Macroeconomic and Financial Situation of Nepal [2023]

GP Chudal
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The real sector of an economy is the part that produces goods and services, as opposed to the financial sector, which deals with money and investments. It is an important part of any economy because it creates jobs, income, and wealth for both individuals and the whole country. In this article, we will explore the Current Macroeconomic and Financial Situation of Nepal, based on seven months’ data ending Mid-February, 2022/23 provided by the Nepal Rastra Bank.

Macroeconomic and Financial Situation of Nepal in 2023

Nepal’s macroeconomic and financial situation in the first seven months of the fiscal year 2022/23, ending in mid-February, has been characterized by a mix of positive and negative trends (Current Macro-Economic and Financial Situation Archives – नेपाल राष्ट्र बैंक, 2023).


One good thing is that remittances, which are a big source of foreign currency for Nepal, have been going up. Remittances increased by 27.1 percent in NPR terms and 16.4 percent in USD terms. This increase is likely due to the relaxation of COVID-19 restrictions and the easing of mobility in some of the countries where Nepali workers are employed.

Current-Macroeconomic-and-Financial-Situation-of-Nepal

On the other hand, the country’s trade balance has been a source of concern, with imports decreasing by 19.9 percent and exports decreasing by 29.0 percent. The trade deficit went down by 18.7%, which is good news, but the overall decrease in trade shows that the economy is slowing down.


Inflation, as measured by the CPI, has remained high at 7.88 percent on a year-on-year basis. This level of inflation is a cause for concern as it erodes the purchasing power of consumers and reduces overall economic growth.


But things have gone well with the balance of payments, which now has a surplus of Rs. 133.21 billion. Gross foreign exchange reserves stood at NPR 1383.33 billion and 10.50 billion in USD terms. This surplus shows that Nepal can pay its foreign debts and has a safety net to protect it from shocks from the outside world.


In terms of the government’s finances, the federal government spent 667.66 billion rupees and brought in 514.69 billion rupees. This indicates that the government is running a budget deficit, which is a concern as it increases the country’s debt burden.


The money supply has increased, with broad money (M2) increasing by 4.7 percent. On a year-on-year basis, M2 increased by 8.8 percent. Deposits at BFIs increased by 5.0 percent, and private sector credit increased by 3.2 percent. On a year-on-year basis, deposits increased by 10.5 percent, and private sector credit increased by 3.9 percent. These money supply and credit increases suggest that the economy may be poised for growth.


Current Situation of Inflation in Nepal

Nepal’s economy has been experiencing a rising trend of inflation in recent months. As per the data released by the Nepal Rastra Bank, the consumer price inflation (CPI) remained at 7.88 percent in mid-February 2023 compared to 6.24 percent a year ago. This rising trend is attributed to a surge in non-food and services inflation which has risen to 9.22 percent in the review month. The food and beverage inflation stood at 6.19 percent.


Under the food and beverage category, prices of essential food items such as cereal grains & their products increased by 12.39 percent, tobacco products by 10.83 percent, alcoholic drinks by 8.78 percent, and spices by 8.04 percent. Similarly, the non-food and services category witnessed a significant surge in transportation prices by 15.58 percent, health by 10.39 percent, housing & utilities by 9.78 percent, furnishing & household equipment by 9.00 percent, and recreation & culture by 8.81 percent.


The rising trend of inflation is not limited to any specific region of Nepal. In the review month, consumer price inflation in the Kathmandu Valley, Terai, Hill, and Mountain remained at 8.47 percent, 7.82 percent, 7.30 percent, and 7.92 percent, respectively. Inflation in these regions was significantly lower a year ago.


In addition to the consumer price inflation, the wholesale price inflation increased to 9.67 percent in the review month compared to 10.34 percent a year ago. The wholesale prices of consumer goods, intermediate goods, and capital goods all went up by 3.49 percent, 14.02 percent, and 5.44 percent, respectively. In the same way, the wholesale price of building supplies went up by 12.07 percent during the review month.


