May 2023 Analysis: Economy & Development
The Finance Ministry's announcement of a reduced budget for the upcoming fiscal year, which includes limitations on capital expenditure, raises concerns about the potential impact on progress and development. However, amidst these constraints, the government plans to introduce new programs in the agriculture sector, aiming to address challenges and drive growth through this sector. Foreign investment declines and inflationary pressures impact market demand, but potential economic recovery expected with falling petroleum prices. Nepal Electricity Authority (NEA) has resumed electricity exports to India, with plans to increase production during the upcoming monsoon season, but faces challenges due to decreased budget allocation for transmission line projects in the next fiscal year.
The upcoming fiscal year's budget for the country is set at NPR 1.751 trillion, a decrease of 2.37% compared to the previous year. The government aims for 6% economic growth, but the IMF predicts a more modest 4.4% growth rate. The budget targets limiting inflation to 6.5%. The budget plans to collect revenue of NPR 1 trillion and 248 billion, foreign grants of NPR 49 billion, foreign loans of NPR 212 billion, and internal loans of NPR 240 billion in order to be able to manage the government's finances. The government's financial management has faced severe concerns this current fiscal year due to revenue shortfalls, making it difficult to cover key expenses.
Despite the critical financial situation, the government plans to continue many programs from the previous year. However, there are notable changes in the budget, particularly the reduction in capital expenditure as the budget for physical infrastructure is decreased by 30 billion in comparison to the current fiscal year's budget. This decision raises concerns as capital expenditure is linked to development expenditure, and gradually reducing it may hinder progress and development.
Similarly, looking at the dire economic situation, there is no increase in employee salaries and incentive allowances are abolished to save costs. The budget plans to scrap 20 government agencies that are non-operational and forbids the government to buy or build buildings unless necessary.
The budget introduces new programs in the agriculture sector, despite its decreasing contribution to GDP. There have been instances where farmers have been deprived of seeds and chemical fertilizers on time despite the budget of every fiscal year focusing on the easy and timely facilitation of the chemical fertilizers and seeds.
Efforts are made to attract foreign investment by easing reinvestment and repatriation processes. Such provisions ease injection of foreign currency by attracting foreign investors.
One thing that we must be clear of is Fiscal policies are driven by political motives, and governments often propose larger budgets initially but may revise them due to political considerations, changing economic conditions, negotiations, compromises, and the need for fiscal sustainability. Budgeting approaches vary based on government priorities, economic circumstances, and the political climate of the country.
According to the economic survey for the current fiscal year 2022/23, foreign investment approvals in the first eight months amounted to 20.56 billion across 159 industries. However, this figure reflects a decline of 35.4 percent compared to the same period in the previous financial year when foreign investment approvals reached NPR 31.83 billion across 149 industries.
Notably, China holds the highest share of total investment with 44.7 percent, followed by India at 23.5 percent, among the industries that have received approval for foreign investment since the start of the fiscal year. In terms of the number of investment approvals, China leads with 37.4 percent, while India follows with 14.4 percent.
Simultaneously, the wholesale and retail market, construction, mining, and manufacturing industries experienced a contraction, which had a visible impact on the overall economy. This shrinkage suggests a slowdown in business activities, reduced investments due to lack of incentives, and potentially lower consumer demand.
The high inflationary pressures resulting from a sharp rise in petroleum product prices have also contributed to a decrease in market demand. Increased petroleum prices raise production costs, leading to higher prices for goods and services. As a result, it dampens consumer spending and impacts the overall economy.
However, there is a positive expectation: a recovery in the economy is anticipated as petroleum prices are dropping. Falling petroleum prices can lead to reduced production costs, lower inflation, and increased consumer demand, stimulating economic growth. However, the impact may take time and is influenced by other factors such as global conditions, government policies, and consumer sentiment.
Nepal Electricity Authority (NEA) resumed exporting electricity to India starting from 27 May 2023, which earlier had been halted due to the dry season. The authority reported that on the first day of the resumption, they exported 100 MW of electricity to India at about 7 rupees per MW. The export has started due to the increase in electricity production after the water flow in the river has increased especially with the onset of pre-monsoon. With the monsoon season on the horizon, there is certainly an expectation that electricity production in Nepal will soar.
The prospects of electricity trade with Bangladesh and the focus on hydroelectricity development in the upcoming fiscal year will not only boost domestic consumption but also contribute to earning foreign reserves for Nepal to reduce the current trade deficit. Improving the transmission line infrastructure has become a top priority for the Nepal Electricity Authority (NEA) as they strive to enhance domestic consumption and increase exports, taking advantage of the surplus energy generated during the wet season. However, there is concerning news that the government has decided to decrease the budget allocation for transmission line projects in the upcoming fiscal year 2023-2024. This poses challenges to the NEA's goals of increasing domestic consumption and boosting exports, as inadequate funding will certainly hinder the necessary infrastructure improvements.
