September Analysis: Economy and Development

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Timeline of Major Events

DateEvents 
September 8GoN lowers import taxes on sanitary pads, iron bars, and raw materials for edible oils
September 14Nepal Rastra Bank (NRB) started issuing fresh banknotes for Dashain
September 15Import through Tatopani, Rasuwa checkpoints resume
September 26The selling exchange rate of one US dollar to the Nepalese rupee reached a record high of Rs. 130.90

Tatopani and Rasuwa checkpoints resume imports

After one and a half months, the border crossings with China at Tatopani in Sindupalchok and Rasuwagadhi in Rasuwa have reopened. The border crossing point had previously been closed by China reasoning the rise in COVID-19 cases in the Tibet Autonomous region. Before that, since March 2020 the checkpoints hadn’t been on smooth operations, with occasionally few trucks allowed to drop goods on side of the border. China has allowed the consignments to enter Nepal from Tatopani and Rasuwagadhi border points. This comes after the strong reservations from Nepali officials with Li Zhanshu, Chairperson of the Standing Committee of the National People’s Congress of China, during his recent visit to Nepal. This is also attributed to the decreasing COVID-19 incidences in Tibet.

Just before the start of festive seasons in Nepal, the reopening of the border in the northern point might ease the hampering businesses which were dependent on imports from China. Not only this, but it also gives a slight aid in the increasing consumer demands during this festive season.

Export tariffs on Rice by India

On the 8th of September 2022, India added a 20 percent export duty on various types of rice except for parboiled and basmati rice. Large quantities of rice are imported by Nepal from its neighbor India, to meet the increasing demands. According to the Department of Customs, Nepal imported 550,000 tons of paddy, 520,000 tons of rice, and 50,000 tons of broken rice in the last fiscal year, mostly from India.

This year’s rice yield in Nepal is expected to be lower than in previous years due to various reasons; the government’s failure to provide farmers with chemical fertilizers during the paddy transplantation period in June, and the impact of drought-like environments on major food-producing districts, especially in the Terai Region. This decision by the Indian Government will make rice more expensive to Nepali consumers and might create a shortage of rice during the festive season when the demand for rice is generally high.

A rise in bank interest rates

Banks and Financial Institutions (BFIs) have raised their interest rates on fixed deposits by 10% to 12.13% just as the economy is commencing to recuperate from the effects of the coronavirus outbreak. The monetary policy for the past two fiscal years was expansionary as it was concerned with reviving the economy after the COVID-19 outbreak. At present, for the monetary policy of the FY 2022/23, NRB has taken a contractionary step to control the rising inflation rate which triggered the rate of interest on fixed deposits to rise. The interest rate on credits is projected to surpass 15% starting from October due to the revision of their base rate. Although Nepal Rastra Bank (NRB) had been pressurizing the BFIs to increase their interest rate through monetary policy, the rate had been static for the months up to August.

In light of the continued liquidity problem, the central bank had also been recommended by the International Monetary Fund (IMF) to raise interest rates for banks. However, BFIs in Nepal has been facing all-around reproval from various sources after they decided to raise the interest rate. BFIs have been facing a liquidity crisis and facing problems to facilitate borrowers with loans. With the hope to ease the progressing liquidity crisis by drawing in more deposits, BFIs moved forward to increase their interest rate. Lately, the rising cost of necessary goods is particularly harsh on the common citizens. People’s day-to-day costs becoming even more expensive as a result of the higher interest rates. To curb the liquidity crunch, NRB had issued a repo worth 20 billion in early September which would mature by the end of September.

A plunge in NEPSE and a new securities market formulation

Nepal Stock Exchange (NEPSE) building Photo: RSS

The country’s stock market, Nepal Stock Exchange (NEPSE), has been depicting a miserable picture over the month as a result of the banks’ rising interest rates. NEPSE had a bearish trend with an overall loss of 134.42 points in the index with a small pullback of about 83 points during the mid of September. The market was relatively steady and there was less volatility in the market. The sentiments of people towards NEPSE were bearish as all the major indicators of the economy were not showing a green signal for any new investments

The Securities Board of Nepal (SEBON) has authorized the formation of a new securities market. The only organization currently overseeing the trading of securities in the nation is Nepal Stock Exchange (NEPSE). Investors had been requesting that the government authorities grant the license to a new stock exchange, citing a recent increase in the amount of stock trading. Now with this, in the coming future, there will be two stock markets in Nepal where traders can trade in both stock markets. As proposed by SEBON, the cabinet of ministers has agreed to issue a new broker license.

SEBON has also opened licenses for two commodity exchange firms. At present, the government lacks a legitimate organization to oversee the commodities trade. A commodity exchange is a regulated market where buyers and sellers can transact in future delivery contracts for graded commodities (such as grains, cotton, sugar, coffee, and wool).  

Nepal’s electricity trade with India

Nepal Electricity Authority (NEA) has been gradually increasing the export of surplus electricity to India at a competitive rate. In the second month (mid-August to mid-September) of the current fiscal year, Nepal traded surplus electricity worth Rs 2.42 billion to the Indian energy market. NEA sold about 246.52 million units of surplus electricity at a rate of Rs 9.80 per unit to Indian Energy Exchange during the review period. 

The increase in the export of electricity to India helps to replenish the country’s declining foreign reserves. This also helps to reduce increasing Nepal’s trade deficit with India. Following a decline in domestic consumption after the festive season in Nepal, NEA had planned to sell an additional 200 MW of power to India. However, according to “Procedure for Approval and Facilitating Import/Export of Electricity by Designated Authority-2021”, India can’t buy electricity from countries that have a foreign investment in the production and transmission of electricity. In accordance with that policy, India will not buy the surplus electricity that Nepal will have after the festive season as most of the investment done in the hydropower sector in Nepal is by China. This raise concerns on market access for the increasing volume of electricity generation in Nepal.

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