Nepal's Economic Indicators: Inflation Rises Amidst Slow Economic Activity

Nepal Rastra Bank (NRB) has reported an increase in the consumer price inflation for the month of Magh in the current fiscal year, which ended in January 2023. The rise in inflation typically signals higher economic activity or a rise in overall market demand. However, based on indicators such as the financial sector’s lending rates, imports and exports, liquidity in the financial sector, and interest rates, NRB finds no substantial increase in economic activity.

Inflation Increase Amid Economic Stagnation

The average interest rate on loans remains at 7%, with the growth rate of private sector loans at 4%. The total investable amount in the NRB exceeds NPR 100 billion, yet there is little evidence suggesting significant economic recovery. Despite this, the NRB’s report indicates that the external sector of the economy remains strong.

As of January 2023, the annual consumer price index-based inflation rate stood at 3.25%, a slight increase from 2.42% in December. Although inflation has risen compared to the previous month, the growth is minimal when compared to the same period last year. This suggests that while inflation is rising, it remains within manageable levels, and the economic environment has not yet significantly improved.

Economic Activity and Money Supply

Despite the rise in inflation, the NRB pointed out that there has been no substantial improvement in economic activity, as evidenced by the slow growth of loans and limited demand in the market. The central bank has noted that inflation is unusual, largely due to a sluggish economy, youth dissatisfaction (referred to as “Generation Z revolt”), and an overall lack of demand.

However, the NRB has acknowledged a modest improvement in the inflation trend over the past few months, partly due to improvements in the credit sector and a slight recovery in economic activity. The increase in the money supply by 5.9% this fiscal year suggests that there has been some improvement in financial conditions, though it remains far from robust.

Foreign Exchange Reserves and Remittance Growth

NRB reported that as of mid-January, Nepal's foreign exchange reserves stood at NPR 3.32 trillion (USD 22.76 billion), sufficient to cover 18 months' worth of goods and services imports. This substantial increase in foreign reserves, alongside a significant rise in remittance inflows, has positively impacted Nepal’s current account, which showed a surplus of NPR 493.78 billion (USD 3.47 billion). Similarly, the balance of payments (BoP) surplus stood at NPR 572.73 billion (USD 4.03 billion).

Remittance inflows have grown by 39.8% in Nepali rupees and 33% in US dollars. In January alone, remittance inflows reached NPR 198.08 billion (USD 1.37 billion), marking a significant year-on-year increase. The robust inflow of remittances has acted as a stabilizing factor for Nepal's external economic position, supporting the current account balance and foreign reserves.

Trade Growth: Exports and Imports Increase

Trade figures have also shown positive growth. Exports increased by 32.2%, while imports grew by 13.6% during the same period. The increase in exports points to growing demand for Nepal’s goods in foreign markets, while the rise in imports suggests increased domestic demand for foreign products. However, the trade deficit remains a concern, despite the growth in trade activity.

Government Spending and Revenue Generation

As of mid-January, Nepal’s government expenditure stood at NPR 801.37 billion, while government revenue collection reached NPR 665.22 billion. These figures show a substantial expenditure-to-revenue gap, with the government spending more than it is collecting in taxes and other revenues.

Monetary Growth and Banking Sector Performance

In terms of monetary growth, the NRB has reported a 14.9% increase in deposit growth on an annual basis, with private sector credit growth at 6.8%. These figures indicate moderate expansion in the financial sector, but still far from indicating a strong economic recovery. The average interest rate on loans in the banking sector remains at 7%, while the average deposit interest rate stands at 3.51%. These rates suggest that the banking sector is still not lending aggressively, and the low interest rates for deposits reflect the cautious approach towards savings amidst economic uncertainty.

Conclusion: A Mixed Economic Outlook

Overall, Nepal's economic indicators for the first seven months of the current fiscal year show a mixed picture. While inflation has increased slightly, it remains within manageable levels. The economy continues to show signs of sluggishness, with limited credit growth and no significant improvements in demand or overall economic activity. However, there are positive signs in the form of strong foreign exchange reserves, significant remittance inflows, and trade growth, which are helping to stabilize the economy.

The NRB's report suggests that while inflation is rising slightly, the economy still faces challenges such as slow credit growth and a high expenditure-to-revenue gap. These challenges must be addressed to ensure sustainable economic growth in the coming months. As the economy gradually recovers, further policy adjustments may be necessary to stimulate growth and manage inflation effectively.