–DURGA PRASAD GAUTAM
Following a robust recovery in FY22, the economy grew less quickly in H1FY23 due to tighter monetary policy, rising global prices, and the continuance of import restriction measures. Despite expansion in the services and agriculture sectors and a contraction in the industrial sector, real GDP growth slowed in Q1FY23. A reduction in private investment during H1FY23 is indicated by a decrease in building activity, a decrease in new business registrations, a slower expansion of loans to the private sector, and a decrease in imports of intermediate and capital goods.
With food prices rising by 7.5 percent year over year and non-food price inflation rising to 8.7 percent (y-o-y) in H1FY23, inflation has been broadly based. Higher vegetable prices linked in part to supply shocks in India, higher cereal grain prices brought on by India’s ban on the export of wheat and rice, higher transportation prices linked to the rise in global energy prices, and higher housing and utility costs are all contributing factors.
Due to a decline in remittances and an increase in the trade deficit, the current account deficit increased from 7.8 percent of GDP in FY21 to a historic high of 12.8 percent of GDP in FY22. During H1FY23, the current account deficit decreased to 0.5 percent of GDP, the lowest level since H1FY17, as a result of lower imports of goods and increased remittances.
As a result of the reduced current account deficit, foreign exchange reserves were once again able to grow during H1FY23. From USD 9.5 billion in mid-July 2022 to USD 10.5 billion in mid-January 2023, the country’s foreign exchange reserves increased. This stock exceeds the policy floor of 7 months of import coverage by covering 9.4 months of concurrent imports.
Imports could increase significantly once more in the future. Continued import demand management through interest rate policies and luring more sources of external funding will be crucial to preventing the imposition of harmful import restrictions in the future.
Non-performing loans (NPLs) continue to be extremely low by international standards, and capital adequacy indicators remain above minimum thresholds. Bank capital adequacy was measured by the total average capital to risk-weighted assets ratio, which finished H1FY23 at 13.1%, exceeding the required minimum of 11%. At the conclusion of H1FY23, the NPL ratio increased slightly to 2.6 percent. Although indications of financial institution soundness continue to be encouraging, several forbearance policies in effect through the end of FY23 may be concealing real asset quality in the banking industry.
At the start of FY23, monetary policy was created to strike a balance between tightening needed for financial and economic stability and support for the economic recovery. 200 basis points (bps) were added to the policy rate in H2FY22, and another 150 bps were added in H1FY23 (August 2022). Further slowdowns in credit to the private sector occurred during H1FY23 as a result of a combination of factors including increased global pricing, demands that importers deposit cash in bank accounts before obtaining letters of credit for importation, and policy rate increases. In January 2023, the final import restrictions were removed.
The standing liquidity facility and the overnight liquidity facility, both of which were launched at the start of FY23, helped to meet the ongoing high demand for liquidity. These windows were successful in bringing the interbank lending rate into the target range starting in December 2022. The supply of credit was constrained in part by stricter controls on the credit-to-deposit ratio.Import limitations ceased to exist in January 2023.
With imports accounting for roughly half of all tax collections from VAT, excise, and import charges, Nepal significantly relies on imports as its tax base. The fiscal balance of Nepal was negative in the first half of FY23, at -0.3% of GDP, for the first time in five years as a result of falling overall receipts and stagnant spending. The slowdown in revenue growth is due to both slower economic activity and decreased imports. On the other hand, during the election season, spending was mostly consistent. Between H1FY22 and H1FY23, the public debt to GDP ratio grew as a result of the H1FY23 budget deficit, rising from 35.6 percent to an estimated 38.3 percent.
A mid-term review revised the government’s lofty 21.3 percent nominal growth tax revenue projection for the year from the FY23 Finance Bill. The Ministry of Finance conducted a mid-year FY23 budget review in February 2023, which resulted in a 2.9 percentage point decline in GDP in the budgeted revenue estimate, from 26 to 23 percent of GDP. The mid-term review reduced spending even more, from 28.9 percent of GDP to 24.7 percent of GDP (a 4.2 percentage point drop in GDP), which resulted in a smaller-than-anticipated annual budget deficit of 3.6 percent of GDP (a 1.3 percentage point decrease in GDP).
(Principal at Arya Academy High School, Subhakamana Tole, Nagarjun -4 ktm durga.gautam@pac.edu.np )