Nepal's Mid-Year Economic Review Shows Strong External Sector, Easing Inflation

Kathmandu. The Ministry of Finance has published the mid-term evaluation report for the budget of the current fiscal year 2082/83. According to the public details, the country's external sector appears very strong, while signs of improvement are also visible in the domestic economy.

Government data indicates that the surge in remittances, coupled with the decline in bank interest rates and inflation, has provided relief to the economy.

• Historic Improvement in Remittances and Foreign Exchange Reserves

A miraculous improvement has been observed this year in remittance inflows, considered the backbone of the country's economy. During the review period, remittances sent by Nepalis from abroad increased at a high rate of 39.1 percent, reaching NPR 1062.93 billion. This flood of remittances has positively impacted the country's foreign exchange reserves and the balance of payments situation.

Currently, the country holds foreign exchange reserves equivalent to US$ 22.47 billion. Furthermore, with more money flowing in than flowing out of the country, the balance of payments is in surplus by NPR 501.24 billion. This confirms that the stability of the country's external sector is in a very strong position.

• Inflation and Interest Rates Both Declining

Relief news for the general public and industrialists is that both market inflation and bank interest rates have significantly decreased. In the first six months of the current fiscal year, the average consumer inflation (price hike) was limited to 1.7 percent.

Looking at interest rates, the average interest rate charged by commercial banks on loans has fallen into the single digits, settling at 7.12 percent. The drop in interest rates, which were in the double digits some time ago, has provided relief to investors. The average deposit interest rate has also dropped to 3.56 percent, while the interbank interest rate is limited to 2.75 percent. The fall of the 91-day Treasury Bill interest rate to 2.35 percent signals sufficient liquidity in the financial system. Data showing that the Nepal Rastra Bank has absorbed over NPR 286 billion in liquidity from the market also indicates that banks have ample investable funds.

• Economic Growth and Sectoral Improvements

While the global economy is projected to grow by 3.3 percent, neighboring India by 7.3 percent, and China by 5 percent, Nepal's economic growth rate is expected to be moderate. The Ministry's preliminary estimate for Nepal's economic growth rate in the first quarter of the fiscal year is 3.0 percent.

Sectorally, encouraging improvement is seen in the industrial sector. Due to increased activity in the energy and construction sectors, the industrial sector is estimated to expand by 5.44 percent. The service sector also shows a growth of 3.03 percent due to improvements in tourism and trade. However, due to a decrease in paddy production, the expansion of the agricultural sector is constrained to 1.36 percent. Although the production of crops like maize, millet, and buckwheat increased, the decline in the main crop, paddy, has affected the agricultural sector.

• Trade Deficit and Stock Market

There has been high growth in exports in foreign trade. Total merchandise exports increased by 43.8 percent, exceeding NPR 142 billion. However, as imports also increased by 14.2 percent in the same proportion, the trade deficit continues to widen. During the review period, the trade deficit increased by 10.1 percent to reach NPR 797 billion.

Signs of improvement are also visible in the capital market. The NEPSE index stands at 2641.44 points, and the total market capitalization has reached NPR 4435 billion. The number of listed companies in the securities market has reached 284.

In the banking sector, loans to the private sector increased by 6.7 percent, reaching nearly NPR 57 trillion, while deposit collection increased by 5.7 percent, exceeding NPR 7681 billion. Overall, this mid-term review by the Ministry of Finance shows that while external sector and financial indicators appear strong, the pace of domestic production and economic growth remains sluggish.