An update on the economy of Nepal based on three months data (mid-July to mid-October) of financial year 2021/22 has been presented here wherein the domestic economic situation, external sector scenario, fiscal position, banking and monetary policy stance have been analysed.
Snapshot of the economy
Table 1: Annual data
| Indicators | 2017/18 | 2018/19 | 2019/20 | 2020/21 (E) |
| Real GDP growth at basic price (%) | 7.4 | 6.4 | -2.1 | 4.0 |
| Nominal GDP growth at producers’ price | 12.3 | 11.7 | 1.4 | 9.0 |
| GDP (current prices: Rs bn) | 3,456 | 3,859 | 3,915 | 4,266 |
| GFCF/ GDP (%) | 32.4 | 33.8 | 28.4 | 27.3 |
Source: Nepal Rastra Bank
Table 2: Monthly data
| Indicators | October
2020 |
August 2021 | September 2021 | October
2021 |
| Consumer price inflation (y-o-y%) | 3.8 | 4.4 | 3.5 | 4.2 |
| Wholesale price inflation (y-o-y%) | 8.3 | 4.3 | 3.1 | 3.8 |
| Export growth (y-o-y%) | 22.4 | 115.9 | 115.0 | 98.2 |
| Import growth (y-o-y%) | 7.6 | 75.7 | 76.0 | 44.6 |
| Trade deficit growth (y-o-y%) | 6.2 | 70.6 | 70.9 | 39.1 |
| Trade deficit (Rs bn) | 102.8 | 129.9 | 140.5 | 142.9 |
| Worker’s remittances (Rs bn) | 93.2 | 75.9 | 79.4 | 83.9 |
| Foreign exchange reserves ($ bn) | 12.6 | 11.4 | 11.1 | 10.9 |
| Domestic credit (YoY%) | 14.3 | 27.9 | 31.0 | 29.7 |
| Deposits (YoY%) | 20.9 | 19.6 | 21.7 | 17.2 |
| Bank rate (%) | 5.0 | 5.0 | 5.0 | 5.0 |
| Weighted average deposit rate (%) | 5.4 | 4.8 | 4.9 | 5.4 |
| Weighted average lending rates (%) | 9.8 | 8.5 | 8.6 | 8.7 |
Source: Nepal Rastra Bank
Positive outlook on Nepal’s economy by ADB and World Bank for 2021/22
- As per the preliminary estimate of the Central Bureau of Statistics (CBS), the economy is estimated to grow by 4% in 2020/21 after a pandemic-led contraction in 2019/20. Agriculture, industry and services sectors are estimated to grow by 2.64%, 5.05% and 4.43% in 2020/21.
- The gross fixed capital formation (as a % of GDP) also fell sharply from 33.8% in 2018/19 to 27.3% in 2020/21, reflective of weak investment activity in the economy.
- The Asian Development Bank (ADB) has projected Nepal’s economy to grow by 4.1% (at market prices) in the fiscal year 2021/22, up from an estimated growth of 2.3% in the previous year. Growth is expected to be largely supported by the ongoing vaccination campaign against COVID-19 and subsequent recovery of the services sector.
- According to World Bank’s latest South Asia Economic Focus, the economy is expected to grow by 3.9% in FY22, an improvement over 1.8% growth in FY21, but still below pre-pandemic growth averages.
- The downside risks to the economic outlook include a possible surge in COVID-19 cases due to the new variant (Omicron) and subsequent strict containment measures, which could reverse the gradual economic recovery achieved in FY21. Delays in vaccine deployment, higher public debt burdens and the risk of natural hazards such as erratic monsoons and floods could scar the economy in the longer term.
Retail and wholesale inflation picks up in October 2021
- Retail inflation (CPI) picked up to 4.2% in October 2021 compared with 3.5% in the previous month. It stood at 3.8% in the corresponding month last year. Spike in non-food and services inflation have led to firming of retail inflation in October 2021.
o Food and beverages inflation has fallen to 3.6% in October 2021 compared with 5.5% in October 2020 chiefly on account of deflation in vegetables (-18.3%) and moderation in cereals inflation this year compared with last year.
o However, inflation in pulses (10.7%) and edible oil (31.7%) continues to remain at elevated levels. o Inflation in the non-food and services basket jumped to 4.7% in October 2021 compared with 2.5% in corresponding period last year, owing to housing and utilities inflation which has 20% weight in the CPI basket. o As per the latest ADB estimate, the country’s retail inflation will rise modestly to 5.2% in FY22, up from 3.6% in FY21, due to higher global oil prices and a gradual recovery in domestic demand.
