The year also saw the deterioration in the relationship between Finance Minister and Nepal Rastra Bank Governor, the federal budget tampering episode, and the government issuing licenses to a certain sector in collusion with the private sector.
The private sector's displeasure over high borrowing rates is yet to subside and the financial sector is facing a possible storm in the form of rising bad loans and difficulties in the recovery of debts. Over the past year, the non-performing loans (NPL) of BFIs have doubled. The recent data published by the Nepal Rastra Bank (NRB) shows that NPLs of commercial banks stood at 2.49 percent compared to 1.18 percent in the last fiscal year. The lending of BFIs has remained dismal as industrialists and businesspersons held back their new investment plans. The country's economic growth in the first quarter has been limited to 0.8 percent. Over the past year, interest rates have been a subject of much debate and controversy with the business community blaming high borrowing as one of the main reasons for the current economic slowdown in the country. The high-interest rates, declining market demand, and slowdown in the stock market, realty sector, and construction sector have weakened the private sector's confidence. According to Rajendra Malla, President of Nepal Chamber of Commerce, 2079 was a very difficult year for business community members. "In my 36 years in the business sector, I have not seen economic problems like in the past year," he said. Government treasury in deficit The import restrictions to avert the external sector crisis has hit the government hard. With revenue collection on a continuous decline, the mismatch between government expenditure and income has widened further. Data show the government treasury is in deficit by over Rs 200bn by mid-April 2023. According to the latest statistics of the Financial Comptroller General Office (FCGO), the government's expenditure reached Rs 895.13bn by mid-April while the income totaled Rs 667.82bn. The government has been able to meet only 47.59 percent of the revenue target during the nine months of the current fiscal year while the total expenditure has reached 49.9 percent of the annual target. Amid rising recurrent expenditure, the government has failed to expedite capital expenditure. Rising inflation Throughout the year, the Nepali economy had to deal with high consumer prices. While the government had set a goal of keeping inflation below 7 percent this year, the rate rose to more than 8 percent. While official data show the inflation rate did not reach double digits, surveys conducted by private sector organizations and independent studies have reported that prices of many products and services went by as high as 25 percent. While the inflation in Falgun (mid-March) came down to 7.44 percent, it is still higher than that of the last year. The average inflation last year was 6.32 percent. The Russia-Ukraine conflict, disruption in the supply chain, and subsequent price rise in the commodities hit the economy hard. Liquidity crunch and high-interest rates Last year, the banking system went through a liquidity crunch, which was seen as the most severe in living memory, pushing the interest rates to double digits. With the acute shortage of investment-grade liquidity in the financial system, interest rates on both deposits and lending kept on rising. The average interest rate of commercial banks till mid-February was above 13 percent. In fact, interest rate in 2079 BS was the highest in the last one decade. Amid higher interest rates, banks struggled in lending in the last year. The demand for loans declined sharply as economic activities slowed dramatically. The extension of loans of banks and financial institutions stood at Rs 128.18bn compared to Rs 522.49bn in 2078 BS. As the cost of loans increased, there was a strong protest against the banks and financial institutions across the country. However, starting from Magh, banks gradually reduced interest rates on deposits with easing of the liquidity in the financial system. The high interest rate has increased the cost of funds for banks which resulted in a decline in their profits. Realty and construction sector in recession With BFIs tightening the realty lending, the real estate sector saw business coming to a new low. Realty entrepreneurs said there has been a decline of about 60 percent in real estate transactions in the first nine of the current fiscal year. The government restriction on land plotting due to the delay over the classification of lands also hit the realty sector hard. As the realty sector was in disarray, the construction sector along with the cement, steel and other construction material business slumped massively. The slowdown in new housing construction as well as sluggish capital expenditure of the government hit the production capacity of the country's steel and cement industries. According to National Statistics Office, the construction sector's growth has remained negative by 24 percent and the mining sector by 29 percent in the first quarter of the current fiscal year. Stock market on a downward spiral 2079 was a year of losses for the stock market investors. The investors lost more than Rs 612bn last year. With the central bank not keen to ease the provision on margin lending, the stock market went on a bearish run throughout the year. While there is strong pressure on the government to ease the margin lending policy, the central bank is still reluctant to ease the flow of money to the stock market. And, some silver linings Amid the difficulties, silver linings have also been seen in the dark clouds of uncertainty. The improvement in the country's external sector has continued in the eight months of the current fiscal year. The report by the central bank shows noticeable improvements in the country's forex reserves, the balance of payment (BOP), tourism income, and remittance inflow. The electricity export to India has given new optimism. Nepal exported electricity worth Rs 11.16bn to its southern neighbor in the last one year. With Nepal and India agreeing to more energy cooperation, the door for more power export has been opened.
