NRB data shows economy not out of recession

The latest macroeconomic data indicates that the economy has not been able to come out of recession. Experts also say that although the external sector looks strong, economic indicators show that the country’s internal sector is weakening.

The Macroeconomic Situation Report of the first seven months of the fiscal year 2023/24 released by the Nepal Rastra Bank (NRB) shows remittances inflow has remained the mainstay of the economy’s external sector. Like in the past fiscal year, remittances inflow is increasing significantly in the current fiscal year. Because of this, the current account and balance of payments are in a surplus situation and have helped increase liquidity, create domestic demand, and reduce pressure on bank interest rates. BoP surplus, however, is due to a drop in imports and rising remittances flow.

NRB data shows the current account and balance of payments are both in surplus, amounting to Rs 161.69bn and Rs 297.72bn, respectively, over the first seven months of the current fiscal year. In the same period of the last year, the current account was in a deficit by Rs 40.16bn, while the balance of payments was in a surplus of Rs 128.55bn.

Foreign exchange reserves have improved to Rs 1,844.94bn at the end of the seventh month. This is sufficient to cover merchandise imports for 14.7 months and merchandise and service imports for 12.3 months, according to the report.

Imports during the first seven months were down by 1.8 percent, while exports have fallen by 7.1 percent.

Former executive director of NRB, Nara Bahadur Thapa, said the balance of payments wouldn't be in such surplus had imports picked up. “Foreign exchange reserves would have also gone down, and inter-bank rates also wouldn’t have gone below three percent,” Thapa added.

A drop in interest rates hints at recession, according to Thapa. “Imports have fallen due to a drop in domestic demand as many people are moving out of the country due to recession. This does not bode well for the country.”

Thapa suggested that the government come up with programs to increase domestic demand. “The government should be able to spend its capital budget and clear its outstanding dues,” he said.

Since domestic demand is not rising and demand for loans is not picking up, banks and financial institutions are awash with loanable funds.

Economic Dr Chandra Mani Adhiakri argues that although the external sector has improved, this will not be sustainable. “Our external sector is looking good as remittances inflow is rising. This has also improved our foreign currency reserves,” Dr Adhikari said. “But we cannot say our economic situation has improved based on this data. It shows a gap in our economy as domestic investment is not increasing. Also, exports are down by seven percent.”

Nepal’s net service income is at a deficit of Rs 37.26bn over the first seven months of 2023/24. Nepal’s income from the tourism sector was Rs 45.4bn in the review period, while Nepalis traveling abroad have taken with them foreign currency worth Rs 104.75bn, including Rs 66.64bn to fund higher education alone. Higher education expenses in the same period of the previous fiscal year were Rs 43.74bn.

The government’s revenue, which fell by 16.1 percent in the first seven months of 2022/23, has increased by 10.2 percent in the review period of the current fiscal year. However, the government has been able to mobilize only 44 percent of its revenue target in the seven months of 2023/24. Dr Adhikari said the government might have to borrow to bridge the revenue shortfall. “Also, capital expenditure hasn't gone above 25 percent even though recurrent expenditure has already gone above 50 percent. Such dismal spending will not stimulate private sector spending,” he added.

While banks and financial institutions have seen their deposits go up by 7 percent in the review period, their credit expansion has seen a slower growth of 4.1 percent.

Inflation, however, is gradually moderating. NRB data shows consumer price inflation came down to 5.01 percent in the seven months. While prices of lentils and cereals, dairy products, food products, and vegetables have gone up, the price of oil and ghee has come down by 12.33 percent. There, however, are risks of fuel and food prices fluctuating due to conflict in Ukraine-Russia and West Asia.