World Economic Situation and Panorama

The Russia-Ukraine war, rise in the price of petroleum products and import obstacles were the main causes of inflation last year that had simultaneously increased the interest rate resulting in sluggish economic growth.

According to predictions made by the International Monetary Fund, both advanced and developing countries' economic growth rates would be at their lowest in 2023 and gradually rise by 2024. In April 2023, the International Monetary Fund predicted that the global economy will expand by 3.4% in 2022. The fund also anticipates that the global economy will expand at a 2.8% annual pace in 2023 and a 3% annual rate in 2024. Similar to this, it was estimated that China and India would expand at rates of 6.8% and 3%, respectively, in 2023, and 6.3% and 4.5%, respectively, in 2024.  

Global inflation has been trending downward. However, the ongoing conflict between Russia and Ukraine, the oil crisis, and generalized economic unrest kept inflation rates higher than what was expected. The supply chain's breakdown and the rupee's decline in value against the dollar have both made a substantial impact on inflation. 

According to the IMF, global inflation was 8.7% in 2022, but it is predicted to be 7% in 2023 and 4.9% in 2024. As a result, it is anticipated that the majority of nations in the world would execute their monetary policies consistently and strictly to do away with the inflation which stands to be higher than the targeted value. 

The majority of central banks throughout the globe have adhered carefully to the monetary policy regulatory exemptions. On June 14, 2023, the American Federal Reserve reaffirmed the Federal Fund Rate at 5-5.25%. Previously, this rate was raised from 0-0.25% between March and May of 2023. 

The Reserve Bank of India left the repo rate consistent in its monetary policy in June 2023 after raising it to 6.5% in February 2023 to combat increasing inflation. The repo rate has, however, been raised by the Bangladesh Central Bank to 6.5 percent. 

Economic Situation and Panorama: A Domestic Overview

For the current fiscal year, the Central Bureau of Statistics, Nepal, projects that domestic economic growth would be 1.86% in terms of producer prices and 2.16% in terms of basic prices. Due to the BOP deficit's impact on liquidity and the inability to fund necessary capital expenditures, domestic demand decreased significantly in the previous fiscal year.

A 6% economic growth is the target set forth in the fiscal year 2080/81’s  budget. A budget of Rs. 302 Arab 7 crore has been set aside by the central government for capital expenditure in order to accomplish this target. Similar to this, the state governments have allotted a budget for capital expenditures of Rs. 159 Arab 49 crore. 

The Ministry of Agriculture and Livestock Development estimates that 53% of the rice plantation is finished by Asar 29, 2080. This year's prolonged rice planting is mostly due to the delayed monsoon and the spread of lumpy skin disease. But the agricultural growth rate this year is anticipated to be adequate due to the persistent monsoon and the government's pledge to provide enough fertilizer. 

In the fiscal year 2080/81, an additional 900 MW of power is anticipated to be added to the National Grid Mechanism. Additionally, Nepal just received approval to sell 300 MW more of power to India. This would allow Nepal to export 952 MW of power to India, reducing the trade deficit Nepal has with India over time. 

As soon as the post-Covid travel restrictions were relaxed, the tourism industry started to thrive in 2079/80. The Government of Nepal's designation of the years 2023 to the year 2033 as the "Visit Nepal Decade" and the development of airports, hotels, and other facilities are anticipated to result in a significant rise in the number of visitors and, eventually, a strengthening of the tourism industry. 

It is expected that domestic inflation will exceed the targeted level. Over the first 11 months of the fiscal year 2078/79, the average rate of consumer inflation was 6.18%; however, over the same time period the following fiscal year, it was 7.77%. At the end of the month of Jestha, the point inflation was 6.83%, which was less than the desired amount. 

Customers are under inflationary pressure due to the rising costs of food and drink, household items, imported commodities, petroleum products, and also because of the depreciation of the Nepalese rupee in regard to the US dollar. However, the general decline in demand locally as well as the decline in the wholesale prices of items imported from India have in some ways helped to reduce inflation. 

External Sector: International Trade, Remittance and BOP Position

The FY 2079/80 saw a decline in trade with the rest of the globe. The overall export for the 11 months under consideration was Rs. 143 Arab 59 Crore, a reduction of 22.7%. Similar to that, items worth Rs. 1480 Arab 98 crore were imported, a 16% decrease from the previous FY. As a consequence, the trade deficit improved and decreased by 15.2% to Rs. 1337 Arab 39 Crore. It is also noteworthy that the Balance of Payment (BOP) has improved in the fiscal year 2079–80. 

With a rise of 22.7% in Nepalese currency and 13% in US dollar terms, the remittance influx appeared to have a significant impact in FY 2079/80. The inflow of remittances was significantly boosted in FY 2079/80 due to the unexpected rise in labor migrants immediately following Covid, although it was just a little increase in growth rate for FY 2080/81. 