The year on year salary and wage rate index increased to 10.27 percent in the review month, which was 5.72 percent a year ago. In the review month, the salary index and wage rate index increased by 12.39 percent and 9.64 percent, respectively.


The rising trend of inflation poses a significant challenge to Nepal’s economy, especially for low-income households who are most vulnerable to inflation. To tackle this challenge, the government and policymakers need to take effective measures such as managing the supply chain, controlling prices, and adopting monetary and fiscal policies to control inflation.

Current Situation of External Sectors in Nepal

During the time period, merchandise exports fell by 29.0 percent to Rs. 93.43 billion, while merchandise imports fell by 19.9 percent to Rs. 919.17 billion, according to the report. The total trade deficit fell 18.7 percent to Rs. 825.73 billion. Exports to India and China fell, while those to other countries rose. India, China, and other countries reduced their imports.


The composition of foreign trade reveals that intermediate and final consumption goods accounted for the majority of exports and imports, while capital goods accounted for a negligible proportion. The unit value export price index increased by 3.3 percent, while the import price index increased by 7.8 percent, according to the report.


The terms of trade index fell 4.3 percent. Net services income remained deficient by Rs. 38.45 billion, while remittance inflows increased by 27.1 percent to Rs. 689.88 billion. The number of Nepali workers seeking foreign employment has increased, and net transfer has increased by 25.2% to Rs. 759.11 billion.


According to the information provided by NRB, during the seven months of 2022/23, merchandise exports decreased by 29.0 percent to Rs.93.43 billion, while merchandise imports decreased by 19.9 percent to Rs.919.17 billion. The total trade deficit decreased by 18.7 percent to Rs.825.73 billion.


The composition of foreign trade shows that intermediate and final consumption goods accounted for 53.9 percent and 45.5 percent of the total exports, respectively. On the imports side, the share of intermediate goods remained 53.1 percent, capital goods 8.6 percent and final consumption goods remained 38.3 percent.


The year on year unit value export price index increased by 3.3 percent and the import price index increased by 7.8 percent. The terms of trade (ToT) index decreased by 4.3 percent.


In the services sector, net services income remained at a deficit of Rs.38.45 billion, while travel income increased by 107.4 percent to Rs.32.24 billion. Travel payments increased by 56.6 percent to Rs.62.57 billion, including Rs.43.74 billion for education.


Remittance inflows increased by 27.1 percent to Rs.689.88 billion, and the number of Nepali workers taking approval for foreign employment increased by 57.3 percent to 314,767. Net transfer increased by 25.2 percent to Rs.759.11 billion.


The current account remained at a deficit of Rs.29.64 billion, as compared to a deficit of Rs.411.34 billion in the same period of the previous year.


The price of oil (Crude Oil Brent) in the international market has decreased by 12.3 percent to US dollar 85.46 per barrel in mid-February 2023, compared to US dollar 97.50 per barrel a year ago. In contrast, the price of gold has increased by 1.6 percent to US dollar 1859.70 per ounce in mid-February 2023, compared to US dollar 1831.15 per ounce a year ago.


The Nepalese currency depreciated by 3.18 percent in mid-February 2023, compared to mid-July 2022. The buying exchange rate per US dollar stood at Rs.131.70 in mid-February 2023, compared to Rs.127.51 in mid-July 2022. The depreciation in the Nepalese currency could be attributed to various factors such as increased demand for US dollars due to higher imports and repatriation of profits by foreign investors. However, the increase in foreign exchange reserves could help mitigate the impact of currency depreciation on the economy.

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Current Situation of Remittance in Nepal

According to the data provided by NRB, remittance inflows in Nepal increased by 27.1 percent to Rs.689.88 billion in the seven months of 2022/23, compared to a decrease of 4.4 percent in the same period of the previous year. In US Dollar terms, remittance inflows increased by 16.4 percent to $5.30 billion in the review period, compared to a decrease of 5.3 percent in the same period of the previous year.


