Nepal Invests: Weekly Economic Bulletin for 10th to 16th April, 2022!

Well, the year 2079 is here and like every new year, there is a renewed hope and aspiration. Most of us may have new resolutions, while some of us have few of them carried forward from the last year! In any case, we wish everyone of you a very happy, healthy and prosperous year ahead.

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Without further ado, we present you the weekly economic updates from Nepal for the week ending April 16!

Eight-month NRB Report on Current Macroeconomic and Financial Situation 

On April 12, Nepal Rastra Bank (NRB) released its eight-month report on the current macroeconomic situation of the country. In a nutshell, while the Government’s stringent import restriction measures along with improvement in remittance inflow, and gradual revival of the tourism sector have improved the BoP condition, the report indicates the economy is still closer to a crisis than normalcy. Here’s what the indicators say.

Inflation

The Consumer Price Inflation (CPI), which recorded at 7.14% as of mid-March this year as compared to 3.03% of the same period last year, is well above the NRB’s threshold of 6.5%.

The staggering rise in inflation, which is at a 67 months high, can largely be attributed to the Russian-Ukraine crisis. Though Nepal's combined trade with both countries hovers around a mere 2%, due to the global rise in price of commodities, high fuel prices, and higher logistics costs, along with goods we have imported the high inflation as well.

And don’t forget, the local level elections are just around the corner and so is more inflationary pressure. This is because cash outflow will be high to local levels in the May elections, it will increase demand, and traders will accordingly hike the prices of consumable goods.

Balance of Payment (BoP)

The country’s eight-months import bill, which stands at Rs.1308.73 billion, is well over the trillion-rupee mark, a ‘feat’ which the country was able to achieve only in 2017-18. Even though export earnings are at its highest, mostly due to the same inflation but also due to recovering tourism and remittance inflow, it is simply not enough to foot the staggering import bill. 

As a result, the BoP stands at a deficit of Rs.258.64 billion in the first eight months, against a surplus of Rs.68.01 billion in the same period of the previous year.

Having said that, the stringent import restriction measures of the Government seems to be working because the growth rate in imports is under control and thus the BoP deficit is declining. 

Foreign Reserves

Well, with sources of foreign exchange earnings doing not so great, the Government has been compelled to dive a bit deeper into the foreign reserves to foot the expensive imports.

As a result, Nepal's gross foreign exchange reserves has decreased by 16.2 percent to Rs1.17 trillion in mid-February 2022 from Rs1.39 trillion in mid-July 2021. This is enough to import goods and services for only 6.7 months, less than the NRB benchmark of maintaining such reserves for sustaining imports for at least 7 months.

In order to ease the depleting foreign reserves, the Non-Resident Nepal Association (NRNA) has decided in its April 12 meeting to join hands with the government. In this regard, the meeting decided to urge all non-resident Nepalis to open an account in US Dollars in any bank in Nepal and to deposit at least 1,000 USD in that account.

Investment

The Government has also started work to reduce the threshold amount for foreign direct investment (FDI) from the existing Rs 50 million so as to encourage currency inflow in the country in light of the depleting reserves. 

In June 2019, the government had raised the minimum threshold amount for FDI from Rs 5 million to Rs 50 million, a move which was not well received by investors. Now, with the Government mulling over reducing the threshold, domestic investors are worried that more than large investments investors will invest in small businesses such as restaurants and coffee shops, which will crowd out the small business owners.

Also in the investment topic, the Investment Board of Nepal (IBN) records show that foreign and domestic investors have pledged a combined investment of Rs 1 trillion in 31 big projects in the country. Among the committed investment projects,17 are related to hydropower production.

Though, this indeed is good news for Nepal that lacks the domestic fund base to fuel its ambitious growth targets, it must also be noted that there is a considerable gap between the investment committed and received, especially in FDI. NRB in its survey report on FDI in Nepal (2019-20) has revealed that between 1995-96 and 2019-20, the total actual net FDI inflow stood at around only 34.1 per cent of total FDI approval in the country. 

Considering the wide gap, this is indeed worrying and something that needs to be immediately addressed by the Government.

Also, do you remember how the Deuba Government had last week abruptly suspended the Governor of Nepal Rastra Bank, Maha Prasad Adhikari, on charges of allegedly leaking sensitive information to the media and failing to fulfil his responsibilities as the chief central banker?

