Submit your Article

Six development banks and finance companies are under the scrutiny of Nepal Rastra Bank (NRB) after Karnali Development Bank was declared problematic on Dec 25. The central bank took over the management of Karnali Development Bank after it was found that the Class ‘B’ bank had submitted a fake deposit certificate, claiming it had deposits in commercial banks.

Earlier this week, the NRB wrote a letter to different commercial banks, requesting them to furnish details of deposits maintained by these six institutions. An internal investigation by the central bank showed that funds in the Class ‘B’ bank were misappropriated with the involvement of Karnali’s former Executive Chairperson and CEO Rajendra Bir Raya, former CEO Dinesh Kumar Rawat, former Finance Department Head Mahadev aka Bed Prakash Thakuri, and incumbent CEO and Finance Department Head Niraj Bikram Shah.

While the bank’s core banking system showed a balance of Rs 227.46m in Karnali Development Bank’s Cash Reserve Ratio (CRR) account at NRB as of 22 Dec 2024, the investigation committee found the account did not have the said funds. The investigation committee also reported that the bank’s senior management covered up the misappropriation by creating fake balance certificates from other banks.

The central bank wrote letters to different commercial banks, requesting them to send details of deposits maintained by Saptakoshi Development Bank, Excel Development Bank, Narayani Bikas Bank, and Sindhu Bikash Bank as well as Janaki Finance and Pokhara Finance.

While share prices of a majority of Class ‘A’ banks, which have better corporate governance compared to these institutions,  are below Rs 300 per unit, shares of these institutions are traded at as high as Rs 1,100 per unit on the bourse.

NRB sources say they have begun analyzing the liquidity situation of four development banks and two finance companies with weak financial conditions and governance issues.

An NRB official said they are taking stock of the liquidity situation in these institutions before taking required action. “Our efforts will be on resolving the issue through the management of the concerned financial institutions themselves,” the official added.

About a decade ago, the central bank formed a dedicated Problematic Institutions Management Department and managed 16 banks and financial institutions.

In a continued effort to manage the country’s financial system, Nepal Rastra Bank (NRB) absorbed
Rs 50bn from the market through a 21-day deposit collection auction on Sunday. This is the central bank’s second major liquidity absorption in recent weeks. The NRB mopped up Rs 100bn liquidity from the banking system on Nov 27. 

According to bankers and the central bank data, the banking system currently holds an unprecedented Rs 760bn in investable funds. Investable funds of banks and financial institutions are expanding in recent months with deposit collection consistently outpacing credit disbursement. 

Experts say this liquidity glut is symptomatic of broader economic challenges including weak economic activity that has significantly reduced demand for goods and services. The reduced economic activities have had cascading effects on the economy. Reduced consumer and business spending has led to decreased import volumes, which has directly impacted government revenue collection. This has forced the government to rely on public debt even to pay the salary of government employees.

Despite the central bank’s efforts to stimulate economic activity by easing monetary policy for the current fiscal year, credit demand has shown minimal improvement. As a result, the central bank kept policy rates unchanged in the first quarter review of the monetary policy for the current fiscal year on Friday. According to the central bank, the bank rate and policy rate have been maintained at 6.5 percent and five percent, respectively. The NRB has also kept the credit-deposit ratio, statutory liquidity ratio and cash reserve ratio unchanged.

The low demand for bank credit amid a slowdown in economic activities has driven interest rates to record lows. The average loan interest rate has dropped to 9.33 percent while the average deposit rate sits at 5.44 percent. Most commercial banks are now offering loans within an 8-9 percent interest rate range for the month of Mangsir (mid-November to mid-December).

The interbank lending rate has also declined to three percent. NRB starts mopping up liquidity from the market when interbank lending rate comes down to three percent, to prevent further rate erosion. The deposit collection auction is one of the important tools that the central bank has been deploying to absorb excess liquidity. Banks also have the option to park their surplus funds in the permanent deposit facility, which offers a fixed three percent interest rate.

The country has received Rs 407.31bn in remittances in the first three months of the current fiscal year (2024-25).

“Remittance inflows increased 11.5 percent to Rs 407.31bn in the review period compared to an increase of 25.8 percent in the corresponding period of the previous year,” Nepal Rastra Bank (NRB) stated in the Current Macroeconomic and Financial Situation of Nepal Report, which is based on three months’ data ending mid-October.

