August 2021 Analysis: Economy and Development

Posted by : Shraddha Ghimire


Date : 2021-09-20

The month of August saw the unveiling of the Monetary Policy for the Fiscal Year 2021/22 by the Governor of the Nepal Rastra bank, Maha Prasad Adhikari. The major focus of the policy for the new fiscal was refinancing, rescheduling and restructuring of loans and maintenance of liquidity on targeted credit programs for tourism businesses, communications, transportation, SMEs, party palaces, gyms, cinema halls and so on.

Timeline of major events in August:

Date Event
01 August The National Assembly passed two bills- Civil Aviation Authority of Nepal Bill and Air Services Authority of Nepal Bill, allowing Civil Aviation Authority of Nepal (CAAN) to spilt into two separate bodies– regulator and service provider.
02 August The Commission for Investigation of Abuse of Authority (CIAA) launched an investigation into SEBON chairperson and NEPSE CEO for insider trading over shares of Sarbottam cement.
10 August Finance Minister introduced the white paper in the House of Representatives (HoR) showing a bleak picture of the national economy.
11 August Prime Minister Sher Bahadur Deuba re-appointed Kul Man Ghising as the Managing Director of Nepal Electricity Authority (NEA); transferring the incumbent Hitendra Dev Shakya to Water and Energy Commission as its secretary.
13 August Governor of Nepal Rastra Bank (NRB), Maha Prasad Adhikari unveiled the monetary policy for fiscal year (FY) 2021/22, focusing on reviving COVID-19 affected businesses and industries.
21 August The Office of the Auditor General (OAG) presented the 58th Annual Report 2021 to President Bidya Devi Bhandari.
22 August Nepal Rastra Bank (NRB) reported that domestic migrant workers sent home NPR 961.05 billion in the last fiscal year (FY) 2020/21.
29 August Nepal’s Balance of Payment (BoP) registered a surplus of only NPR 1.23 billion in fiscal year (FY) 2020/21, falling from a surplus of NPR 282.41 billion as compared to the previous fiscal year (FY) 2019/20.

Monetary policy presented, yet its merits remains a question

Governor of Nepal Rastra Bank (NRB), Maha Prasad Adhikari on 13 August presented the monetary policy for fiscal year (FY) 2021/22. Delayed time and again due to the change in government and other bureaucratic reasons, the policy was disclosed months after the unveiling of the national budget, disrupting the implementation of financial provisions as laid in the national budget. Nevertheless, the policy has prioritized on providing respite to COVID-19 affected businesses by easing their access to the country’s financial and economic resources. The major focus of the policy for the new fiscal has been refinancing, rescheduling and restructuring of loans and maintenance of liquidity on targeted credit programs for tourism businesses, communications, transportation, SMEs, party palaces, gyms, cinema halls and so on. The policy has also included interest rate corridor for liquidity management, which has been maintained at 2 percent to 5 percent. Similarly, technical tools including statutory liquidity ratio (SLR) has been fixed at 10 percent, credit to core-capital plus deposit ratio (CCD) has been scrapped and replaced with the loan-to-deposit ratio, cash reserve ratio (CRR) has been maintained at 3 percent, bank rate at 5 percent and credit-deposit ratio (CDR) has increased from the previous 85 percent to 90 percent. Likewise, the policy has also encouraged mergers and acquisitions of banks and financial institutions (BFIs) by annulling the cooling-off period of six months for board members and executives from joining other institutions and by extending 1 percent leniency in the interest spread rate among many other provisions. Moreover, the central bank has also extended the deadline for paying loan installments by six months, nine months and one year, depending on the degree of impact of COVID-19 on the economic and productive sector.

Despite these provisions, lack of proper communication and coordination between NRB and the Ministry of Finance (MoF) is anticipated to hamper the implementation of the new merits/provisions as laid in the monetary policy. With the Deuba government yet to table a new replacement bill for the ordinance budget (brought in by the previous Oli government), the new provisions and merits as laid in the monetary policy is expected to drastically change on the introduction of a new budget bill by the new government. In this context, the assumptions laid in the monetary policy seem factitious and demand a more realistic evaluation and consideration before its actual implementation.

