During this pandemic, did Nepal's economy perform as expected by the Monetary Policy?
Reference: Taken from Nepal Rastra Bank's review of the first quarter of FY 2077/78
Amid the uncertainty created by the Covid-19 epidemic, national and international economic Monetary Policy 2077/78 was unveiled in Shrawan 02. The monetary policy was brought keeping in view the scenario created by the pandemic.
As the control measures implemented to reduce infection are eased, the economy is gradually moving. There is sufficient liquidity in the banking system. Financial access as well as electronic transactions are improved. Inflation is under control while BOP is in surplus. Also, investors are enthusiastic about the rise in stock market trading and indices.
Although the macroeconomic fundamentals remain strong, the pandemic still poses a resistance to the expansion of economic activities. NRB feels the necessity of the continuation of economic activities following the health standards.
Because of pandemic-induced situations, the international economy is expected to contract. International inflation is low due to decreasing demand.
In FY 2076/77, economic activities in Nepal were affected due to the pandemic and the growth rate remained minimal. Due to control measures implemented to curb the virus, sectors like tourism, construction, industrial production, educational institutions, etc were the most affected.
The monetary policy plans to keep the annual inflation under 7% in the fiscal year. In the first quarter, inflation remained fairly low at 3.93%. Even though inflation was higher in food products, the rate was kept low because of the low inflation in non-edible goods and products. On an annual point basis, consumer inflation stood at 3.79%. In the same month last fiscal year, the figure stood at 6.21%.
In the review period, exports increased by 14.3% to Rs. 31.5 Arba. Meanwhile, imports decreased by 12.7% to Rs. 292.27 Arba. Consequently, the trade deficit saw an improvement of 15.1%.
The monetary policy had kept a target of having a Foreign Exchange Reserve that would sustain the import of 6 months worth of goods and services. As of Ashwin's end, Nepal has enough Foreign Exchange Reserve to sustain the import of 14.1 months worth of goods and services.
In the first three months of FY 2077/78, the total expenditure of the Federal Government was Rs. 201.8 Arba while Revenue collection was just 172.36 Arba.
Deposit mobilization of banks and financial institutions increased by 4.9% to Rs. 4,027.37 Arba during the review period. Deposit mobilization had increased by 3% in the corresponding period of the previous year. As of Ashwin's end, the capital adequacy ratio of Commercial banks was 14%, that of Development banks was 13.5%, and that of Finance companies was 19.4%.
138 more branches of banks and financial institutions have been operational in this fiscal year as of now.
The NEPSE index was at 1,362.4 at the end of Ashad this year. After a few months of the new fiscal year 2077/78, the index is at 2,055.46 (as on Mangsir 18). Thus, less than a year into this fiscal year, NEPSE has gained more than 50%.
As of Ashwin 2077, 207 banks and financial institutions have participated in the merger/acquisition to operate as 50 institutions in total.
NRB has ceased to issue new licenses to establish microfinance companies. Furthermore, 12 total microfinance institutions have participated in the merger and have become six institutions in the first quarter of this fiscal year. Microfinance companies are also barred from issuing more than 15% interest to their customers on any scheme.
In order to facilitate the sectors affected by the pandemic, refinancing worth Rs. 50.7 Arba has been approved.
However, these are some of the negative performance:
a) Hotels and Restaurants saw the most, i.e. 83.28% decline in their business. The Agriculture sector saw a decline of 30.31%.
b) Even though NRB had increased the CCD ratio to 85%, the target wasn't achieved since it had kept the liquidity ratio at 20%. Additionally, the CCD ratio of banks remained at 73%, which created excess liquidity and forced banks to reduce interest rates.
c) In the international economic scenario, the International Monetary Fund has projected the world economy to contract to 4.4%.
Furthermore, these are the provisions that will be added:
a) BFIs will be required to keep the difference not more than 5% between the highest interest rate for fixed deposits and the lowest for savings schemes.
b) The fees levied by BFIs on Digital Banking services will be squeezed. Declining spread, increasing operational expenses, and tightened fee policies may affect the overall profitability of the banking sector.
c) Share loans, real estate loans, and personal loan schemes will be revised. If this is done to control the increasing concentration of lending on these sectors, the respective sector might be affected. However, this may have only a minimal impact on the overall lending atmosphere of BFIs.
