What is the current state of economy?

There have been improvements in some of the economic indicators in recent times. Inflation came down to 4.95 percent in mid-December 2023 compared to 7.38 percent a year ago, according to Nepal Rastra Bank . Foreign exchange reserves continue to grow and the interest rate has also gone down. Finance Minister Prakash Sharan Mahat has said that the economy is showing signs of recovery and is optimistic about further improvement. But the business community and ordinary people continue to feel the pinch of the struggling economy. Here’s what you need to know about the current state of economy:

What is the current state of the global economy?

As the world nears the midpoint of what was intended to be a transformative decade for development, the global economy is set to rack up a sorry record by the end of 2024—the slowest half-decade of GDP growth in 30 years, according to the World Bank’s latest Global Economic Prospects report. By one measure, the global economy is in a better place than it was a year ago: the risk of a global recession has receded, largely because of the strength of the US economy. But mounting geopolitical tensions could create fresh near-term hazards for the world economy. Meanwhile, the medium-term outlook has darkened for many developing economies amid slowing growth in most major economies, sluggish global trade and the tightest financial conditions in decades. 

Global trade growth in 2024 is expected to be only half the average in the decade before the pandemic, the World Bank report says.  Meanwhile, borrowing costs for developing economies—especially those with poor credit ratings—are likely to remain steep with global interest rates stuck at four-decade highs in inflation-adjusted terms. The World Bank report says that global growth is projected to slow for the third year in a row—from 2.6 percent in 2023 to 2.4 percent in 2024, almost three-quarters of a percentage point below the average of the 2010s.

What is the economic status of South Asia?

The World Bank says growth in South Asia (SAR) is estimated to have slowed slightly to 5.7 percent in 2023, yet it remains the fastest among emerging market and developing economy regions. This is largely attributed to a robust expansion in India, which accounted for more than three-fourths of the regional output in 2023. Excluding India, however, activity was more subdued. The World Bank outlook says that growth in SAR is expected to edge slightly lower to a still-robust 5.6 percent pace in 2024, before firming to 5.9 percent next year. Domestic demand, including public consumption and investment, will remain major drivers of economic growth. A pickup in external demand, albeit still subdued, is also expected to contribute to growth.

What is the situation of Nepal’s economy?

According to the recent report released by the International Monetary Fund, Nepal’s post-pandemic rebound, fueled by a credit boom, ended last year as growth slowed markedly. Low domestic demand helped resolve external pressures but also deflated government revenue and led to a widening of the fiscal deficit despite expenditure control. Inflation is declining. Growth is expected to recover to 3.5 percent in the fiscal year FY 2023/24, which is below potential, led by increased domestic demand, new hydroelectric capacity and a continued recovery in tourism.  

External sector risks dominate Nepal’s outlook given its high remittance income and dependence on imported goods. Domestically, further deterioration in bank balance sheets or lack of progress in addressing the deficiencies identified by the Asia Pacific Group of the Financial Action Task Force (FATF) could create financial system stress.

What is the current status of inflation?

Surprisingly, inflation came down to 4.95 percent in mid-December 2023 compared to 7.38 percent a year ago. Though people have not felt it, a report prepared by Nepal Rastra Bank shows that inflation has heavily gone down. Food and beverage category inflation stood at 5.10 percent, whereas non-food and service category stood at 4.84 percent in the review months. Similarly, year to year wholesale price inflation stood at 2.63 percent in mid-December 2023 compared to 9.15 percent a year ago.

What is the current flow of remittance?

Remittance inflows increased 27.6 percent to Rs.613.25bn in mid-December 2023 compared to an increase of 23.0 percent in the same period of the previous year. In the US dollar terms, remittance inflows increased 24.5 percent to $4.62bn in the review period compared to an increase of 13.1 percent in the same period of the previous year. 

A report published by Nepal Rastra Bank says, “In the review period, the number of Nepali workers, both institutional and individual, taking first time approval for foreign employment stands at 173,555 while those applying for renewed entry approval stands at 104,037. In the previous year, such numbers were 236,779 and 115,948 respectively.”

What is the current situation of foreign exchange reserves?

Gross foreign exchange reserves increased 14.8 percent to Rs.1767.04bn in mid-December 2023 from Rs.1539.36bn in mid-July 2023. In the US dollar terms, the gross foreign exchange reserves increased 13.6 percent to $13.31bn in mid-December 2023 from $11.71bn in mid-July 2023.

What is the current state of interest’s rate of banks?

According to Nepal Rastra Bank, the average base rates of commercial banks, development banks and finance companies stood at 9.64 percent, 11.64 percent and 13.14 percent respectively in the fifth month of FY 2023/24. The average base rate of commercial banks was 10.69 percent in the corresponding month a year ago.

Why is the current growth of GDP ?  

The National Statistics Office (NSO) has estimated a 3.2 percent gross domestic product (GDP) growth at basic prices in the first quarter of the current fiscal year compared to the same quarter of the previous fiscal year. However, the seasonally unadjusted data suggests that the growth could be down by 1.4 percent compared to the fourth quarter of FY 2022/23. The government has set a 6 percent growth target in the current fiscal year.

Which sector is witnessing the largest growth ? 

The NSO data indicates that the largest growth is anticipated in the mining and quarrying sector, with an estimated growth of 15.8 percent compared to the first quarter of the previous fiscal year, thanks to increased quarrying activities. Increased mining activities ensured easy availability of construction materials and provided a significant boost to the construction sector. On this basis, the NSO estimates a 11.4 percent increase for the construction sector. However, seasonally adjusted numbers project contractions of 5 percent and 7.8 percent in these sectors respectively, compared to the data of the last quarter of FY 2022/23.

The NSO estimates a 13.2 percent growth for the financial and insurance sector in the first quarter of the current fiscal year due to factors like deposit and credit growth, changes in inter-banking lending rates and rising insurance premiums. Seasonally adjusted growth rate of this sector, however, is only 6.7 percent compared to data of the fourth quarter of the previous fiscal year.

Similarly, accommodation and food services activities are projected to register a growth of 11.7 percent compared to the first quarter of the previous fiscal year due to a rise in foreign tourist arrivals. Seasonally adjusted growth rate of this sector, however, is only 2 percent compared to data of the fourth quarter of FY 2022/23.

What is the state of growth in agriculture ? 

The growth of the agriculture, forestry and fishery sector is projected at 1.4 percent compared to the first quarter of the previous fiscal year, mainly due to the growth in paddy production.

What about the impact of the import ban in the economy? 

Wholesale and retail trades are estimated to contract by 1.2 percent, indicating that trading activity, which was hit hard by the government ban on certain imports in the previous fiscal year, is yet to revive. Seasonally adjusted growth rate of this sector is estimated to be 8 percent negative compared to the fourth quarter of FY 2022/23. 

What are the current states of 18 sectors of economy? 

Out of 18 sectors of the economy, 12 recorded growth in the first quarter of the current fiscal year compared to the last quarter of FY 2022/23 after seasonal adjustments, while six may have contracted, according to the periodic report of the NSO. Water supply, sewage and waste management is forecast to grow by 7.3 percent, public administration and defense by 5.5 percent, compulsory social security by 5.5 percent and human health and social work activities by 3.4 percent. Similarly, information and communication, and real estate activities are forecast to grow by 3.8 percent and 2.2 percent respectively.