- Wholesale inflation inched up marginally to 3.8% in October 2021 compared with 3.1% last month and 8.3% in the corresponding period last year.
o The increase in wholesale inflation has been on account of notable inflation in the fuel and power (10.6%) and manufacture segment (9.7%). Fuel basket continues to record double digit inflation owing to surging global crude oil prices.
o Within the manufactured goods segment, sub-components having large weights in the index – food, beverages and tobacco (10.6%) and basic metals (10.8%) recorded significantly high inflation. These two components account for nearly 28% of the entire WPI basket.
o Primary segment witnessed a deflation of 5.2% in October. Food component registered a deflation of 6.4% while non-food inflation was elevated at 15.7%.
External Sector – Widening trade deficits and decline in forex reserves
Trade deficit widens in October
- Trade deficit rose to Rs 143 billion during the review period, 39% higher than the previous year (Rs 102 billion) on account of spike in imports.
o Imports at Rs 164 billion in September 2021 were 44.6% higher than the imports in corresponding period last year. Exports at Rs 21 billion recorded a significant growth of 98% over the corresponding period last year. Although exports have grown at a higher pace compared with the total imports, a relatively higher quantum of imports has resulted in overall trade deficit.
o Major commodities which have seen a growth in exports during the first three months were: soyabean oil (189.5%), palm oil, polyster yarn (37.9%) and jute goods (39.2%).
o Commodities which have seen a sharp rise in imports were petroleum products (132.9%) and transport equipment (64.4%), among others.
o The robust import growth is indicative of sustained revival in economic activity. However, massive import bills, lower remittance inflow and decline in forex reserve could threaten the external sector stability of the economy.
Lower worker’s remittances in October 2021
- Remittance inflows, which is the largest source of Nepal’s foreign currency reserves, declined nearly 10% (YoY) to Rs 84 billion in October 2021. Also, for the first three months cumulatively, workers’ remittances were 7.6% lower from the corresponding period last year.
- However, on sequential basis, remittances witnessed a 5.7% uptick in October 2021.
Current account deficit widens sharply during August-October 2021
- Nepal has recorded a current account deficit of Rs 151.7 billion during the first three months of current fiscal compared with a current account surplus of Rs 33 billion last year for the same period. The huge Y-o-Y jump in deficit during this period has been primarily due to higher trade deficit in merchandise goods and lower remittances inflows.
- As per ADB’s latest estimate, the current account deficit will remain high in FY22, at an estimated 5.0% of GDP, though down from 8.0% a year earlier.
Foreign exchange reserves declined while domestic currency depreciated
- In the US Dollar terms, the gross foreign exchange reserves declined by 12% to Rs 10.9 billion in mid-October 2021 from Rs 12.5 billion in mid-October 2020. Sequentially, foreign exchange reserves recorded a 1.4% decline over the previous month.
- A surge in global commodity prices due to the improving demand conditions along with supply side challenges has led to lower foreign exchange reserves.
- According to the central bank, the existing foreign exchange reserves are sufficient to meet the merchandise and services imports for 7.8 months.
- The domestic currency (month average) during August – October 2021 weakened by 8.4 bps from the end of the previous financial year. The US-Dollar/Nepali rupee exchange rate averaged Rs 118.9/$ in October 2021 compared with Rs 117.9/$ in the previous month.
Government finances continue in surplus
- The government balance (difference between total revenue and expenditure) improved significantly recording a surplus of nearly Rs 24 billion during August-October 2021 compared with a deficit of Rs 4 billion in the corresponding period last fiscal.
o Total revenue resources registered a growth of 48% while total expenditure grew 30% during August-October 2021.
o Revenue has registered a strong growth due to a robust tax as well as non-tax collections during the review period. VAT (30%), Customs (56%), Income tax (30.2%) and were the top three contributors.
o Non-tax revenue grew by about 190% against a contraction of 27% last year. The negative base has contributed to the triple-digit growth print.
Bank Credit and Deposits
- Incremental domestic credit expanded by 5.1% during August-October 2021 compared with 2.8% expansion in the corresponding period last year. On y-o-y basis, domestic credit growth jumped to 29.7% in October 2021 compared with 14.3% growth last year.
- Deposits at Banks and Financial Institutions (BFIs) rose marginally by 1.2% during August-October 2021 compared with a growth of 4.9% in the corresponding period of the previous year. On y-o-y basis, deposits at BFIs expanded 17.2% in October 2021 compared with 20.9% growth last year.
Key interest rates
- The bank rate was stable at 5% in October 2021.
- The weighted average deposit rate at 5.43% in October 2021 was around 51 bps higher than last month but 2 bps lower than corresponding month last year.
- The weighted average lending rate for commercial banks at 8.69% in October 2021 was 12 bps higher than last month but 114 bps lower than corresponding month last year.
Capital Markets
- NEPSE index stood at 2,657 points in mid-October 2021 and was 70.1% higher than corresponding period last year. • Stock market capitalization at Rs 3,719.7 billion as of mid-October 2021 was 78.6% higher than last year.
