Nepal’s economy is anticipated to grow by 5.8% (in real terms) in 2021/22, as per the preliminary estimate of the Central Bureau of Statistics (CBS). Growth during the last fiscal is expected to be supported by a rebound in the services and industrial sectors. Agriculture sector is estimated to grow at a relatively muted pace due to production disruptions owing to unseasonal rains in October last year and shortage of fertilisers.
Factoring in the impact of persistent geopolitical tensions since February 2022 on Nepal’s economy, international organisations have lowered the country’s growth outlook. In April 2022, Asian Development Bank revised downwards Nepal’s GDP growth forecast to 3.9% for 2021-22 from 4.1% projected earlier. World Bank has projected the economy to grow by 3.7% in 2021/22 and 4.1% in 2022/23 – a reduction by an estimated 0.2 and 0.6 percentage points in FY22 and FY23 compared with the previous estimate. Further downside risks to the growth outlook remain amid slowing global growth.
Table 1: Annual Data
|Real GDP growth at producers’ price (%)||7.6||6.7||-2.4||4.3||5.8|
|Nominal GDP growth at producers’ price (%)||12.3||11.7||0.8||10.0||13.4|
|GDP (current prices: Rs billion)||3,456||3,859||3,889||4,277||4,852|
|GFCF/ GDP (%)||32.4||33.8||30.5||29.9||29.4|
Source: Nepal Rastra Bank; *Revised estimate by CBS; **Preliminary estimate by CBS
Note: Financial year runs from July 16 to July 15
Table 2: Monthly Data
|Indicators||June 2021||April 2022||May 2022||June 2022|
|Consumer price inflation (y-o-y%)||4.2||7.3||7.9||8.6|
|Wholesale price inflation (y-o-y%)||9.0||14.4||16.1||14.8|
|Export growth (y-o-y%)||115.1||-8.3||-6.8||-2.2|
|Import growth (y-o-y%)||70.8||-5.7||-3.3||22.7|
|Trade deficit (Rs billion)||116.5||145.1||125.2||146.1|
|Worker’s remittances (Rs billion)||61.0||93.5||87.0||92.4|
|Foreign exchange reserves ($ billion)||11.7||9.6||9.3||9.4|
|Domestic credit (y-o-y%)||22.2||20.2||18.9||17.3|
|Bank rate (%)||5.0||7.0||7.0||7.0|
|Weighted average deposit rate (%)||4.72||7.11||7.25||7.34|
|Weighted average lending rates (%)||8.46||10.78||11.42||11.54|
Monetary Policy 2022/23: Move Towards Policy Normalisation
The Nepal Rastra Bank (NRB) announced the monetary policy for the current financial year 2022/23 in July 2022. Some of the key highlights of the policy announcement are:
- Focus is on controlling inflation and maintaining external sector stability by reining in credit expansion.
- The growth target of credit expansion and money supply has been reduced sharply to a multi-year low level of 12.6% (earlier 19%) and 12% (earlier 18%), respectively.
- Inflation target for the fiscal year has been set at 7% as announced in the annual budget plan.
- The Cash Reserve Ratio (CRR) has been raised to 4% from 3% starting from August 17 while the Statutory Liquidity Ratio (SLR) has been raised to 12% for commercial banks from the existing 10%.
- Bank rate has been raised to 8.5% from 7%, whereas, policy rate (repo rate) and deposit collection rate have also been hiked by 1.5 percentage points to 7% and 5.5%, respectively.
Retail Inflation Spikes While Wholesale Inflation Continues in Double-Digits Retail inflation has been accelerating since March 2022 and touched a near six-year high of 8.6% in June, pushed up by a surge in food and fuel costs. Food and beverage prices inched up to 7.4%, while non-food and service inflation jumped to 9.4%. Within food, the spike in prices was pronounced for categories like vegetables, meat, fish, milk and eggs. Edible oil inflation remained in double-digits for the 20th straight month in June (22.6%). Non food and services component, which contributes nearly 56% to the CPI basket, witnessed a broad-based rise in prices across categories. Transport inflation jumped to 25.8% in June reflecting the transmission of higher global oil prices. The average retail inflation in the first 11 months of the fiscal year 2021/22 stood at 6.1% and is expected to stay within the average annual target of 6.5% for the full fiscal year.
Wholesale inflation eased moderately in June but was still elevated in double-digits at 14.8% on account of high petroleum and metals prices. The recent easing of commodity and metals prices, if sustained, could provide some comfort in coming months.
Rising Import Bill, Falling Reserves Pose Threat to the External Balance
Nepal’s heavy dependence on imports of items like petroleum and edible oils amid high global prices for these commodities has caused nearly a 23% (y-o-y) jump in merchandise imports (in value terms) in June. A depreciating Nepalese rupee has further contributed to the high import bill. As a result, merchandise trade deficit soared to an all-time high of Rs 1,577 billion during the first eleven months of 2021/22, nearly 25% higher than the corresponding period last year. For the same period, the balance of payments (BoP) deficit ballooned by nearly 18 times to Rs 270 billion putting pressure on country’s already dwindling foreign exchange reserves.
Nepal’s gross foreign exchange reserves plunged by nearly 19% (y-o-y) to USD 9.4 billion in June 2022. The current level is sufficient to cover imports of goods and services for just 6.7 months against Nepal’s target of maintaining the import cover of at least seven months. To maintain foreign exchange reserves at adequate level and curtail capital outflows, the government has extended the ban on luxury goods imports for another one and a half months (till the end of August) in July 2022.
In a positive sign, two major sources of Nepal’s foreign exchange reserves, remittance inflows and tourism have shown improvement in recent months. However, massive import bills amid high global commodity prices and depreciating domestic currency will continue to put pressure on the country’s foreign exchange reserves.
Interest Rates on the Upward Trajectory
The persistent liquidity crunch in the banking system has triggered a spike in interest rates. Consequently, the weighted average lending rate shot up to 11.54% in June 2022 from 8.46% in June 2021. During the same period, the weighted average deposit rate has gone up by more than two percentage points to 7.34% in June 2022. After the rate hike announced in July monetary policy, the lending rate is expected to rise further in coming months which could help in reducing credit growth as targeted in the July monetary policy.