In US dollar terms, remittance inflows reached $3.04bn in the review period which was $2.76bn in the same period of the previous year, according to the NRB.

The central bank said the number of Nepali workers taking first-time approval for foreign employment stands at 110,654 and taking approval for renewed entry stands at 59,939 in the past three months. In the review period of the previous year, the number of workers taking time-time approval for foreign jobs was 113,397.

A surplus of Rs 111.87bn

The current account of the government remained at a surplus of Rs 111.87bn in the review period compared to a surplus of Rs 59.65bn in the same period of the previous year. “In the review period, net capital transfer amounted to Rs 2bn and foreign direct investment inflow (equity only) remained at Rs 4.81bn,” according to the NRB.

Meanwhile, the Balance of Payments (BOP) remained at a surplus of Rs 184.99bn in the review period while it was at a surplus of Rs 101.66bn in the corresponding period of the previous year.

The report stated that the gross foreign exchange reserves increased 9.4 percent to Rs 2,232.28bn in mid-Oct 2024 from Rs 2,041.1bn in mid-July 2024.

It said that the year-on-year unit value export price index, based on customs data, increased 2.9 percent and the import price index decreased 3.5 percent in the past three months. The terms of trade index increased by 6.5 percent in the review period.

The net services income remained at a deficit of Rs 23.29bn in the review period compared to a deficit of Rs 29.39bn in the corresponding period of the previous year.

Trade goes down

During the three months, the country’s exports and imports decreased by 6.1 percent and 4.2 percent, respectively. The exports decreased by 6.1 per cent to Rs 38.38bn compared to a decrease of 2.3 percent in the same period of the previous year. Exports to India, China and other countries decreased by 5.3 percent, 24.8 percent and 6.6 percent, respectively whereas the export of soybean oil, tea, particle board, shoes, sandals and oil cakes increased even as exports of zinc sheet, palm oil, cardamom, juice and readymade garments decreased in the review period.

The imports decreased 4.2 percent to Rs 390.75bn compared to an increase of 1.7 percent a year ago. Destination-wise, imports from India, China and other countries decreased 3.9 percent, 1.5 percent and 7.9 percent, respectively.

The total trade deficit decreased four percent to Rs 352.37bn during the first three months of the current fiscal year against a 2.1 percent increase in the corresponding period of the previous fiscal. The export-import ratio decreased to 9.8 percent in the review period from 10 percent in the corresponding period of the previous year.

The consumer price increased by 4.82 percent in mid-October compared to 7.5 percent a year ago. Food and beverage inflation stood at 7.18 percent whereas non-food and service inflation stood at 3.49 percent in the review period.

Under the food and beverage category, the year-on-year price index of vegetables increased by 25.15 percent, pulses and legumes by 10 percent, cereal grains and their products by 9.57 percent and ghee and oil by 4.98 percent but the price index of meat and fish sub-category decreased 1.18 percent.

Although foreign investment commitments are on the rise, actual investment inflows have seen a slowdown in recent years.

According to Nepal Rastra Bank (NRB)—the central monetary authority, net foreign direct investment (FDI) inflow was Rs 19.48bn in 2019/20. Net FDI inflows improved slightly to Rs 19.51bn in 2020/21 when the Covid-19 pandemic was at its peak. However, FDI inflows started to decline in 2021/22. The declines were more severe in fiscal years 2022/23 and 2023/24.

Data provided by the central bank shows FDI inflows dropped to Rs 18.56bn in 2021/22. Such inflows marked a sharp decline to just Rs 6.17bn in 2022/23. Although FDI inflows recovered slightly to Rs 8.4bn 2023/24, it was still 56.87 percent lower compared to 2019/20.

The slowdown in FDI inflow is expected to continue in the current fiscal year as well, as Nepal has received net FDI inflow of Rs 2.71bn only in the first two months of the current fiscal year 2024/25.

While the central bank's FDI inflow figures paint a disappointing picture, investment commitments have been increasing in post-covid years. Nepal received foreign investment commitments of a whopping Rs 61.9bn 2023/24. However, the central bank says that only around 35 percent of investment commitments typically materialize as net investments.

Experts say the government’s loose monetary and fiscal policies created a favorable environment for domestic investment in the post-covid years. This encouraged foreign investors to commit funds to Nepal. However, investors are keeping their investment on hold due to tighter policies in successive years.

The Foreign Investment and Technology Transfer Act, 2019, has laid the ground for foreign individuals, firms, companies, non-resident Nepalis, foreign governments, international institutions, and organized institutions to bring capital, technology and other investments to Nepal.

