Thursday, February 15, 2018

NEPAL: Mid-year review of FY2018

Here is a brief rundown of the economic situation in the last six months (mid-July 2017 to mid-January 2018) of FY2018. 

In a nutshell, growth prospects look less optimistic than previously thought (unless this changes after the formation of new left alliance led government), inflation will accelerate but likely to stay within 7%, capital budget under-execution remains a chronic issue but fiscal deficit might widen a bit, credit disbursement growth will likely outpace deposit mobilization growth, and deceleration of remittance amidst widening trade deficit would mean a larger current account deficit.


Agricultural output growth is expected to be lower than expected. Industrial and services output activities are supported by continued improvement in electricity supply and some pick up in post-earthquake related construction activities. Gross value added growth will likely be between 4.5% and 5.0% in FY2018 as all three major sectors grow less than in FY2017.


Budget execution, especially capital spending, continues to remain dismal. The government spent just 14.1% of the total NRs335.2 billion earmarked for capital spending in FY2018. However, the government spent 41.1% of NRs803.5 billion allocated as recurrent spending. Revenue mobilization increased by 20.7%, reaching NRs335.1 billion (out of which tax revenue was NRs297 billion). 


Inflationary pressures are building up as reconstruction activities accelerate and fuel prices increase. Furthermore, rising prices in India will also exert additional pressure on prices of goods and services in Nepal. 

CPI inflation averaged 3.5% in the last six months, down from 5.8% in the corresponding period in FY2017. Food inflation reached 2.4% in mid-January 2018, up from negative 0.7% in mid-January 2017. Prices of veggies, milk products, fruits, ghee and oil and cereals among others have increased in recent months. Non-food inflation decelerated to 5.3% from 6.2% in the corresponding period in FY2017 as prices of clothes and footwear, and furnish and household equipment moderated on account of improved supplies situation and steady supply of electricity. Inflation will likely be below 7% in FY2018.

Money supply grew by 6.7% compared to 8.1% in the first six months of FY2017 as net foreign assets decreased on account of the deceleration of remittance inflows. Deposit mobilization by BFIs increased by 6.9% but credit increased by 7%. Credit to private sector increased by 11.9%. The share of institutional deposits in total deposit of BFIs is about 44.3%. 

NRB mopped up NRs129.2 billion through open market operations (deposit collection auction, 14 days deposit collection auction under interest rate corridor, and reverse repo auction). Meanwhile, it injected NRs69.3 billion (14 days repo auction under interest rate corridor and outright purchase auction).  

NRB provided refinance facility totaling NRs12.1 billion, out of which just NRs1.12 billion was for housing loan at 2% concessional interest rate for post-earthquake reconstruction of houses (for which NRB provides refinance facility at zero percent interest to BFIs).
The weighted average 91-day T-bills rate increased to 5.8% from 1.7% in the first six months of FY2017. The weighted average inter-bank rate among commercial banks increased to 4.4% from 2.7% by mid-January 2017. It indicates tight liquidity situation in the banking sector as most BFIs were short of loanable funds because their CCD ratio was close to the regulatory threshold of 80.  

External sector

Trade deficit increased by 15.1% in the first six months of FY2018 compared to 74% in the corresponding period in FY2017. While exports increased by 13.4% (reaching NRs41.1 billion), imports increased by 15% (reaching NRs534.2 billion). With balance of trade on goods and services amounting to negative NRs478.9 billion and workers remittances of NRs340.5 billion (a deceleration by 0.5% as the number of out-migrants decreased by 1.8%), current account deficit widened to NRs75.7 billion, up from a deficit of NRs1.2 billion in the first six months of FY2017. FDI inflows was NRs14.3 billion (up by 93.9%). Consequently, balance of payments deficit was NRs6.7 billion (down from a surplus of NRs45 billion in the first six months of FY2017).

In US dollar terms, merchandise exports increased by 18.7% while merchandise imports increased by 19.7% in the first six months of FY2018, resulting in merchandise trade deficit of US$4.6 billion. CAD reached US$737.5 million and BOP deficit reached US$65.1 million. Gross foreign exchange reserves was US$10.5 billion, which is enough to cover import of goods and services for 10.6 months.

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