Well, this political interference of the Central Bank’s autonomy has not been taken lightly by the International Monetary Fund (IMF). The multilateral institution has started an inquiry to find out the reason behind the abrupt suspension of the Governor and has also stated it could discontinue funding if authorities concerned couldn’t produce a valid reason. At this point it is worth noting that the IMF had recently agreed to provide Nepal with an interest free loan of US $ 395.90 million. 

Public Sector

Unsurprisingly, the Government has for the umpteenth time failed miserably to meet the set capital expenditure target, while comfortably meeting the revenue collection target.

The Government has spent only Rs 103.78 billion out of the allocated budget of Rs 378.09 billion for 2021/22, which is less than one third of the targeted expenditure under the heading. It means the government now has the next to impossible task of spending two-third of the amount in just the next three months.

While the Government has introduced almost draconian measures to control imports, which has been touted as the primal cause of the liquidity crisis in the country, it itself has been unable to improve efficiency in its working mechanism to spend over Rs 200 billion allocated for capital expenditure, aggravating the already dire situation. 

Anyways, with the last hour of the current fiscal year 3 months away, like always, we will likely see a rush of construction work to meet the expenditure targets. This is why the quality of these infrastructures built in haste is mediocre at best.

Renewable Energy

On the Renewable Energy front we have more good news. 

Nepal seems to be making admirable progress in harnessing the hydro-energy potential of the country. In the Nepali year 2078 (mid-April 2021 to mid-April 2022) that ended on April 13, Nepal produced an additional 710 MW of hydroelectricity from 20 hydropower projects, taking the country’s capacity to supply electricity to 2,150 MW.  

With the private sector contributing 1,452 MW among the total generated electricity, it’s easy to say that the entry of the private sector has been the game changer for the stagnant power sector of the country. 

Aviation

This time too, the Government seems to have lived up to its tradition of ‘putting the cart before the horse’. 

The construction work at the Pokhara International Airport is 95% complete. In fact, as a gesture that the Chinese-funded airport would be ready for operations before July 10, last month the Chinese Foreign Minister Wang Yi also handed over the symbolic key of the country’s third international airport to Nepal. 

However, the operation deadline has caught a snag and is expected to be pushed a year due to the bird-strike risk to aircrafts posed by the Bacche Baduwa landfill site that lies 1.5 km from the airport on the banks of the Seti river. 

The landfill site attracts birds of prey such as vultures, kites and eagles, which invite risk of bird aircraft strike hazard, as has been the case with Tribhuvan International Airport. More than 100 bird hit incidents during take-off or landing have occurred at this country’s first international airport of the country since 1990.

As Pokhara Valley is a fine habitat for various species of birds due to its Seti canyon, marshy lakes, dense forests and flat plains, and there are at least 108 species of birds in and around the new airport, it is already a high risk area for bird-strike hazard. This risk will compound further if the landfill site is not removed. In fact, it is reported that the relocation of the landfill site will reduce the number of birds in the airport area by 40 percent.

However, as nobody wants to live near a landfill site, its relocation is a political issue that is set to take center stage in the upcoming elections. 

Nonetheless, exercising the Civil Aviation Rule 2002, which states that no person shall be allowed to store and dump solid waste openly in and around the airport boundary of 3 km, the Government should quickly put the issue of relocation to rest and focus its resources on marketing the international airport to revive the languid tourism industry of the country.

Technology

In the technological front we have a positive development in regards to digital convenience and security. 

Nepal’s telecom regulator is preparing to implement a centralized biometric based digital Know Your Customer, a process wherein an individual's identity and address are verified electronically through authentication of the National Identity.

Individuals need to fill up the form using their national ID number, and once the operator or the service provider makes a one-time entry in the e-KYC system, the user will be verified. Henceforth, the user will not have to face the hassle of filling out paper KYCs every time. Also, unlike the paper system, due to its characteristics as a biometric verification system, there will be no duplication or cheating. This will thus protect individual’s privacy and also prevent avoidable security breaches and financial crimes.

Private Sector

For the final economic update, the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), the country’s apex private sector body, has appointed Gokarna Awasthi as its director general in its 9th executive committee meeting of the FNCCI held on April 10.

Awasthi was the former chairman of the Society of Economic Journalists Nepal (SEJON), and had also served in Kantipur Daily as its business head, and at the United Nations in Nepal as an Sustainable Development Goals adviser.

So this is all for this week! Did we miss anything? Do you have any feedbacks or suggestions for us? Do let us know. And if you like our weekly updates, do share in your network so that we can reach out to more readers.

And last but not the least, if you wish to know more about UDAN: Udhayme Angel Network, please visit the link below or drop an email to hello@nepalinvests.com !