In 2023/24, only 13.59 percent of foreign investment commitments materialized. According to the Department of Industry (DoI), foreign investment approvals during the year totaled Rs 61.78bn. However, data from the central bank reveals that net foreign direct investment (FDI) inflows stood at just Rs 8.4bn.

The trend of low FDI realization is not new. In 2022/23, net FDI inflows were Rs 6.17bn, representing only 16.06 percent of the Rs 38.4bn in approved foreign investments. Similarly, in 2021/22, Nepal received foreign investment commitments of Rs 54.15bn, but only 34.27 percent, or Rs 18.56bn, turned into actual inflows.

For the current fiscal year, the DoI has received foreign investment commitments worth Rs 18.66bn in the first four months alone. These commitments were made by 263 firms that secured investment approvals during the period.

Real-Time Gross Settlement (RTGS) transactions increased significantly in the first month of the current fiscal year 2024/25 (mid-July to mid-August), a recent study report of the Nepal Rastra Bank  (RRB) shows.

A total of 74,380 individuals conducted RTGS transactions worth Rs 1080.3bn during the review month. This is an increase of 65.13 percent compared to total RTGS transactions of Rs 654.11bn in the previous month (mid-June to mid-July). The number of transactions between mid-July to mid-August (2.86m), however, was lower compared to mid-June to mid-July when 2.98m RTGs transactions were conducted, Monthly Payment Systems Indicators Report of the central bank shows.

RTGS refers to a funds transfer system in which the transfer of funds between one bank and another takes place in ‘real time’ and on a ‘gross’—transaction by transaction—basis.

During the first month of 2024/25, people withdrew Rs 87.87bn from ATMs, a slight decrease compared to Rs 91.26bn withdrawn by 11.21m people in the previous month of mid-June to mid-July. 

Transactions through ConnectIPS saw a decline in both the number of users and transaction volumes during mid-July to mid-August. According to the report, 6.84m users processed total transactions worth Rs 525.33bn through connectIPS during the review month, down from Rs 666.58bn processed by 7.79m in the previous month. 

According to the report, transactions through internet banking saw an increase to Rs 22.49bn in the first month of the previous fiscal year (mid-July to mid-August), compared to Rs 17.73bn in mid-June to mid-July. The number of people doing internet banking transactions also increased to 409,065 from 351,301 transactions during the period. Mobile banking transactions also increased to Rs 377.63bn in the review month compared to Rs 373.97bn in the previous month.

Transaction through digital wallets increased by 14.55 percent to Rs 43.69bn during mid-July to mid-August compared to Rs 38.14bn. The number of transactions, however, fell to 30.87m, down from 32.1m in the previous month. 

QR-based payments increased to Rs 62.28bn during mid-July to mid-August compared to Rs 61.73bn in the previous month. Such transactions during the review month, however, recorded more than 100 percent growth compared to the last first month mid-July to mid-August of last year when QR-payments worth Rs 29.99bn were recorded.

The Nepal Rastra Bank (NRB) made public the monetary policy for the fiscal year 2024/25 on Friday.

The monetary policy was made public following the approval from the meeting of the Board of Directors held today.

Nepal Rastra Bank Governor Maha Prasad Adhikari made public the monetary policy from the building of the Nepal Rastra Bank in Baluwatar.

The Nepal Rastra Bank (NRB) has presented five-point suggestions to address the problems of financial cooperatives.

In today's meeting of the Parliamentary Probe Special Committee formed to investigate the misuse of savings of depositors in financial cooperatives, NRB Governor Maha Prasad Adhikari shared that problems seen in the cooperatives sector could be resolved by following the-five-point suggestions.

Governor Adhikari suggested returning the savings of the depositors in three phases. He suggested that savings up to Rs 100,000 of the depositors could be returned in the first phase, while up to Rs 500,000 in second phase and more than Rs 500,000 in the third phase.

The NRB has forwarded a proposal to form a dedicated group to resolve problems as well as to move ahead following the measures adopted while addressing the problems of banks.

He advised that necessary arrangements should be made on the issue of cooperatives that have functioned without restriction of geography.

 Similarly, Chief Executive Officer of Credit Information Bureau, Anil Chandra Adhikari suggested making arrangements for an integrated Information System at the Bureau.  Establishment of a separate information bureau on the issues of insurance and cooperatives was suggested in the meeting.

