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Last week, the World Bank and International Monetary Fund (IMF) came up with their respective reports highlighting the state of Nepal’s economy. 

Both reports state that Nepali economy, which is currently going through a recession, will grow in the coming days mainly due to the positive indications in agriculture, tourism and remittances.
For the first time, the government has acknowledged that the nation is in a recession, which is primarily caused by a decline in industrial production, low investment, liquidity crisis, high-interest rates, widening trade deficit, low capital spending, and decrease in tax revenue.

The IMF’s prediction is that Nepal’s economy will grow by 3.5 percent in the current fiscal year. Similarly, the World Bank has projected that Nepal’s economy is poised to achieve a growth rate of 3.9 percent.

In September, the Asian Development Bank had anticipated Nepal’s economy to grow by 4.3 percent in 2024, up from the estimated growth of 1.9 in the fiscal year 2023.  

Nepal’s external situation has improved because of responsible fiscal and monetary policies, robust remittances, and rising tourism. After slowing down in 2018, growth is anticipated to pick up in the fiscal year 2023/24 to 3.5 percent, although it will still be below potential due to weak domestic demand and high inflation.

The Extended Credit Facility (ECF) arrangement’s third review calls for a disbursement of about $51.3m, and the Nepali government and IMF team have agreed at the staff level.

Despite monetary easing, necessary balance sheet repairs have been preventing credit expansion. The ECF’s reforms seek to increase credit stability and promote economic growth while preserving external and price stability. In order to increase demand, the budget calls for accelerating the planned increase in capital spending.

Senior economist at the IMF Tidiane Kinda stated in a statement that regardless of monetary easing, loan growth has been constrained by the need to restore balance sheets following the credit boom and a downturn in the real estate market. In August, Nepal’s inflation maintained its high at 7.5 percent, according to the IMF, but it is anticipated to decline. The forecast for Nepal over the medium term is still positive, as planned investments in infrastructure, particularly in the energy sector, are anticipated to help sustain potential growth.

The Nepali government is working to strengthen Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT), notably by amending existing AML regulations to conform to global norms. On the country’s side, however, growth is projected to have slowed in the most recent financial year due to import restrictions from the previous year, regulatory uncertainty regarding land markets and construction licensing, lower credit flows, and weaker domestic demand in the context of significant post-Covid emigration outflows.

The resulting revenue shortfall caused the fiscal deficit to increase in the most recent fiscal year, but it did so at a level that still fits with a manageable level of public debt, demonstrating budgetary restraint. However, there seems to be a contradiction in the IMF, World Bank, and Nepal government’s perceptions.

The expansion of Nepal’s economic growth is predicted by the World Bank for the upcoming fiscal year. The World Bank claimed that it anticipates Nepal’s economy will rebound to a 3.9 percent growth rate in the fiscal year 2024. It also indicated that Nepal's Gross Domestic Growth Rate will stay at 1.9 percent this year.

According to the update, Nepal can revive its economy by fostering tourism as well as export and remittances. Even while Nepal’s economy currently benefits greatly from tourism, there are still chances for more investments to increase returns, particularly for local communities. This is significant since Nepal is one of many nations attempting to solve the Covid-19 pandemic-related development setbacks while attempting to limit massive biodiversity losses.

Within the next three years, Nepal hopes to become a middle-income country, and the government has been painting a picture of a thriving economy based on data showing rising remittances and improvements in the tourism industry. However, the general state of the nation’s economy is getting worse by the day.

Chiranjibi Nepal, former governor of Nepal Rastra Bank and a senior economist, points out that the World Bank's optimistic outlook is in contrast to the challenging reality on the ground. He emphasizes that to truly understand a country's financial condition, we must observe local financial developments. He argues that international reports tend to highlight the positive aspects and may not accurately reflect the true economic situation. Nepal's government should focus on policies that stimulate local financial markets instead of relying solely on external reports.

“These reports are made by financial backers which demonstrates the positive side. How could a financial backer focus his/her interest into destruction?” he says. 

Senior economist Dr. Chandra Mani Adhikari says Nepal’s economy is distinct from other nations. This is the busiest time of year for Nepal’s economy, but it appears to be stagnating this year due to limited expansion, low wages, inflation, inadequate investment, corruption, lack of private sector confidence, youth migration, and sudden radical shifts in policy.