Timeline of Major Events
| Date | Events |
| May 16 | Indian Oil Corporation notified Nepal Oil Corporation of reduced petroleum product prices, with petrol decreasing by NPR 9.52 and diesel decreasing by NPR 8.13. |
| May 27 | Nepal resumes electricity export to India. |
| May 28 | Finance Minister Prakash Sharan Mahat presented the Economic Survey of FY 2022/23 at the Federal Parliament. |
| May 29 | Finance Minister Prakash Sharan Mahat presented the budget for the upcoming FY 2023/24. |
Budget for the Fiscal Year 2023/24
The upcoming fiscal year's budget for the country is set at NPR 1.751 trillion, a decrease of 2.37% compared to the previous year. The government aims for 6% economic growth, but the IMF predicts a more modest 4.4% growth rate. The budget targets limiting inflation to 6.5%. The budget plans to collect revenue of NPR 1 trillion and 248 billion, foreign grants of NPR 49 billion, foreign loans of NPR 212 billion, and internal loans of NPR 240 billion in order to be able to manage the government's finances. The government's financial management has faced severe concerns this current fiscal year due to revenue shortfalls, making it difficult to cover key expenses.
Despite the critical financial situation, the government plans to continue many programs from the previous year. However, there are notable changes in the budget, particularly the reduction in capital expenditure as the budget for physical infrastructure is decreased by 30 billion in comparison to the current fiscal year's budget. This decision raises concerns as capital expenditure is linked to development expenditure, and gradually reducing it may hinder progress and development.
Similarly, looking at the dire economic situation, there is no increase in employee salaries and incentive allowances are abolished to save costs. The budget plans to scrap 20 government agencies that are non-operational and forbids the government to buy or build buildings unless necessary.
The budget introduces new programs in the agriculture sector, despite its decreasing contribution to GDP. There have been instances where farmers have been deprived of seeds and chemical fertilizers on time despite the budget of every fiscal year focusing on the easy and timely facilitation of the chemical fertilizers and seeds.
Efforts are made to attract foreign investment by easing reinvestment and repatriation processes. Such provisions ease injection of foreign currency by attracting foreign investors.
One thing that we must be clear of is Fiscal policies are driven by political motives, and governments often propose larger budgets initially but may revise them due to political considerations, changing economic conditions, negotiations, compromises, and the need for fiscal sustainability. Budgeting approaches vary based on government priorities, economic circumstances, and the political climate of the country.
Foreign Investment Declines as per Economic Survey 2022/23
According to the economic survey for the current fiscal year 2022/23, foreign investment approvals in the first eight months amounted to 20.56 billion across 159 industries. However, this figure reflects a decline of 35.4 percent compared to the same period in the previous financial year when foreign investment approvals reached NPR 31.83 billion across 149 industries.
Notably, China holds the highest share of total investment with 44.7 percent, followed by India at 23.5 percent, among the industries that have received approval for foreign investment since the start of the fiscal year. In terms of the number of investment approvals, China leads with 37.4 percent, while India follows with 14.4 percent.
Simultaneously, the wholesale and retail market, construction, mining, and manufacturing industries experienced a contraction, which had a visible impact on the overall economy. This shrinkage suggests a slowdown in business activities, reduced investments due to lack of incentives, and potentially lower consumer demand.
The high inflationary pressures resulting from a sharp rise in petroleum product prices have also contributed to a decrease in market demand. Increased petroleum prices raise production costs, leading to higher prices for goods and services. As a result, it dampens consumer spending and impacts the overall economy.
However, there is a positive expectation: a recovery in the economy is anticipated as petroleum prices are dropping. Falling petroleum prices can lead to reduced production costs, lower inflation, and increased consumer demand, stimulating economic growth. However, the impact may take time and is influenced by other factors such as global conditions, government policies, and consumer sentiment.
Export of electricity to India resumes and its future
Nepal Electricity Authority (NEA) resumed exporting electricity to India starting from 27 May 2023, which earlier had been halted due to the dry season. The authority reported that on the first day of the resumption, they exported 100 MW of electricity to India at about 7 rupees per MW. The export has started due to the increase in electricity production after the water flow in the river has increased especially with the onset of pre-monsoon. With the monsoon season on the horizon, there is certainly an expectation that electricity production in Nepal will soar.
The prospects of electricity trade with Bangladesh and the focus on hydroelectricity development in the upcoming fiscal year will not only boost domestic consumption but also contribute to earning foreign reserves for Nepal to reduce the current trade deficit. Improving the transmission line infrastructure has become a top priority for the Nepal Electricity Authority (NEA) as they strive to enhance domestic consumption and increase exports, taking advantage of the surplus energy generated during the wet season. However, there is concerning news that the government has decided to decrease the budget allocation for transmission line projects in the upcoming fiscal year 2023-2024. This poses challenges to the NEA's goals of increasing domestic consumption and boosting exports, as inadequate funding will certainly hinder the necessary infrastructure improvements.
CESIF Nepal