Alerting about possible problems to be surfaced in other financial institutions like that of cooperatives, President of Nepal Bankers' Association, Sunil KC laid emphasis on the need of resolving the problems soon.

Coordinator of erstwhile cooperative suggestion taskforce, Dr Jay Kanta Raut, explained that problems are increasing in the cooperatives sector for lack of implementation of the suggestions.

Most of the financial cooperatives are operating against cooperatives norms, values and principles are in problems, he added.

Experts laid emphasis on the need of establishing a Credit Recovery Tribunal in the financial cooperatives sector.

On the occasion, Chairperson of the Special Committee Surya Bahadur Thapa said the Committee has not started discussions on whether the government should pay the victim cooperatives' depositors. Discussions are underway keeping it in mind that returning the savings of depositors was the main responsibility of cooperatives. 

Officers who had already worked as registrar of the Cooperative Department after 2048 BS have been invited for tomorrow's meeting.    Similarly, discussions would be held with the financial cooperatives' victims in other meetings.

Nepal Rastra Bank has reported that inflation was around 4.5 percent in the last Nepali month of Baishakh. According to the central bank's report, which includes data from the first 10 months of the fiscal year 2080-81, the annual point-to-point consumer inflation in Baishakh was 4.40 percent, down from 7.41 percent in the same month last year.

In Baishakh, the inflation rate in the food and beverage category was 6.27 percent, while in the non-food and services category, it was 2.96 percent. The annual point-to-point price index for the vegetable subgroup under the food and beverage category increased by 23.11 percent, pulses and legumes by 10.85 percent, spices by 8.98 percent, food and food-related items by 7.42 percent, and sugar and sugar-related items by 7.25 percent. However, the price index for the ghee and oil subgroup decreased by 7.13 percent.

The annual point-to-point price index for various goods and services under the non-food and services category increased by 12.26 percent, education by 5.64 percent, and clothing and footwear by 3.46 percent, while the communication subgroup's price index decreased by 0.48 percent.

In Baishakh, the annual point-to-point consumer inflation was 4.30 percent in Kathmandu Valley, 4.32 percent in the Tarai, 4.7 percent in the Hills, and 4.22 percent in the Mountains. In the same month last year, inflation rates in these regions were 7.68 percent, 7.15 percent, 7.57 percent, and 7.12 percent, respectively.

Forex reserves at Rs 1.94trn

The central bank's report also highlighted foreign exchange reserves, which increased by 26.2 percent from Rs 1.53trn at the end of Asar 2080 to Rs 1.94trn in Baishakh 2081. In terms of US dollars, foreign exchange reserves rose by 24.2 percent from $11.71bn at the end of Asar 2080 to $14.54bn at the end of Baishakh 2081.

Of the total foreign exchange reserves, those held by the central bank were Rs 1.34bn at the end of Asar 2080, which increased by 28 percent to reach Rs 1.72bn at the end of Baishakh 2081. Reserves held by banks and financial institutions (excluding Nepal Rastra Bank) were Rs 193.59bn at the end of Asar 2080, which increased by 13.8 percent to Rs 220.38bn at the end of Baishakh 2081.

According to the central bank, based on import data from the first 10 months of the fiscal year 2080-81, the banking sector's foreign exchange reserves are sufficient to cover 15.1 months of goods imports and 12.6 months of goods and services imports.

Remittances reach Rs 1.19trn

According to Nepal Rastra Bank, remittances increased by 19.2 percent to Rs 1.19trn in the first 10 months of the current fiscal year 2080-81. 

Although the number of people going abroad for employment was high in the past two years and has decreased slightly this year, the total number, including new labor permits and renewals, is still more than 500,000. Due to the high number of Nepalis going for foreign employment in the past two years, remittances have seen a significant increase.

In the first 10 months of the current fiscal year, 374,887 Nepalis received final labor approval for foreign employment, and 237,893 received renewed labor approval. In the same period last fiscal year, 421,279 Nepalis received final labor approval for foreign employment, and 238,976 received renewed labor approval.

During this period, net transfers increased by 17.2 percent to Rs 1.30trn.

The Nepal Rastra Bank (NRB) has, through the third quarter review of the monetary policy of the current fiscal year 2023/24, reduced the risk weightage of vehicle loans.

The risk weightage on hire purchase loans provided by banks and financial institutions has been reduced to 100 percent from the existing 125 percent.

