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With the government struggling to strike a balance between income and expenditure, the federal budget is currently in deficit which is increasing every successive month. The statistics of the Financial Comptroller General Office (FCGO) show the federal budget is in deficit by Rs 153.61 billion till March 5. The government revenue till the first week of March stood at Rs 594.91 billion whereas expenditure has reached Rs 748.52 billion. With the government failing to collect enough revenue while expenditures, particularly the recurrent expenditure, are rising fast, the fiscal imbalance is growing alarmingly. According to FCGO, the fiscal deficit began by the end of Ashoj (mid-September to mid-October) with the government failing to collect revenue as per target while recurrent expenditure, especially continue to increase. The government has targeted to collect Rs 1,244.75 billion in revenue in the current fiscal year. However, even after almost eight months, only 44.58 percent of the target has been achieved. With fiscal deficit looming, the government on February 12, announced a cut in its annual budget by a whopping 13.59 percent, the largest cut in recent times, after realizing that it would not be able to raise the required resources from all the most sources—particularly revenue and foreign aid. The revised budgetary allocation now amounts to Rs 1,549.99 billion from the original size of Rs 1,793.83 billion. The government’s revenue collection suffered mainly due to the prolonged import restrictions on a number of products including vehicles, alcohol, and expensive mobiles as well as the provision of cash margin in imports. The restrictions were first imposed in April 2022 for the import of 10 types of products. The number of restricted products was later reduced gradually but the ban on vehicles, alcohols, and expensive mobile sets continued till mid-December last year when the embargo was eventually lifted. The Nepal Rastra Bank made it mandatory to deposit a cash margin of up to 100 percent for opening letters of credit for the import of a number of products which also hit import-based revenue. Import covers around 50 percent of Nepal’s total revenue, according to the Department of Customs. Though these measures were taken to address the external sector vulnerability amid the ballooning balance of payment deficit and depleting foreign exchange reserves, the restrictive steps created a new problem of shortfall of resources for the government. The shortfall in revenue was also aggravated by increased compulsory liability by the previous government led by Sher Bahadur Deuba by increasing salaries for public officials and increasing the beneficiaries of social security allowances. This prompted the government to take harsh measures of budget cuts. A reprioritization of projects which have not been implemented even after getting a resource guarantee from the finance ministry, surrender of the budget which cannot be spent in the current fiscal year, and abandoning any proposal that creates new liabilities are other austerity measures announced by the Finance Ministry.

The price of gold has dropped by Rs 300 per tola in the domestic market on Tuesday. According to the Federation of Nepal Gold and Silver Dealers’ Association, the yellow bullion is being traded at Rs 102, 500 per tola today. The yellow metal was traded at Rs 102, 800 per tola on Monday. Meanwhile, tejabi gold is being traded at Rs 102, 000 per tola. Similarly, the price of silver has dropped by Rs 10 and is being traded at Rs 1,265 per tola today.

Amid the precarious economic outlook of the country, growing fiscal imbalance, rising bank default cases, and threats to the banking sector, Prime Minister Pushpa Kamal Dahal on Sunday sat down with the representatives of the private sector for the first time after he took charge of the Singha Durbar. The Prime Minister, who is also overseeing the Finance Ministry, discussed the problems in the economy and banking sector with the private sector representatives and senior government officials at his office in Singha Durbar. During the interaction, Dahal discussed the issues related to bank interest rates, microfinance problems, concerns of the private sector, and the attempts to create financial disorder in the country. During the meeting, Dahal said that the government has taken recent incidents to cause financial disorder seriously and is taking initiatives to resolve the problems in the banking and financial sector. "The government is worried about the current situation," a government official who participated in the meeting quoted the prime minister. "After discussions with the stakeholders, the government will move quickly and take concrete decisions." "The government is serious about resolving the challenges of the economy. I am aware and aware of people's complaints in the field of banks and microfinance," said Dahal. Seeking suggestions from the private sector, he further said that a high-level commission may have to be formed to resolve the problems. However, Sunday's discussion ended without a concrete decision. The Prime Minister came late to the meeting by an hour. While the meeting was called for 12.30 pm, Dahal reached only at 1.30 pm. "As the Prime Minister has another program to attend, the meeting lasted for one hour only," said a businessperson who attended the meeting. According to him, the representatives of the private sector put forward their concerns. According to Rajendra Malla, President of Nepal Chamber of Commerce (NCC), the private sector demanded a reduction in the bank's interest rate. "We have requested the Prime Minister to reduce the interest rate and premium rate of banks," he said. During the interaction, Nepal Rastra Bank Governor Maha Prasad Adhikari briefed the latest situation of the country's economy. Adhikari reported that the economy is in recovery mode following improvement in the country's external sector. Shekhar Golchha, President of Federation of Nepalese Chambers of Commerce and Industries (FNCCI) touched on the issues of banks' higher interest rates as well as rising non-performing loans. Vishnu Kumar Agrawal, president of the Confederation of Nepalese Industries (CNI) demanded the early appointment of the finance minister. Agrawal was of the view that the new finance minister should be a technocrat who understands the economy well. Nepal Bankers' Association President Sunil KC drew the PM's attention to recent anti-bank agitation by a vested interest group.