This suggests that the remittance situation in Nepal has improved significantly in the current review period, with a substantial increase in remittance inflows. This increase in remittance inflows is likely to have a positive impact on the Nepali economy, as remittances are an important source of foreign currency earnings and can contribute to reducing the trade deficit and improving the country’s balance of payments.


Additionally, the increase in remittance inflows may have positive implications for household consumption and poverty reduction in Nepal, as remittances are often used to finance household expenses and investment in education and health.


Current Situation of Foreign Exchange reserves in Nepal

Nepal’s foreign exchange reserves have seen a significant increase in the review period, as per the latest data released by Nepal Rastra Bank (NRB), the central bank of Nepal. Gross foreign exchange reserves have increased by 13.8 percent to Rs.1383.33 billion in mid-February 2023, compared to Rs.1215.80 billion in mid-July 2022. In US dollar terms, the gross foreign exchange reserves have increased by 10.2 percent to $10.50 billion in mid-February 2023, compared to $9.54 billion in mid-July 2022.


Of the total foreign exchange reserves, reserves held by NRB have increased by 16.2 percent to Rs.1228.05 billion in mid-February 2023, compared to Rs.1056.39 billion in mid-July 2022. However, reserves held by banks and financial institutions (except NRB) have decreased by 2.6 percent to Rs.155.28 billion in mid-February 2023, compared to Rs.159.41 billion in mid-July 2022.


The share of Indian currency in total reserves stood at 22.4 percent in mid-February 2023. Nepal’s foreign exchange reserves have been aided by a surplus in the balance of payments, which remained at Rs.133.21 billion in the review period, compared to a deficit of Rs.247.03 billion in the same period of the previous year. In US dollar terms, the balance of payments remained at a surplus of $1.01 billion in the review period, compared to a deficit of $2.07 billion in the same period of the previous year.


Nepal’s foreign exchange reserves have also been supported by positive foreign exchange adequacy indicators. Based on the imports of seven months of 2022/23, the foreign exchange reserves of the banking sector are sufficient to cover the prospective merchandise imports of 10.8 months, and merchandise and services imports of 9.4 months. The ratio of reserves-to-GDP, reserves-to-imports and reserves-to-M2 stood at 28.5 percent, 78.3 percent, and 24.0 percent, respectively, in mid-February 2023. Such ratios were 25.1 percent, 57.8 percent, and 22.1 percent, respectively, in mid-July 2022.


Current Fiscal Situation of Nepal

Nepal’s fiscal situation has been a topic of discussion, especially after the COVID-19 pandemic hit the country. Table 2 shows the government expenditure and revenue for the first seven months of 2021/22 and 2022/23, indicating a significant shift in the fiscal situation.


The total expenditure for the first seven months of 2022/23 increased by 13 percent to Rs. 667.66 billion, compared to Rs. 591.02 billion in the same period of the previous year. Recurrent expenditure, which includes salaries, interest payments, and other recurring expenses, rose by 11.7 percent to Rs. 531.50 billion from Rs. 475.62 billion. Similarly, capital expenditure, which includes infrastructure development, increased by 9.1 percent to Rs. 66.30 billion from Rs. 60.79 billion.


However, financial management expenses saw a significant increase of 27.9 percent to Rs. 69.86 billion from Rs. 54.61 billion in the previous year. It includes expenses incurred in managing the government’s finances, such as interest payments and other fees.


On the revenue front, the total revenue for the first seven months of 2022/23 decreased by 16.1 percent to Rs. 514.69 billion from Rs. 613.41 billion in the previous year. Tax revenue, which contributes significantly to the total revenue, decreased by 17.2 percent to Rs. 464.19 billion from Rs. 560.84 billion. Non-tax revenue also decreased by 3.9 percent to Rs. 50.50 billion from Rs. 52.57 billion in the previous year.