Similarly, a provision has been brought allowing for the extension of loans for home purchases based on the Debt Service to Gross Income Ratio, from the existing 50 percent to 70 percent, based on the presentation of appropriate evidence.

In the review of the monetary policy, the Central Bank has introduced a provision where banks and financial institutions can sell up to 20 percent of their primary capital in a single fiscal year from investments made in the mid-category.

Likewise, the loan loss requirement provision for loans classified as 'good loans' from banks and financial institutions has been maintained at 1.20 percent from the existing 1.25 percent.

According to the NRB, the existing provision related to import and sale of silver would be reviewed. The flexibility outlined in the annual monetary policy has been continued in the third quarterly review, added the NRB.

"Based on the current internal and external economic conditions and outlook, the policy rate of 5.5 percent, the deposit collection rate under the interest rate corridor of 3.0 percent and the bank rate of 7.0 percent has remained unchanged," reads the third quarter review.

The provision of permanent deposit facilities would be reviewed as necessary to ensure the effectiveness of interest rate corridor as well as necessary facilitation would be provided for the use of additional instruments to further strengthen the capital base of banks and financial institutions.

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.

The macroeconomic report for the first half of the current fiscal year and the mid-term review of the monetary policy for fiscal year 2023-24, recently released by the Nepal Rastra Bank, shows positive developments in the external sector of the economy. The economy has experienced strong performance in sectors such as mining, construction, tourism and financial services. The resurgence of tourism after Covid has been remarkable, with a substantial increase in tourist arrivals contributing to economic activities and income generation. Infrastructure development, particularly in the energy sector, is expected to enhance production potential. Foreign exchange reserves have reached an impressive Rs 1,816.57bn by mid-January. This achievement is primarily fueled by a notable 25.3 percent increase in remittances amounting to Rs 733.33bn, which undoubtedly paints a positive picture of Nepal's external sector.

Prudent policy adjustments such as maintaining interest rate stability and implementing targeted measures like lowering interest rates for institutional fixed deposits in the mid-term review of monetary policy demonstrate a proactive approach to mitigating risks and stimulating economic activity. The Nepal Rastra Bank's decision to maintain the interest rate corridor while implementing measures to enhance its effectiveness shows its commitment to balanced monetary policies. Moreover, the focus on supporting agriculture and small to medium enterprises through regulatory retail portfolio arrangements reflects a dedication to growth and economic resilience.

While a healthy foreign exchange reserve is essential for economic stability, it is not a solution to all of our economic problems. The decline in exports, slow import growth, manufacturing slowdown, low demand for bank loans from the private sector and the lack of investment despite favorable conditions highlight the underlying issues plaguing our economy. The government has been consistently missing revenue targets. It is crucial to accurately assess economic indicators and devise appropriate policies. Worryingly, both the government and the central bank seem to be falling short in this regard. It is high time for the government and the central bank to shift their focus from highlighting nominal successes to implementing meaningful changes.

The half-yearly review of the current fiscal year 2080-81 BS (2-23-24), showed the Gross foreign exchange reserves stood at NPR 1816.57 billion (USD 13.69 billion), with a 18-percent rise in the past six months.

According to the current macroeconomic and financial situation of Nepal based on the six months data ending in mid-January assessed by the central bank, the current size of the foreign exchange reserves is bigger than the country's annual budget and this is the highest forex reserves so far. 

The report states gross foreign exchange reserves increased 18.0 percent to Rs 1816.57 billion in mid-January 2024 from Rs 1539.36 billion in mid-July 2023. In the US dollar terms, the gross foreign exchange reserves increased 16.9 percent to 13.69 billion in mid-January 2024 from 11.71 billion in mid-July 2023.

Of the total foreign exchange reserves, reserves held by NRB increased 18.9 percent to Rs 1600.23 billion in mid-January 2024 from Rs 1345.78 billion in mid-July 2023.

Reserves held by banks and financial institutions (except NRB) increased 11.8 percent to Rs 216.35 billion in mid-January 2024 from Rs 193.59 billion in mid-July 2023. The share of Indian currency in total reserves stood at 22.5 percent in mid- January 2024. Based on the imports of six months of 2023/24, the foreign exchange reserves of the banking sector are sufficient to cover the prospective merchandise imports of 14.5 months, and merchandise and services imports of 12.1 months. The ratio of reserves-to-GDP, reserves-to-imports and reserves to-M2 stood at 33.8 percent, 100.9 percent and 27.7 percent respectively in mid-January 2024.