In recent weeks, the plights of borrowers of microfinance institutions (MFIs) have made numerous headlines. Particularly those who had availed loans from multiple MFIs have suffered badly after failing to repay the loans amid business losses and a decline in income due to the Covid-19 pandemic and economic slowdown in the country. But banks and financial institutions (BFIs) are now concerned about whether the cases of willful defaults will rise following the campaign launched by controversial businessman Durga Prasain against repaying the loans. Besides political demands for the restoration of the monarchy and Hindu nation status, Prasain has been demanding that the BFIs should waive loans up to Rs 2 million and reduce the interest rates. Bankers say with the slowdown in business activities, rising inflation, and high-interest rates, borrowers' ability to repay the loans has weakened and this has led to a surge in the number of 'blacklisting' of the people by banks and government authorities who are unable to repay the loans. According to bankers, due to the drastic slowdown in the real estate market, banks are not able to recover loans easily even through auctioning the real estate properties. "Small and medium enterprises, agricultural enterprises, hotels and tourism firms, schools/colleges, and companies in the construction sector are unable to repay their debts," said a banker. Prasain's campaign has alarmed the bankers. Issuing a joint statement on March 2, Nepal Bankers’ Association, Development Bankers Association Nepal, Nepal Financial Institutions Association, and Nepal Microfinance Bankers’ Association drew the government's attention amid threats and manhandling of the staff of BFIs by unidentified people. The associations said that calling not to repay loans and inciting violence will invite anarchy which would not benefit anyone in the country. According to them, it will further complicate the situation and affect economic activities. "It is the responsibility of borrowers to repay the principal amounts and interest of the loans they've availed. It is anarchy to refuse to settle the financial liabilities," reads a joint press release issued by the umbrella organizations of the BFIs. According to a senior official at the Nepal Rastra Bank, Prasain’s campaign could cause some of his followers to default on the loans. “But the ultimate victims of following such a campaign will be those who fail to repay the loans regularly,” the official said. “BFIs will recover their loans anyway because almost all the loans in the country have been provided against the collateral.” The NRB official claimed that Prasain has been making an effort to make his campaign a springboard to elevate his political ambitions but his followers who will be inspired not to pay the loans would suffer finally. “It may take some time to recover the loans, but BFIs will definitely recover the debts,” he said. While the debt default rate in Nepal is relatively low so far but the worrying sign is, the rise in the non-performing loans (NPLs) of the banks. As of mid-January, the NPLs of commercial banks stood at 2.54 percent while development banks' NPLs stood at 2.47 percent and finance companies at 5.79 percent. “NPL level of banks in Nepal is relatively lower compared to their South Asian peers,” the NRB official said. But the quality of loans has become a concern for the central bank as well as international agencies like the International Monetary Fund (IMF). The IMF’s Article IV consultation mission which concluded its visit last month has stated in its initial observation report that bank asset quality in Nepal has deteriorated, reflecting a decline in the repayment capacity of borrowers due to higher lending rates and rising leverage, a concern that is moderated by banks’ capital-adequacy ratios that are above the regulatory minima. “The discussions recognized the need for the Nepal Rastra Bank to ensure appropriate reclassification of loans and close monitoring of the impact of a potential deterioration in repayment capacity of borrowers,” the IMF said. Continuing to advance reforms on banking regulations and supervision and ensuring bank asset quality, and further strengthening NRB’s governance by amending the NRB Act in line with best international practices are the commitments Nepal made to the IMF to receive funding under the Extended Credit Facility (ECF). As international agencies like the IMF have been warning about the quality of the loans, the central bank is concerned that the campaign run by Prasain can cause an increase in debt defaults further. How the defaults affect the bank can be gauged from painful rehabilitation measures taken to rescue Rastriya Banijya Bank and Nepal Bank in the early 2000s. The credit rating agency ICRA Nepal in its recent report has also pointed out a looming challenge to the Nepali banking sector. "While the rise in NPAs during the first half of the financial year can be partly attributed to the industry seasonality, the ongoing challenges led by increased interest rates, erosion in the credit profile of the borrowers as discussed in earlier sections, the inability of the banks to extend credit facilities under a new regulatory regime, etc have exacerbated the liquidity concerns and weakened the debt-servicing ability of the borrowers; which could continue the pressure on banking sector asset quality going forward," reads the report. According to the report, the probable deterioration in asset quality of banks in subsequent quarters could result in the need for recapitalization, given the moderate capital cushion of many banks. “However, the ability of the banks to recapitalize through equity issuance could remain a challenge given the weak to moderate profitability outlook for the banking sector," states the report.