March Analysis: Economy and Development

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The month of March recorded some major economic and development activities that the government had planned in its fiscal. The biggest achievement for the nation was noticed in its growing digital transaction wherein the country recorded e-payments worth Nrs. 349 million in a month’s period. Similarly, as a relief to the ongoing liquidity crisis, banks and financial institutions received deposits at 14 percent higher than the national GDP. However, weak public capital expenditure, falling remittance earnings and the ever-increasing petroleum and fuel prices overshadowed these achievements, signaling a growing possible crisis in the economy.

Timeline of Major Events

Date:Events:
11 MarchRemittance inflows decreased by 4.9 percent to Nrs. 540.12 billion within the first seven months of the current fiscal.
16 MarchThe government managed to spend only 20.16 percent of its capital expenditure in the first eight months of the current fiscal.
16 MarchNOC increased prices of petroleum products (petrol, diesel, kerosene, cylinder gas, aviation fuels) by Nrs. 5.
17 MarchNepal recorded e-commerce transaction worth Nrs. 349 million within a month.
19 MarchAccording to NRB, consumer inflation reached 5.97 percent as of mid-February 2022l.
20 MarchDeposits at banks and financial institutions (BFIs) stood at 14 percent higher GDP as of mid-March 2022.

Online Transaction on Rise yet Challenges Remain

Finance Minister Janardan Sharma. Photo: RSS

Context

With most Covid-19 restrictions out, retail and street businesses have come back into business. Yet the number of transactions on e-commerce platforms remains the same or at times, larger as compared to the lockdown days. Moreover, digital platforms have also recorded a 20 percent month-on-month growth in their transaction as compared to lockdown days; signaling shifting preference of customers on digital shopping over physical visits to nearby stores.

Analysis

The rise of online/digital shopping is a huge achievement for the Nepali society which predominantly prefers traditional modes of shopping. While owners of digital/online businesses/platforms had feared being irrelevant post the lifting of Covid-19 restrictions and the nationwide lockdowns; rising preference of online transactions comes as a huge relief to them. A major part of this development can be attributed to the country’s increasing access to internet services and other digital facilities. According to a report published by Nepal Telecommunication Authority (NTA) in December 2022Internet penetration has reached 119.49 percent of the population. Similarly, people performed online payments worth Nrs. 349 million (between mid-December 2021 to mid-January 2021). Despite this, awareness of e-commerce platforms in Nepal is still very low. According to the Business-to-Commerce E-Commerce Index 2020 (done by UNCTAD), Nepal ranked 113th in terms of internet awareness. Likewise, the nationwide digital literacy rate (as of 2019) among adults stands at only 31 percent; hampering optimum utilization of new technologies in the rapidly progressing digital sector. Timely delivery of goods has also been impacted by the lack of a proper addressing system for houses. Moreover, skills development services including – access to finance for e-commerce, tech start-up lags, low incentives (especially for women-led businesses) among others pose to be the major challenges for Nepal’s growing digital economy.  

NOC Increases Petroleum Prices, Increasing Inflation and External Deficit

Context

The Nepal Oil Corporation (NOC) on 16 March 2022, received a revised price list for petroleum products from its sole exporter, Indian Oil Corporation (IOC). According to the new list, the price of petroleum products has reached an all-time high, wherein NOC is required to pay Nrs. 182.81, Nrs. 164.44, Nrs. 113.49, Nrs. 131.94, and Nrs. 114.51 per litre for petrol diesel, kerosene, aviation fuel (domestic) and aviation fuel (international), respectively. Similarly, the corporation is to pay Nrs. 2,240.34 per cylinder for cooking gas. With the revised list, market prices for the same products have been readjusted to Nrs. 150, Nrs. 133 (each), Nrs. 136, Nrs. 156, and Nrs. 1,575 per litre.

Analysis

Any increase in fuel and petroleum prices has rippling effects on economic sectors across the country; in particular the inflation rate. Nepal is dependent on imports for most of its basic necessities. Out of its Nrs. 153 trillion imports bill, it spends around roughly 20 percent or Nrs. 158 billion on importing petrol and fuel products. With most of the imported items coming via roadways, any increase in fuel prices automatically increases transportation cost; making prices of consumables (goods and other services) dearer. Moreover, according to Nepal Rastra Bank’s (NRB) Inflation Expectation Survey Report Q2, 91.9 percent individuals expect prices of cereal grains, pulses, sugar, spices, oil, meat, real estate, drinks and tobacco, hotels and restaurants to increase in the next three months. Rising fuel prices are also anticipated to impact the growing trade deficit, in particular external deficit. Being a net importer of petroleum products, any changes in the global oil market bring about changes in Nepal’s external deficit which is outside the control of its domestic policies. Thus, with the Russia-Ukraine crisis, there is no doubt that Nepal’s trade deficit has widened with respect to the increasing global and domestic oil prices. 

Weak Capital Expenditure Impacting Overall Economic Growth-

Context

According to the Office of Comptroller and Auditor General (OCAG) of Nepal, the government has spent only 20 percent of its targeted capital expenditure within the first eight months of the current fiscal year (FY) 2021/22. In terms of numbers, the government has managed to spend only Nrs. 76.22 billion out of the allocated Nrs. 378 billion in the same period. Looking at the country’s total budget expenditure, the government has managed to spend Nrs. 672.90 billion out of Nrs. 1,632.82 billion or 41.21 percent.

Analysis

Slow and weak capital expenditure is not a new phenomenon in Nepal. It has been chronically impacting the economy and the government’s ability to utilize its resources. In any economy, economic growth and the government’s ability to spend money is directly correlated. Capital expenditure (in its essence) builds infrastructure and development projects. Successful completion of these projects attracts more investment vis-a-viz creating jobs and raising more revenue for the government to inject back into the economy. Yet the government in Nepal regularly fails to spend money on development activities. Weak capital spending results in the government producing shoddy and unprofessional infrastructure at the end of every fiscal year. Similarly, low budget on development activities also impacts job creation; by snatching jobs instead of creating it. The biggest implication of the current state of capital expenditure can be anticipated in the infrastructure deficit. With both planned and actual spending far below what is needed to close the infrastructure deficit, one can expect critical sectors like energy, transport, water supply and irrigation, and telecommunication to take the biggest hit; ultimately hampering revenue collection and the overall development of the nation.

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