Such ratios were 28.6 percent, 83 percent and 25 percent respectively in mid-July 2023.

The current account remained at a surplus of Rs 161.62 billion in the review period against a deficit of Rs 35.57 billion in the same period of the previous year. In US Dollar terms, the current account registered a surplus of 1.21 billion in the review period against a deficit of 279.6 million since the same period last year.

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.

Following the Nepal Rastra Bank’s (NRB) recent decision to relax its stringent policy on share mortgage loans, the stock market is showing early signs of a positive trend.

In its first quarter review of monetary policy released on Friday, the central monetary authority reduced the risk weight of realty and shared mortgage loans from 150 percent to 125 percent. This provision alone will increase the bank’s capacity to extend an additional Rs 40-50bn toward the sector, market analysts say.

This policy shift appears to have had an immediate impact, as the next trading session on Sunday witnessed an early closure due to the activation of a positive circuit breaker—a development not seen in more than two years.  Nepal Stock Exchange (Nepse) gained 111.2 points, or six percent,  in just nine minutes of trading. Stocks worth Rs Rs 482.4m changed hands during those minutes. Although the market witnessed some correction the next day, losing 15.4 points, daily turnover hit a five-month high of Rs 4.82bn. On Wednesday, the benchmark index posted a nominal gain of 2.6 points while daily turnover reached Rs 3.90bn.

The monetary policy review has injected a renewed sense of optimism among investors who had experienced a prolonged downturn, marked by a continuous decline in the benchmark Nepse index over the last 28 months. Investor confidence had waned, prompting calls for the central bank to reassess its policies. The recent positive market atmosphere is now seen as a potential morale booster for investors.

Simultaneously, the central bank’s reduction in the policy rate will contribute to a decline in overall interest rates in the coming days. The correlation between interest rates and stock market performance is well-established. With banks expected to announce a decline in interest rates, the stock market is expected to witness a further boost in the coming months.

Investors say that the central bank’s policies play a pivotal role in shaping market dynamics, as factors such as interest rates, monetary policy, inflation, and more directly affect the market. Additionally, external elements such as political events, financial reports of listed companies, and the psychology of investors collectively contribute to the overall market sentiment.

The observed decrease in interest rates, coupled with the relaxation of stringent policies by the central bank, has led to a notable increase in investor sentiment—a positive sign for the capital market. The surge in daily turnover further indicates the return of institutional investors who had exited the market during the bearish phase. Recent trading sessions have recorded an average daily turnover of more than Rs 4bn, showcasing a revitalized interest in the market. These developments signify a potential turning point for the Nepali investors.

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.

With news of Nepal Rastra Bank (NRB) lifting the Rs 120m cap on margin lending doing the rounds, the stock market saw a 44.34-point surge on Thursday.

Investors are expecting a relaxation of the margin lending provision by the central bank after the meeting of the financial sector high-level coordination committee on Tuesday.

The daily turnover at the Nepal Stock Exchange (Nepse) also rose to almost two months high with total turnover reaching Rs 3.29bn on Thursday. 

Along with the daily turnover, the Nepse also saw a surge in volume. The number of shares traded also hit a two-month high. A total of 11.26m units of shares were traded on Thursday. The last time, the volume was higher than that of Thursday, was on July 24 when 20.97m shares were traded. 

The domestic stock market has been on a downward spiral after the central bank unveiled a new monetary policy in the last week of July, with the Nepse index down by more than 190 points. 

Of late, the central bank is under tremendous pressure on the NRB to lift the Rs 120m cap. The private sector, stock investors, and Finance Minister Prakash Sharan Mahat himself have been urging Governor Maha Prasad Adhikari to review margin lending provisions. Finance Minister Mahat, during Tuesday’s meeting, asked Governor Adhikari to facilitate the stock market to increase economic activities. 

Finance Minister Mahat and Governor Adhikari had also met on Monday in which discussion was centered on adopting some flexibility in monetary policy to increase economic activities.

While the stock investors were hoping that the central bank through monetary policy 2023/24 would relax the margin lending provisions, the central bank only reduced the risk weightage on margin loans. That too for marginal loans up to Rs 5m only. The NRB reduced the risk weightage of margin loans up to Rs 5m from 150 percent to 100 percent. However, the risk weightage of margin loans above Rs 5m remained untouched by the NRB.