April 2023 Analysis: Economy & Development

Posted by : Milan Acharya


Date : 2023-04-30

Nepal's economy shows an increase in remittance inflows and a surplus in the Balance of Payment, but the decline in imports and exports, along with a GDP contraction and recession, presents a mixed economic scenario. Nepal's provinces face financial irregularities of NPR 27 billion 95 crores, posing concerns for the economy. Nepal's Supreme Court allows a second stock exchange, potentially diversifying investment opportunities.  

Timeline of Major Events

Date  Events
9th April Nepal's Supreme Court approves the creation of a second stock exchange platform in the country.
12th April Nepal Bankers’ Association decided to decrease interest rate on deposits starting from 14th April
18th April The cabinet meeting decided to allow fragmentation of lands up to 2 and a half anna

Current Economic Scenario

The recently released macroeconomic report based on eight months of this current fiscal year by Nepal Rastra Bank sheds light on the country's mixed economic scenario, which is gradually recovering despite the challenges posed by the COVID-19 pandemic and a negative growth of GDP in the first two quarters.

One of the positive trends is the increase in remittance inflows, which have risen by 25.3 percent in NPR compared to the previous year. This increase can be attributed to Nepali migrant workers sending more money back home, with a 25.5% increase in net transfers amounting to over Rs. 789 billion and a 54.3% increase in final labor permits for foreign employment. However, there has been a decline in both imports and exports compared to last year by 19.91 percent and 29.1 percent respectively.

Furthermore, the country's Balance of Payment (BOP) is in a surplus of Rs. 148.11 billion, which is a promising sign for Nepal's economy. The liquidity situation in the market is improving, and high bank interest rates have started to decline, leading to the Nepal Bankers' Association's decision to lower deposit interest rates to a single digit. This move is expected to increase demand for loans, potentially accelerating the economy. However, it's worth noting that loan interest rates can be influenced by other factors, and the relationship between deposit rates, base rates, and loan interest rates is not always straightforward.

Despite these favorable trends in Nepal's economic indicators, the country's GDP has contracted, and it has fallen into a recession for the first time in 60 years. The economic slowdown in the second quarter was primarily caused by a reduction in trade and a decline in the construction and mining sectors. This downturn followed a decrease of approximately 0.34 percent in the first quarter. Although there is no proper definition of recession in the world, but the negative growth in the consecutive two quarters is widely agreed as recession in the world.

Financial irregularities pose challenges for Nepal's economy

The financial irregularities in Nepal have revealed a deep-rooted unrest within the provinces. According to a recent audit conducted by the Auditor General's office, seven provinces collectively faced a deficit of NPR 27 billion 95 million for the fiscal year 078/79. The 60th annual report submitted by the General Accountant to provincial heads highlighted the alarming findings. These financial challenges pose significant concerns for Nepal's economy as the growing deficit between income and expenditure has reached nearly NPR 2 trillion.

The short-term implications of these financial irregularities include a widening budget deficit, putting strain on the government's ability to provide vital services such as healthcare, education, and infrastructure. The construction industry has also been affected, with businesses owed over NPR 1 trillion by all three levels of government. Delayed payments have created a shortage of funds in the market, leading to a slowdown in infrastructure and development projects.

In the long run, financial irregularities can undermine the country's economic growth and development. The lack of transparency and accountability in financial management can deter foreign investors, who may perceive the country as unreliable or corrupt. This, in turn, can impede the inflow of foreign capital, technology, and expertise, all of which are essential for sustainable long-term economic development.

To promote economic growth and generate revenue, the government has implemented a policy to revive the real estate sector. The policy allows for land fragmentation up to a minimum of 2 and a half annas, with the aim of stimulating sluggish land transactions and revitalizing the real estate market, which has experienced a decline in recent years.

Nepal's Supreme Court permits second stock exchange platform

The decision by Nepal's Supreme Court to allow the establishment of a second stock exchange platform in the country is a significant development that could have far-reaching consequences for Nepal's financial markets. While the country's sole stock exchange, the Nepal Stock Exchange (NEPSE), has seen impressive growth in recent years, the introduction of a second exchange could help to further diversify investment opportunities and increase competition among market players.

It is noteworthy that the decision was not without controversy, as the writ filed by Advocate Dipak Bikram Mishra shows. The fact that the case ended up in the Supreme Court suggests that there are different opinions on the benefits of having a second exchange. However, the Court's decision to permit the licensing process to go ahead indicates that there is a belief that the potential benefits outweigh any potential drawbacks. However, it is important to note that the introduction of a second exchange also carries risks. If not properly regulated, it could lead to excessive speculation and market volatility. Additionally, there is a risk that the new exchange could siphon liquidity away from the existing exchange, potentially harming the businesses listed there and reducing investor confidence.

To mitigate these risks, it will be important for regulators to ensure that the new exchange is subject to appropriate oversight and regulation. They will need to ensure that market participants are held accountable for any malpractices, and that market integrity is maintained at all times. If these risks are managed effectively, the establishment of a second stock exchange could be a positive development for Nepal's financial system and help to promote further growth and development in the country.