November Analysis: Economy and Development

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Nepal Rastra Bank (NRB) launched the highly anticipated National Payment Switch (NPS) in a bid to ease digital payments and services across the nation. Similarly, Nepali coffee also recorded an increased demand and presence in the international market. Moreover, the National Telecommunication Authority (NTA) revealed an expanding coverage of the 4G services across the nation. Contrary to its positive developments, the month also recorded some major downfalls which including a meager record in export earnings from high-value goods as listed by the National Trade Integrated System (NTIS), an exorbitant price hike of gasoline fuel and aviation fuel by the Nepal Oil Corporation (NOC), a possible liquidity crunch in the money and financial markets and a fall in remittance earnings as sent by domestic migrant labourers, abroad.

Timeline of Major Events in November

DateEvent
03 NovemberExport earnings from listed or high value products increased by a meager 2 percent year-on-year during the first quarter of the current fiscal year (FY) 2021/22.
09 NovemberDepartment of Electricity Development approved 16 new solar projects with a total capacity of 93 megawatts for the current fiscal (FY) 2021/22.
10 NovemberNepal Oil Corporation hiked prices of petrol, diesel, kerosene, cooking gas cylinder and aviation fuel in its new revised list for November.
14 NovemberAccording to the Annual Report on Public Debt 2020-21, Nepal’s domestic debt reached Nrs. 802.94 billion (USD 6.74 billion) in the last fiscal year (FY) 2020/21.
16 NovemberRemittance earnings decreased by 7.6 percent, from Nrs. 258.91 billion (USD 2.17 billion) to Nrs. 239.32 billion (USD 2.01 billion) during the first three months of the current fiscal year (FY) 2021/22.
16 NovemberExport earnings from Nepali coffee soared by 66.37 percent in the last fiscal year (FY) 2020/21 as per the Nepal Tea and Coffee Development Board.
20 NovemberNepal Rastra Bank (NRB) launched the highly anticipated National Payment Switch (NPS).
22 NovemberNepal Telecommunication Authority (NTA) revealed that 12.86 million people are using the 4G internet services across the country.

National Payment Switch (NPS) Launched to Positive Acclaim

Nepal Rastra Bank (NRB) launched the much-anticipated National Payment Switch (NPS) on 18 November 2021, alongside handing over its operational responsibility to Nepal Clearing House (NCH). The payment switch in its first phase has brought together 29 banks and financial institutions (BFIs) within which 18 are commercial banks, 5 are development banks and 6 are finance companies. Similarly, NPS has bought together services including Nepal-Pay QR, Network QR, Direct Debit Request-To-Pay, E-Mandate, interconnection between wallets and inter-connection through biller gateway for different payments. Moreover, NPS has also allowed banks, financial institutions and non-banking financial institutions to share information with one another.

The implementation of NPS has been regarded as a significant step towards the development of a secure, safe and efficient payment system. While Nepal’s digital payment system is still in its nascent stage, the country has recorded some commendable online transaction figures; particularly since the beginning of the Covid-19 pandemic. As per NRB’s latest figures, Nepal’s electronic payment soared to Nrs. 753.30 billion (USD 6.32 billion) during the first two months of the current fiscal year (FY) 2021/22 as compared to Nrs. 378.85 billion (USD 3.18 billion) in the last fiscal year (FY) 2020/21. Considering this, NPS comes as a huge respite to the general public who previously could not perform inter-wallet transactions alongside make digital transactions without depending on Visa or Mastercard. Moreover, with the on-going pandemic, digital and contactless payments have become more vital in speeding up seamless payment network and service providers; and NPS as a centralized national payment system can significantly accelerate the central bank’s ambition in achieving the same.