The decline in revenue can be attributed to the pandemic’s impact on the economy, which resulted in lower economic activities, reduced tax collection, and decreased income. However, the increase in government expenditure indicates that the government is taking measures to support the economy and provide necessary relief to the affected people.

Current Situation of Capital Market in Nepal

The capital market in Nepal has undergone significant changes in the past year. As of mid-February 2023, the NEPSE index stood at 2121.9, which is a decrease from 2801.6 in mid-February 2022. This decline can be attributed to the overall volatility in the global financial market and the effects of the COVID-19 pandemic.


In terms of stock market capitalization, the figures for mid-February 2023 stood at Rs.3061.96 billion, compared to Rs.3959.65 billion in mid-February 2022. This decline in stock market capitalization can be attributed to various factors, such as the decrease in the NEPSE index, political instability, and liquidity crunch in the banking system.


The number of companies listed at NEPSE has increased from 226 in mid-February 2022 to 246 in mid-February 2023. Out of these, 146 are Bank and Financial Institutions (BFIs) and insurance companies, followed by 63 hydropower companies, 19 manufacturing and processing industries, 6 investment companies, 5 hotels, 4 trading companies, and 3 others. This indicates a growing interest among companies to access the capital market for their financial needs.


In terms of stock market capitalization, the share of BFIs and insurance companies stood at 65.8 percent in mid-February 2023, followed by hydropower companies at 12.9 percent, investment companies at 6.7 percent, manufacturing and processing industries at 4.1 percent, hotels at 1.8 percent, trading companies at 0.4 percent, and the share of other companies at 8.2 percent. The dominance of BFIs and insurance companies in stock market capitalization indicates their growing significance in the overall economy.


The paid-up value of 7.1 billion shares listed at NEPSE stood at Rs.701.61 billion in mid-February 2023, indicating a growing interest among investors to invest in the stock market.


Securities worth Rs.150.68 billion were listed at NEPSE during the first seven months of FY 2022/23. These securities comprise government development bond worth Rs.35 billion, debenture worth Rs.28.44 billion, the ordinary share worth Rs.64.75 billion, bonus shares worth Rs.14.32 billion, mutual fund worth Rs.4.49 billion, and right shares worth Rs.3.67 billion. This indicates a growing trend among companies to access the capital market for their financial needs.


In addition, the Securities Board of Nepal approved the total public issuance of securities worth Rs.22.48 billion in the review period, which includes debenture worth Rs.9.2 billion, mutual fund worth Rs.7.75 billion, the ordinary share worth Rs.4.58 billion, and right share worth Rs.953.6 million. This shows the growing interest among investors to invest in the Nepali capital market (Current Macro-Economic and Financial Situation Archives – नेपाल राष्ट्र बैंक, 2023).


Current Situation of Banks and Financial Institutions in Nepal

As of mid-February 2023, the banking and financial institutions (BFIs) sector in Nepal has remained stable with a total of 121 licensed BFIs, according to Table 3 of the recent economic report. The sector continues to play a crucial role in the economy by mobilizing savings, providing loans, and supporting economic growth.


Number of BFIs and their Branches*

(EMapping System :: Nepal Rastra Bank, 2023)  Get the Latest data here.

Out of the total licensed BFIs, 22 are commercial banks, 17 are development banks, 17 are finance companies, 64 are microfinance institutions, and 1 is an infrastructure development bank. The number of BFIs branches has increased to 11,611 in mid-February 2023 from 11,528 in mid-July 2022, indicating a growing reach of the BFIs in the country (Current Macro-Economic and Financial Situation Archives – नेपाल राष्ट्र बैंक, 2023).


The BFIs have been instrumental in facilitating credit access to different sectors of the economy. However, the recent COVID-19 pandemic has significantly impacted the credit flow to the private sector. In this context, the Nepal Rastra Bank (NRB) has introduced various measures to facilitate credit access to the private sector, including refinancing facilities and concessional lending schemes.

 

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