March 2023 Analysis: Economy & Development

Posted by : Milan Acharya


Date : 2023-03-30

Nepal Rastra Bank (NRB)'s recent macroeconomic report shows a decrease in imports by 19.9%, a decrease in exports by 29%, and a significant increase in remittance inflow by 27.1% in NPR, which can be attributed to an increase in Nepali workers going abroad and sending money back home. The Nepali government faces challenges formulating the upcoming fiscal year's budget due to revenue collection difficulties, a smaller budget ceiling, and reduced financial equalization subsidies. NRB has injected 20 billion Nepali rupees into the economy to ease liquidity constraints, while commercial banks have reduced interest rates from March 15.

Timeline of Major Events

Date Events
March 2 NRB issues NPR 20 billion worth Repo
March 15 Nepal Bankers Association agreed to reduce the interest rates on loans and savings
March 16 Financial equalization grant for state and local government decreased
March 17   Nepal and India have agreed to increase their cross-border electricity supply rates, with India allowing Nepal to use its transmission lines at the border during the 14th meeting of the Nepal-India Power Exchange Committee (PEC)
March 27 NRB issues treasury bills worth NPR 20 billion 10 million
March 29 Nepali and Chinese officials have agreed to fully reopen the border for two-way trade and people movement

Current Economic and Financial Situation

Nepal Rastra Bank's (NRB) recent macroeconomic report for seven months reveals some interesting trends. Inflation is limited to 7.88% compared to last year, and there is a significant increase in remittance inflow by 27.1% in NPR compared to last year, while imports decreased by 19.9%, and exports decreased by 29% compared to last year. Nepal's Balance of Payment (BoP)s has remained at a surplus of Rs. 133.21 billion, and there is a decrease in trade deficit by 18.7%. This increase in remittance can be attributed to a rise in the number of Nepali workers going abroad, and an increase in the amount of money they send back home.
The increase in remittance inflow in Nepal can be attributed to a rise in the number of Nepali workers going abroad and an increase in the amount of money they are sending back home, with a 25.2% increase in net transfers amounting to over Rs. 759 billion and a 57.3% increase in final labor permits for foreign employment.

NRB has infused 20 billion Nepalese rupees into the economy through a repurchase agreement, aimed at increasing liquidity in the market, which could benefit businesses and the economy as a whole. This move was necessitated by challenges the country has been facing, including a slow recovery from the COVID-19 pandemic and a trade deficit. The injection of funds into the market is expected to ease liquidity constraints and stimulate lending activity.

The Nepalese banking sector is experiencing a liquidity crunch, partly due to the outflow of money caused by Nepalese students going abroad for higher education. NRB’s monthly report states that during the first seven months of the current financial year, 43.74 billion rupees were withdrawn for foreign studies, a 92.2 percent increase from the previous year.

In the industrial sector, businesses have been facing significant challenges due to high-interest rates, which have made it difficult for them to secure funding for growth and manage their cash flow. Commercial banks, development banks, and finance companies have taken a proactive step to reduce interest rates from March 15. This reduction in interest rates is likely to have a positive impact on businesses, making it easier for them to obtain financing and manage their finances more effectively, and benefiting the economy as a whole.

The Budget for Upcoming Fiscal Year

The Nepalese government is facing significant challenges in formulating the upcoming fiscal year's budget due to a lack of expected revenue collection and a smaller budget ceiling. Since the end of February, the Ministry of Finance has been lacking a dedicated minister, which could potentially impede important discussions required for effective budget planning while the economy is going through a rough period. This is a matter of concern, given that the budget is set to be presented on May 29, 2023. The Comptroller General's Office reports a 16% decrease in revenue during the first eight months of the current financial year, with a notable drop in revenue collected only Rs 350 billion by the Customs Department in the same period.

In situations where the government is experiencing a lack of expected revenue collection, it may turn to alternative means of financing to meet its short-term funding requirements, such as issuing treasury bills. The NRB issued treasury bills to collect 22 billion 10 million rupees to finance the government's recurrent expenses.

The budget limit for the upcoming fiscal year, as per the medium-term expenditure structure by the National Planning Commission (NPC), is 5.86% lower than the current year's budget. The National Resource Estimates Committee's limit on the overall budget for the upcoming fiscal year has resulted in a significant reduction of the financial equalization subsidy for lower levels of government. The commission has recommended financial equalization subsidies of 58.66 billion, and 75 lakh rupees to 7 provinces, along with a financial equalization grant of Rs 87.35 billion and 29 lakh for local levels.

One of the potential ramifications of reducing the budget size is the possibility of cutting the development budget, as recurrent expenses cannot be reduced further. However, reducing the development budget which falls under capital expenditure could lead to a decrease in job creation and consumer market consumption, which could ultimately weaken the government's revenue. It is crucial for the government to carefully consider the potential impact of budget cuts on the economy to avoid pushing it further into crisis.