Liquidity Crunch on Steady Rise

Finance Minister Janardan Sharma expresses his best wishes at the ‘Economic Picture Release and Honors Program’ of the Nepal Economic Journalists Association (NAIF). Photo: RSS

Liquidity crunch has been on a steady rise in Nepal’s economy. While the impact of increasing imports, declining remittance earnings, high demand for domestic loans and delay by the government in raising internal loans has added towards the crunch; in particularly, the limited availability of loanable funds and low capital expenditure has been accelerating the on-going crisis. As per the recent data released by the central bank (NRB), deposits at banks and financial institutions (BFIs) increased by only 0.7 percent or Nrs. 4.7 trillion (USD 35.48 billion), whereas credit distribution increased by 5.7 percent in the current fiscal. The cash shortage has also left financial systems with only Nrs. 55 billion (USD 459 million) in disposal. Similarly, weak capital spending/expenditure too has been contributing towards the liquid volatility. Capital expenditure of the federal government as of mid-November stood at a meager 4.53 percent of the total allocation of Nrs. 440 billion (USD 3.67 billion) for the current fiscal.

While liquidity crunch is not a new phenomenon in Nepal, the current one seems to have bigger consequences. With Covid-19 restrictions slowly lifting up and businesses finally restarting, the government should have prioritized injection of credit in the financial system alongside speeding up collection of internal loans. The current cash crunch clearly demonstrates the institutional inefficiency of both the Ministry of Finance (MoF) and Nepal Rastra Bank (NRB) in ensuring smooth cash flow in the money market. Considering this, both the entities must address the failures in monetary management and regulatory oversight of the financial system before businesses, enterprises and BFIs head towards a greater cash crisis or even bankruptcy.

Gasoline and Aviation Fuel Getting Dearer

The state-owned Nepal Oil Corporation (NOC) in the second week of November introduced a new revised list, hiking the price of petroleum products. According to the latest hike, price of petrol, diesel, kerosene has increased by Nrs. 3 each (USD 0.025), while the price of cooking gas has increased by Nrs. 75 (USD 0.63) to reach Nrs. 136 (USD 1.14) per litre, Nrs 119 (USD 1.0) per litre, Nrs. 119 (USD 1.0) per litre and Nrs. 1575 (USD 13.23) per cylinder, respectively.

Nepal is highly dependent on India for most of its fuel imports and has been importing from its Southern neighbour since 1974. According to the import statistics for fiscal year (FY) 2020/21, the country imported gasoline fuel worth Nrs. 164 billion (USD 1.37 billion) per month from India. While NOC does buy cheap fuels from India, it pays higher taxes to the government under various headings for every purchase from IOC. As of the latest figure, it paid value added tax (VAT) of Nrs. 55.23 (USD 0.46) per litre on petrol and Nrs. 37.90 (USD 0.32) per litre as revenue and VAT on diesel. This has pushed NOC in determining higher prices by adding charges under various headings including infrastructure tax and pollution charges; ultimately making gasoline fuels dearer and exorbitant for customers who purchase it.

Questionable Performance from NTIS Listed Products

Export earnings from listed or high value products recorded a meager 2 percent increase year-on-year during the first quarter of the current fiscal year (FY) 2021/22. According to the statistics revealed by the Trade and Export Promotion Council (TEPC), shipments made by Nepal during the three months period between mid-July to mid-October 2021 was worth Nrs. 10.30 billion (USD 86 million), compared to a figure of Nrs. 10 billion (USD 84 million) during the first quarter of the last fiscal (FY) 2020/21. Within the shipments, export of yarns, carpet, pashmina, medicinal herbs, textile, footwear and leather increased by a few margins whereas shipments of cardamom and tea dropped drastically by 12.8 percent and 53 percent, respectively.

Trade experts and businessmen have cited the lack in coordination between government agencies and in particular the failure on part of Nepal Trade Integrated System (NTIS) for the recent fall in export of high value products. Even after a decade of its establishment, NTIS goods are yet to find a competitive margin in the international market. Similarly, the efficiency of policies regarding promotion of the listed products is also yet to be observed. Moreover, high freight charges, supply-chain constraints, low investment in trade infrastructure and trade facilitations and high cost of production too have impacted the export basket and export earnings from NTIS products; eventually obstructing Nepal’s aim of reducing its trade deficit via export earnings.

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