First, the good news
First the good news: Nepal Rastra Bank (NRB) says Nepal’s foreign exchange reserves have increased from $9.54 billion in June 2022 to $10.5 billion in February 2023.
This is enough to pay for 9 months and 12 days of imports.
This is a result of a spike in remittances and a ban on the import of luxury items after reserves fell last year.
The NRB’s Current Macroeconomic and Financial Situation Report of Nepal last week noted that imports went down by almost 20% during the first seven months of the current fiscal year. Remittance inflow is still Nepal’s economic lifeline and it increased by 16.4% in the past seven months compared to the same period last year as foreign employment permits increased by 57%.
Nepal’s balance of payments has also reached a surplus of Rs132 billion, compared to a loss of about Rs274 billion last year, which could show that the economy is on the mend.
But this is the only silver lining as dark clouds gather on the global economy as bank collapses in US spread to Europe, and within Nepal there is a looming threat of mass defaults and depositors cheated by micro-finance lenders and cooperatives.
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The bad news is that government revenue has plummeted, going down by almost 15% till February as compared to the previous fiscal year. Paradoxically, political uncertainty has meant that the government has been unable to spend much of its allocated development budget.
Revenue has gone down to Rs622 billion and the government incurred a shortfall of Rs150 billion in expenditure this fiscal year. This is in sharp contrast to a consistent increase in government revenue over the past decades.
High interest rates have discouraged investment, real estate transactions are half of last year, and the stock market is in a slump. Decreased imports have had a knock-on effect on economic activity.
“The demand for goods and services has decreased because of high interest rates, bringing businesses to a standstill,” says Shekhar Golchha of the Federation of Nepal Chambers of Commerce and Industry (FNCCI). Borrowings have declined, and borrowers unable to pay back loans has gone up. Bank loans to the private sector have only increased by 3.2% this year as compared to a 12.3% increase last fiscal year.
Golchha says a government stimulus package is required to save businesses from recession.
“We need policies to reduce interest rates and facilitate credit,” says Golchha.
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Preoccupied with coalition politics, the government is distracted. And the central bank says fears of a recession are exaggerated.
“Our economy was in a precarious position due to the depletion of foreign reserves last year,” explains Gunakar Bhatta of NRB. “But economic activity is increasing and the economy is on the mend.”
Bhatta argues that monetary expansion and credit extension will only lead to an increase in imports, which will send Nepal’s economy back to square one.
Economist Sujeev Shakya also dispels fears of a crisis. He says the private sector is blaming the government for their own business mismanagement.
”Some businesses are facing problems, but to say that the economy has gone into recession is to spread panic,” Shakya notes.
Former Finance Secretary Rameshore Khanal agrees, saying businessmen may be in trouble because of bad investment decisions in real estate and shares, and subsequently failing to sell those assets.
He cautions: “The NRB should not risk being generous with lending just to get businessmen out of trouble. Doing so will increase our imports as well as inflation.”
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