December 2022 Analysis: Economy & Development

Posted by : Milan Acharya


Date : 2022-12-30

Economy and Development

In order to fulfil the rising demand for electricity combined with a fall in production due to the dry season, NEA has resumed importing electricity from India. In order to cushion Nepal’s economy, an import ban was placed which now is uplifted as a result of improvement in a few indicators of the economy. A drop in revenue collection has worsened the capital, current and financial expenditure of the government.

Timeline of Major Events

Date Events
6 December Government of Nepal decided to lift the ban on luxury goods beginning from December 16 2022
12 December 13 billion rupees' worth of treasury bills issued by Nepal Rastra Bank (NRB).
28 December After three years, China reopens the Kerung-Rasuwagadhi border to Nepali exports.
29 December To manage liquidity in banks and other financial institutions, Nepal Rastra Bank (NRB) issued a repo worth Rs 50 billion (BFIs).

Electricity Import during Dry Season

Nepal Electricity Authority (NEA) earned a profit of Rs. 8.50 Billion in the first three months of the current fiscal year. With drying water levels, NEA has halted its export, while has resumed importing electricity from India to meet the current electricity demand of 1,512MW. The export of electricity has been cushioning Nepal's foreign exchange reserves by helping to decrease the widening trade deficit. However, with the NEA importing 365MW of electricity for the next five months, would hugely impact that. In the first four months of this fiscal year, the gross foreign exchange reserves increased by 2.5 percent - from Rs. 1215.80 in mid-July 2022 to Rs.1246.27 billion in mid-November. The overall trade deficit was reduced by 15.9 percent to Rs. 477.92 billion in this review period, after having risen by 56.8 percent last year.
With almost all the hydropower projects being run-of-the-river, Nepal's hydropower sector's production will fall nearly to half its capacity of 2200MW. The 683MW Sunkoshi-3 storage hydropower plant, to be constructed jointly by Bangladesh and Nepal, provides hope for Nepal's hydroelectricity sector, as the Ministry of Forest and Environment has cleared its EIA report. The need for storage-type hydropower projects is relevant if Nepal intends to halt the import of electricity from India in dry seasons.
However, the future of Nepal's electricity export to India still hangs in limbo. India's Power Ministry removed the inter-state transmission charges for new Indian hydropower projects, which will not be applicable to electricity produced in Nepal exported to India. As a result of the Indian government's protectionist measures, Nepali exporters will lose their competitiveness in the Indian market as the cost of exporting from Nepal would be expensive.

Tax Collection and Expenditure

The government's financial management is currently becoming more severe due to the strain on the external sector of the economy. It is under pressure due to the decrease in revenue collection as per the government's target. According to the data of the Financial Comptroller General's Office, 3 trillion 54 billion 41 crore revenue has been collected till November, and the same amount (3 trillion 54 billion 25 crores 69 lakh rupees) has been spent on current expenditure. However, the revenue collected is not sufficient for the current expenses alone, i.e., salaries and allowance for the employees, teachers, soldiers, and police officials.
Due to the lack of resources in the financial system, the government is facing difficulty in mobilizing internal debt, which in turn has made it difficult to meet the current expenses. The same is the case for capital expenditure, due to the decline in revenue collection. In the first five months of the current fiscal year, only about 10 percent of the capital expenditure has been incurred. According to the office of the Financial Comptroller General, only 33 billion 99 million rupees have been spent on capital expenditure in five months, while the budget allocated for the entire year is 3 trillion 80 billion 38 million rupees.
The revenue collection has fallen due to varied reasons such as the restrictions imposed on imports of 10 items since May 2022, the irregularities in capital gains tax on shares, the decrease in the import capacity of business people due to credit crunch, the decrease in real estate transactions, and the decrease in the consumer's consumption pattern. There is liquidity pressure in the financial system to mobilize domestic debt. Banks that could not extend credit due to a lack of investable resources have invested instead in government bonds through repo and central banks' investments in Fixed Deposits of commercial banks.
In order to create capital and expand market resources, the government might issue internal debt and use the proceeds to improve its infrastructure. However, given the current state of the economy, it appears that debt must be used to pay for current expenditures. The economy and financial system won't benefit even if government borrowings are acquired from the financial sector.

Uplifted Import Ban

The government of Nepal has lifted the ban on the import of 10 luxury items, which came into effect from May 2022, after experiencing an extreme decrease in foreign reserves and a growing trade deficit. The government had imposed a ban on the import of expensive goods to decrease the country's dwindling finances. The government decided to uplift the ban upon experiencing an improvement in the external and internal indicators of the economy; however, the margin deposit requirement for opening a Letter of Credit (LC) to import goods is still in place. Business communities have widely welcomed the upliftment of the import ban, but have protested the continuity of margin deposit requirements. Without the provision of a margin deposit requirement, the upliftment of the import ban would have resulted in the enormous entry of goods that were banned before, which would have inevitably increased the trade deficit and further depleted the gross foreign exchange reserves.