These are just a few of the economic features that Nepal is experiencing, Adhikari says, The Nepali economy has become stuck in a downward spiral of high inflation and sluggish growth.

“The banks have money deposited by particular persons that is fixed, and people are also cautious about spending because of the financial crisis, thus money movements in marketplaces are minimal these days. The government is unable to invest money on the market and reassure its citizens that everything is alright,” he says. “To stimulate the economy, the government should increase its development expenditure, which injects money into the market.”

The price of gold has increased by Rs 300 per tola in the domestic market on Tuesday.

According to the Federation of Nepal Gold and Silver Dealers’ Association, the precious yellow metal is being traded at Rs 108, 900 per tola today. It was traded at Rs 108, 600 per tola.

Meanwhile, tejabi gold is being traded at Rs 108, 400 per tola. It was traded at Rs 108, 100 per tola.

Similarly, the silver is being traded at Rs 1, 340 per tola.

The Nepal Stock Exchange (NEPSE) plunged by 12. 58 points to close at 1,908.66 points on Monday.

Similarly, the sensitive index dropped by 2. 83 points to close at 364. 74 points.

A total of 4,327,179-unit shares of 287 companies were traded for Rs 1. 17 billion.

Meanwhile, Sayapatri Hydropower Limited was the top gainer today with its price surging by 6. 88 percent. Likewise, Barahi Hydropower Public Limited was the top loser as its price fell by 10. 00 percent.

At the end of the day, the total market capitalization stood at Rs 2. 91 trillion.

The government is rapidly raising internal debt, taking advantage of sufficient liquidity in the banking system. 

Nepal Rastra Bank (NRB) is also raising debt, originally slated for the second quarter, now as it would reduce the cost for the government and also help manage liquidity to some extent.

The government has set a target of raising Rs 240bn internal domestic debt in the current fiscal year. Out of this amount, the central bank has already secured Rs 87.31bn. This includes Rs 35bn that the central bank had initially planned to raise in the second quarter, according to the Monetary Management Department of the NRB. Of the Rs 87.31bn raised from the market so far, Rs 5bn was collected via treasury bills, with the remaining Rs 82.41bn through development bonds.

The weighted interest rate of treasury bills stands at six percent, and domestic bonds at seven percent, according to the department. Central bank officials say that they decided to raise funds targeted for the coming quarters in the first quarter to take advantage of the easy liquidity situation and low cost of funds and also to manage the banking system, which is flush with liquidity.

Banks have around Rs 500bn in investable funds. Banks have total deposits of Rs 5,823bn and total loans of Rs 4,838bn. They added Rs 35bn in deposits and invested Rs 54bn in the first two and a half months of the fiscal year, ending in September. In the same period of the previous fiscal year, banks had seen deposits fall by Rs 36bn while their loan flow had gone up by Rs 24bn.

The central bank plans to raise Rs 55bn each in the first and second quarters, Rs 53bn in the third quarter, and Rs 77bn in the fourth quarter. As per the schedule, it has already raised Rs 55bn that it had intended to raise in the first quarter. Going further, it has raised about Rs 34bn out of the Rs 55bn, which it had scheduled to raise in the second quarter, in the first quarter itself.

Banks, which were already in a comfortable liquidity situation, are further flush with lendable funds after the government allowed them to count 60 percent of funds of local units parked in them as deposits. Because of this, the inter-bank lending rate has come down to around two percent compared to six percent in the past.

The central bank, which used to absorb liquidity in the past through tools like reverse repo when interbank rates fell below 4.5 percent, hasn’t been able to implement such tools yet. This is because the interbank rates have come down due to the government’s decision to send additional funds into the banking system by allowing banks to count local government’s funds parked in them as deposits. We are in a wait and watch situation regarding our next move, an official at the department said.

The government, meanwhile, has failed to expedite its spending. According to the Office of Financial Comptroller General, the government has expended only 11.77 percent of its total budget allocated for the current fiscal year in the first two and a half months (between July 16 and Oct 8). The progress in capital budget expenditure remains at a disappointing 3.78 percent, while recurrent expenditure stands at 13.78 percent.