Business as unusual

President of the Confederation of Nepalese Industries (CNI) Rajesh Kumar Agrawal declared last week that the economy was in a deep recession. But others cite record high remittances and foreign exchange reserves to say there is no cause for alarm.  

Whom to believe? Both sides are right. The external sector of the economy is sound, but jobs are down and so is domestic demand and economic activities are. There is no domestic and foreign investment.

“Looking at our macroeconomic indicators, we most certainly aren’t heading towards a recession,” says Ishwori Prasad Bhandari of the National Statistics Office. “We are, however, experiencing a slow growth rate."

Unlike what many had predicted last year, Nepal has not gone down like Sri Lanka. Foreign reserves have climbed to $11.85 billion, enough to cover imports for more than 10 months. Nepalis sent home Rs116.2 billion in just the last month, a record and 26% up from the same month in 2022. And that is just through official channels. 

After nearly 34 months, the current account deficit is on firmer ground. And the Asian Development Bank this week projected that the economic growth rate this year will bounce back to 4.3% from 1.9% % last year.

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The inflation rate also dropped to 7.52% in July, down from 8.26% at the same time last year mainly because of lower fuel prices and lower inflation in India. 

There are no figures for unemployment, but since about 1 million Nepalis left for overseas jobs and work-study in 2022-23, the picture is not rosy.

On the import side, demand declined first because of the pandemic and later government-imposed ban on luxury goods. Imports three years ago were down to Rs1.54 trillion only for it to bounce back a year later by nearly 25% once the restrictions were removed.

The decline in demand can also be credited to a slowdown in construction and infrastructure projects. Much of the reconstruction after the 2015 earthquake is complete, and so is new infrastructure for new local and provincial governments. This has led to a decline in demand for cement and other building materials.

The growth rate of bank loans has shrunk to 4.6% which many saw as a reluctance of industries to invest. But higher interest rates in the past have not necessarily resulted in economic growth, production, or jobs.

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Due to the rapid growth of credit, the ratio of credit to the private sector has exceeded 91% of Nepal’s GDP, which is the highest in South Asia. Some experts credit this for the natural slump.

“After seeing an increase of 26% a year, it is only natural for the loan growth rate to decline,” says former banker Parshuram Kunwar Chhetri. “Credit growth can fluctuate when the economy does, it does not always increase at the same pace.”

Loans are starting to see an increase. Last month the figure stood at Rs44.15 billion which is double the amount in the same period last year.

“The economy went into decline, but did not collapse,” concludes Chhetri. “But the Central Bank could lower interest rates, relax the limit of Rs10.2 million imposed on the stock market and increase capital expenditure to boost the morale of the private sector.”

Former Finance Secretary Rameshore Khanal argues that just because some shops have closed down it does not mean that the economy is on the verge of collapse. “A lull in market and consumption have changed leading to some businesses experiencing difficulties. But other businesses have sprung up. This is a natural trend.” 

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Indeed, much business has shifted to digital platforms since the Covid pandemic. Just last month, mobile banking accounted for Rs243 billion, up from Rs73 billion two years ago.

“If it was a real recession, people would stop buying home appliances but here during the NADA auto show this year, there was a record high transaction worth Rs20 billion,” says Khanal.

So why are businesses trying to make it look like we are facing the Great Depression?

Experts say businesses are exaggerating the recession narrative to influence policy so they can get away with not paying high interest rates on loans taken earlier. 

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“This problem arose in the first place due to the flow of cheap loans,” explains Shivraj Adhikari of Tribhuvan University. “And what we have now is the business community trying to create a policy trap by demanding concessions on their unpaid loans.”

But this is not to say that all is hunky dory. Much of the remittances are spent on unproductive sectors when they should have gone into job creation, renewable businesses, and manufacturing. Nepal also needs to increase its capital expenditure.

Says Nepal Rastra Bank’s Prakash Kumar Shrestha: “There are structural problems from the past and we will need major reforms to speed up the economy. Business as usual and only relying on the real estate and stock market for growth will not be enough.”

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