In comparison to Asar 2079, the FOREX reserve in Jestha 2080 is Rs. 1480 Arab 87 Crore, an increase of 21.8%. This number now stands at 11 Arab 30 Crore in US dollars, a rise of 18.5%. 

The FOREX Reserve appears to be under pressure if the inflow of remittances does not rise in sync with the rise in imports. Therefore, it is important to focus on the export and tourism sectors in order to avoid the threats that Nepal must confront since there is not enough FOREX. 

Monetary Policy Structure and Target

According to monetary policy constraints, the fixed exchange rate between the Nepalese and Indian rupees (NPR and INR) remains in effect. An operational objective for the weighted average interbank rate has been maintained. Similar to this, according to the operational target's status, the open market operation and interbank interest rate bank are within the interest rate corridor. 

The policy rate is intended to be set while taking the yearly inflation objective and FOREX reserve into consideration. Additionally, the monetary strategy attempts to keep FOREX levels sufficient to pay for 7 months' worth of imports of goods and services. Along with expanding the money supply, the policy also tries to modify monetary control to keep inflation within a 6.5% range. 

In order to achieve the 6% economic growth objective, this macroeconomic strategy also strives to put emphasis on productive loans. The broad money supply has grown by 12.5%, although the expansion of private sector credit is just 11.5%. 

Monatary Measures

The bank rate stands at 7.5%, the policy rate at 6.5% and the deposit collection rate at 4.5% simultaneously. The Overnight Liquidity Facility at the repo rate and the SLF at the bank rate remain unchanged.CRR and SLR have not changed significantly. The 12 crore margin ceiling loan is also unaltered.

At 6.5%, the policy rate has been lowered by 50 basis points. The real estate market in the capital, Kathmandu will receive a mortgage loan of 30%, while those outside the valley would receive a mortgage loan of 40%. Investors requested an increase of up to 70%; however, the NRB rejected their proposal since it deemed the real estate sector to be unproductive. 

Provisions Related to Regulation and Supervision

The BOPA,2064 has been revised to carefully control disorderly and non-commercial activity. Peer review has been used to develop AML rules. Similarly, the first home mortgage loan will rise from the current 1.5 crore limit to a maximum of 2 crore. 

Continued 1% extra interest on remitted savings. There will be standards for working capital loans, a stressed loan resolution framework, and internal credit risk grading guidelines.

National B class banks have complied fully with CAF, 2015 as well. The mandatory PAN loan limit will be evaluated in light of the budget's objectives.It is time to reevaluate the lending relaxation for venture capital and private equity funds. Credit scoring, support for special regulatory bodies for cooperatives, centralized Know Your Customer (KYC) with national ID, Financial Corporation Survey, Priority in Career Planning with Career Development Certificate, review of risk weight of Loan against Collateral of Shares, Real Estate Loan, and Hire Purchase, among other provisions, are also included in the Monetary Policy. The number of microfinance institutions (MFI) would be significantly reduced by the promotion of MFI mergers under Asar 2081.

Government revenue collection is encouraged using digital means to improve the payment system. To improve the effectiveness of IT export services, foreign currency receipts must also be generated electronically. The Principles for Financial Market Infrastructure (PFMI) must be followed while making payment settlements.

Foreign Exchange Management

NRB Foreign Investment and Borrowings Management has undergone legal modifications. A special provision has been made for IT exporting businesses, including the ability to purchase software and install equipment through commercial banks up to a predetermined percentage of foreign income, establish a foreign contact office, pay foreign organizations or remit money to a personal foreign bank account, and pay foreign bodies.

The updated annual dollar exchange for trips is $2500 (provided twice a year). According to regulatory permission and paperwork, Air Service Providers are now permitted to transfer service fees in FOREX through commercial banks. Additionally, SWAP instruments will be created for the control of forex risk.

Instances of Monetary Policy 2080/81 for Economic Mobility

Risk weights have been loosened for share loans up to Rs. 50 lakhs as well as for loans for hire purchase and real estate. Electronic payments increase the collection of tax income for the government. There are provisions for easing restrictions on foreign currency for IT exporting services. 

Up to $2500 can be spent on foreign currency consumption while traveling. Private equity funds and venture capital funds have received lending relaxations (still pending review). The drop in interest rates is another noteworthy development. To promote imports and sustain government income, the foreign exchange reserve aim of 7 months import holding capacity has been established. 

Outlook

To increase the capacity of the economy's productive sector and decrease the country's dependency on imports, a special emphasis has been placed on doing so. In the long run, encouraging the expansion of the productive sector will help to create jobs and produce sustainable economic growth. As a result, the monetary policy has taken into account the trade-off between economic growth and stability and has placed a higher priority on economic stability, paying particular attention to the productive sector in order to increase the economy's capacity for production and achieve sustainable economic growth.