October 2022 Analysis: Economy and Development

Posted by : Milan Acharya


Date : 2022-11-10

Following a rise in the interest rates on deposits in early October, BFIs raised the interest rates on loans due to their rising costs. The government’s ban on the import of some luxury goods is bound to continue until mid-December. Even while the fuel prices in the international market are low, Nepal Oil Corporation stayed put and kept the fuel charges high despite being in profit. And Nepal agreed to conclude a trilateral agreement on electricity trade which includes Bangladesh and India.

Timeline of Major Events

Year Event
October 12 Commercial banks to raise the interest rates on loans as of mid-October.
October 15 GoN has continued to impose a two-month import restriction on some luxury products.
October 26 Nepal has agreed with Bangladesh to conclude a trilateral agreement on power trade with India.

Interest rate rises on loans

Commercial banks have raised the interest rate on loans as of mid-October. The banks and financial institutions (BFIs), which raised the interest rate on deposits in early October, have also increased the interest rate on loans due to rising costs. The base rate of BFIs has climbed, even though they haven’t raised the interest rate on outstanding loans since last July.

Interest-sensitive firms have been impacted by the commercial bank’s move to increase interest rates because the cost of borrowing has increased. Manufacturers’ fears have grown as a result of the rising interest rate. Despite the continued liquidity crisis, high-interest rates promote saving and lure deposits, yet many business lines with monthly repricing are struggling. Higher inflation and high-interest rates affect small enterprises’ cash flow, borrowing, and reinvestment capacity. Due to soaring fuel prices, rising raw material prices, and rising shipping costs, domestic producers—primarily exporters—were already confronted with difficult circumstances. As hiring slows down, high-interest rates even influence employment. It drives up the cost of production, weakens the sector’s ability to compete, and eventually encourages more imports.

The government prioritized domestic production in this year’s budget statement; however, this does not appear valid given the recent activity observed in Nepal’s banking sector. The interest rate must not be less than the inflation rate. If the interest rate is less than the inflation rate, there is a potential that money will go into informal lending. More investments will be directed towards unproductive sectors like housing and real estate.

NOC’s stance to keep fuel prices high

The Nepal Oil Corporation (NOC) has chosen to keep fuel prices high and unchanged despite the decline in oil prices on the global market. According to the state-owned company, it owes Indian Oil Corporation (IOC) around 33.60 billion rupees.

NOC is making a Rs 14.56 profit on the sale of a liter of petrol in accordance with the new rates the company obtained on October 16, 2022. Petroleum product sales will generate Rs 390 million in earnings for the company over the course of 15 days. In contrast to making a profit on petrol and aviation fuel sales, NOC is at a loss on the sale of diesel and LPG. Despite the decreased cost price of petroleum from IOC, NOC is reluctant to revise the petroleum prices owing to its high cumulative loss.

Public outrage over the fact that domestic prices have not decreased in line with declining global pricing over the past two months is growing. Every two weeks, the Indian Oil Corporation revises diesel, petrol, and kerosene export prices. It does so monthly for other commodities like cooking gas and aviation fuel.

On June 25, Nepal Oil Corporation last lowered the price of petroleum products. Petrol’s cost per liter was dropped by Rs 20 to Rs 179, diesel’s cost per liter was reduced by Rs 29 to Rs 163, and kerosene’s cost was also decreased by Rs 29 to Rs 163.

Declining foreign reserves and Import Restrictions

The government of Nepal has continued to impose a two-month import restriction on some luxury products as the foreign exchange reserves are declining. According to a Cabinet decision, the temporary ban on mobile phones costing more than $300, alcoholic beverages, automobiles, and motorcycles with engines larger than 150cc would last until December 15. The gross foreign exchange reserves decreased 2.0 percent to 9.35 billion in mid-September 2022 from 9.54 billion in mid-July 2022.

On August 30, the government lifted import restrictions from a few “luxury” products; these items included tobacco, large televisions, toys, playing cards, and diamonds, however, it maintained the ban on importing vehicles, motorcycles, cell phones, and alcohol.

Due to the government’s continued restrictions on imports and restricted liquidity in the banking sector, the Dashain shopping season came to a tepid conclusion with fewer options for holiday shoppers. The ban on mobile phones, cars, heavy motorcycles, and alcoholic beverages made festival sales sluggish.

Customs revenue fell as a result of the government banning some imports to boost foreign exchange reserves. The restriction has caused a 22 percent drop in revenue for the current fiscal year compared to the same period last fiscal year.

Electricity trade with Bangladesh

Nepal has agreed with Bangladesh to conclude a trilateral agreement on power trade with India. Sheikh Hasina, the prime minister of Bangladesh, formally requested India to import power from Nepal during her state visit in early September. In August, Nepal and Bangladesh came to an understanding that the Nepal Electricity Authority and Bangladesh Power Development Board would submit a request for a trilateral power trade agreement to NTPC Vidyut Vyapar Nigam Ltd (NVVN) of India in order to permit the export of 40 to 50 megawatts of power produced in Nepal to Bangladesh. By 2040, Bangladesh plans to purchase 9,000 megawatts of electricity in total. Bangladesh has committed to buy 500 megawatts of electricity from the Upper Karnali Hydropower Project that the Indian firm Grandhi Mallikarjuna Rao (GMR) will construct.

Since India is located between Nepal and Bangladesh, and the two nations do not share borders, India’s participation will be essential to facilitate the exchange of electricity between them. In addition, Bangladesh has consented to the cooperative development of the 383MW Sunkoshi-3 Hydropower Project. The Baharampur-Bheramara cross-border transmission line, which connects Bangladesh and India, will be used by the nations to exchange power. If this trade agreement is signed, it would open a leeway for third-country electricity trade beyond India.