Fall in foreign employment/earnings shrinks BoP surplus

The latest ‘Current Macroeconomic and Financial Situation of Nepal’ report published by the Nepal Rastra Bank (NRB) revealed that Nepal’s balance of payments (BoP) registered a surplus of only NPR 1.23 billion in fiscal year (FY) 2020/21, following a steep fall from NPR 282.41 billion in the previous fiscal year (FY) 2019/20. While economists and experts have credited the ever-increasing imports bill and slowdown in the net inflow of foreign direct investment (FDI) for the fall in BoP; fall in foreign employment and foreign earnings too has been adversely impacting the national BoP. In the previous fiscal year (FY) 2020/21, Nepal had recorded merchandise imports of NPR 1,539.84 billion (an increase of 28.7 percent as compared to fiscal year (FY) 2019/20) and a meager FDI inflow of NPR 19.51 billion (during the same review period). Moreover, with the number of domestic migrant workers taking approval for foreign employment reducing by a staggering 62.8 percent, net domestic transfers too have reduced, ultimately reducing the net BoP. Considering these statistics, current account has widened from NPR 33.76 billion in fiscal year (FY) 2019/20 to NPR 333.67 billion in fiscal year (FY) 2020/21.

Any change in a country’s BoP brings about serious ramifications for the national economy; signaling that the country is operating on a thin line to manage foreign currency in its economic dealings with other countries. In Nepal’s scenario, bloated merchandise and food imports as compared to merchandise and food exports has been ensuing more outflow of money from the economy than money inflows. Similarly, remittance earnings sent by domestic migrant workers (which is a crucial source of foreign currency for Nepal) too is on a downward spiral. With restrictions in international migration for employment and economic opportunities, foreign income has reduced, further reducing BoP surplus. Moreover, disruptions in the tourism industry has also contributed towards a falling BoP. With lesser foreigners entering the nation, the country’s service sector has been recording meager revenue collection. Thus, while foreign employment and foreign tourists (entering Nepal) would take a longer time to return back to normal (owing to the obstructions posed by the COVID-19 pandemic), the government must impose quantitative/tariff restrictions including an import ban on import of high-end vehicles, control on import of non-essential commodities and high tariff on luxury items to offset the fall in BoP surplus and a widening current account deficit.

Government remains unguided on issues of labor and employment

The Prime Minister Employment Program (PMEP) which was launched with much fanfare has failed in reaching its desired target. Brought in by the previous Oli government to create better employment opportunities for the domestic labor force, the program has failed in reaching a consensus among the three tiers of the government. The Ministry of Labor, Employment and Social Security (MoLESS) which had started the program with a budget of NPR 30 million (3 years back) has spent over NPR 120 million on the project till date. Yet as many as 752,957 individuals across the country registered as unemployed citizens in last fiscal year (FY) 2020/21. Local governments have been reasoned out as the main reason for the failure of the proposed program. With local governments distributing the budget to their cadres instead of investing it in employment creating opportunities including seed for small businesses, establishment of local industries and trainings for skill and human resource development; individuals have remained unemployed with no scope of income or resource generation.

Youths in Nepal account for more than 40 percent of the 20.7 million working population, yet they face the highest rate of unemployment, with 35.3 percent of them facing social exclusion. With the ongoing pandemic making matters worse, the government needs to step up from its previous pragmatic approaches. The government needs to be a more holistic in its approach to promote an entrepreneurship culture where technical skills and human resource development can be imparted. This should be followed by economic and locally feasible models to make vocational training more demand oriented; easing the work transition and movement of youths and individuals from an informal to a more formal setting/sector. Moreover, a stronger national commitment is also needed in ensuring a technically competent public employment system where efforts and concentration can be diverted towards retaining the young labor force rather than losing them to foreign lands.