itself embroiled in controversy like last fiscal year regarding the drafting of the annual budget. Critics voiced their concerns over the involvement of an unauthorized individual in the budget-making process by the MoF, casting doubt on the transparency and legality of the proceedings. However, Minister Dr. Ram Sharan Mahat clarified the situation, stating that Ram Krishna Shrestha, a former first-class non-gazetted employee of the customs department, was solely hired to assist in typing the final budget.
Despite the controversy, the House of Representatives endorsed the annual budget for the fiscal year 2023-24 on June 28, 2023. Finance Minister Prakash Sharan Mahat tabled the appropriation bill, which sparked a demand from the main opposition party CPN-UML for a vote division—with the threat of voting against the bill and demanding amendments, the ruling parties, the Unified Socialist Party and the Janata Samajbadi Party, eventually voted in favor of the motion.
With 147 lawmakers supporting the motion and 108 opposing it, the budget was endorsed by a majority in the 275-strong parliament. Despite controversy and differing opinions, this decision signifies a pivotal moment for the fiscal year ahead. It remains to be seen how the budget's implementation will unfold and whether any lingering concerns regarding the unauthorized involvement of Ramakrishna Shrestha will impact its execution.
CESIF Nepal