Budget deficit, interest and inflation rate climbs up; Expenditure exceeds Revenue: The current macro-economic and financial story of Nepal

Nepal Rastra Bank (NRB) has published its 11-months' report accessing macroeconomic and financial situation of the country. The brief excerpt of it along with interpretations is presented below:

Government expenditure (Capital Expenditure)

In the review period, recurrent expenditure stood at Rs.607.72 billion, which was Rs.394.51 billion in the corresponding period of the previous year. Similarly, the capital expenditure has increased by 40.1 % to Rs. 151.88 billion. Such expenditure was Rs. 108.43 billion in the corresponding period of the previous year.

From the table below we can see a huge discrepancy between the values of government expenditures and revenue. According to the budget estimate, the expenditure exceeds revenue by Rs 548.9 billion. Similarly according to the actual figures of expenditure and revenue for 11 months, the deficit stands at Rs. 206.2 billion. In the review period, the government revenue collection increased 18.7 % to Rs.625.77 billion. Such revenue had increased 33.1 % to Rs.527.14 billion in the corresponding period of the previous year.

The expenditure clearly surpasses the revenue, but if we are to see the percent values – we have completed 91.67% of this fiscal year, we’ve realized 85.71% of the estimated revenue and 65.05% of the estimated expenditures.

Thus we can infer that even from such huge deficit, we haven’t been able to mobilize the funds like the way it was estimated.

Budget Deficit/surplus

Based on the eleven-months’ data of 2017/18 published by NRB, the budget deficit of Government of Nepal has climbed to Rs 177.82 billion as opposed to a deficit of Rs 12.65 billion in the corresponding period of the previous year. The widening hole of deficit is a huge liability to our economy.

Few months ago, finance minister Dr. Khatiwada had mentioned in his White Paper that the national treasury is almost empty and with such huge deficits, there’s no doubt why.

Budget deficit is desirable and sometimes even deliberate for country like ours. However, one cannot deny, going beyond the desirable can be harmful.

Inflation

The y-o-y consumer price inflation increased to 4.1% in mid-June 2018, from 2.8% a year ago. The food inflation rose to 3.0% in mid June 2018 from negative growth of 1.0% a year ago.

The Mountain region witnessed relatively higher rate of inflation of 6.4 % followed by 4.9 % in Hill, 4.2 % in Terai and 3.1% in the Kathmandu Valley. In the corresponding period of the previous year, these regions had witnessed inflation rates of 1.8 %, 4.0 %, 3.1 % and 1.4 % respectively.

The proposed budget for FY and monetary policy 2075/76 aims for an inflation of 5%.

Interest rates

The weighted average 91-day Treasury bill rate increased to 4.38% in the eleventh month of 2017/18 from 1.03 % a year ago. The weighted average inter-bank transaction rate among commercial banks, which was 2.46 % a year ago, increased to 4.18 % in the review month. Likewise, the average base rate of commercial banks increased to 10.41 % in the review month from 9.40 % a year ago.

As you can see, the rise in interest is abnormally high. Given the recent incidents of rapid increase of deposit interest rates by banks, all other rates like lending rate and base rate were affected simultaneously. Such rise can be attributed mainly to the shortage of loanable funds in the market. However after the Gentleman’s Agreement of Nepal Bankers’ Association, the deposits rates had been maintained within the range of 8% and 11% for savings and fixed deposits respectively.

Remittance

The workers' remittances increased 7.3 % to Rs. 679.73 billion in the review period. However, net transfer receipts increased to Rs. 776.27 billion. Such receipts had increased 11.6 % in the same period of the previous year. Similarly, the number of Nepalese workers going for foreign employment (except renew entry) fell by 8.2 % in the review period. It had decreased 3.9 % in the same period of the previous year, too.

Thus we can see the brain-drain is gradually decreasing, which is a good news for us in long-term. When our Human Resource remains with us, we have a wider chance of growing faster. However in short term, we have to consider the fact that we are a remittance-based economy and a fall in remittance can hurt our BOP (Balance of Payments). The fall in remittance further aligns the vision of Dr. Khatiwada to bring back youths in the country through a provision of credit disbursement of Rs 10 lakhs.

Import, Export, Current account and BOP

The persistent current account deficit since mid-January 2017 has been posing risk to external sector stability. The current account deficit has widened further to Rs. 209.21 billion in the review period from a deficit of Rs. 2.99 billion in the same period of the previous year. The elevated level of imports has widened the current account deficits. As a result, the overall BOP has turned into a deficit of Rs. 4.34 billion in contrast to a surplus of Rs. 74.23 billion in the same period of the previous year.

In the review period, the flow of foreign direct investment (FDI) amounted to Rs.15.88 billion compared to Rs.12.27 billion in the corresponding period of the previous year.

The top five imports and exports are:

BFI lending and deposit

Deposits at Banks and Financial Institutions (BFIs) increased 13.5 % in the review period compared to a growth of 10.1 % in the corresponding period of the previous year. On y-o-y basis, deposits at BFIs expanded 17.6 % in mid-June 2018. Out of the total deposits at the BFIs, the share of demand deposit increased from 7.9% a year ago to 8.6% in mid-June 2018. Similarly, the share of fixed deposit rose from 43.4% a year ago to 45.7% in mid-June 2018. However, the share of saving deposits decreased from 35.8% a year ago to 34.8% in the review month.

The share of institutional deposits in total deposit of BFIs stood at 44.32% in mid-June 2018. Such share was 44.2% a year ago.

Similarly, credit to the private sector from BFIs increased 19.9 % in the review period compared to a growth of 17.1 % in the corresponding period of the previous year. In the review period, private sector credit from commercial banks, development banks and finance companies increased 19.9 %, 20.6 % and 14.3 % respectively. On y-o-y basis, credit to the private sector from BFIs increased 21.0 % in mid-June 2018. Of the total outstanding credit of BFIs in mid-June 2018, 61.4 % is against the collateral of land and building and 14.7 % against the collateral of current assets (such as agricultural and non-agricultural products). Such ratios were 61.1 % and 13.9 % respectively a year ago.

Do you think the current monetary policy will cover the negative aspects of the macroeconomic and financial situation of the country? Please provide your views in the comment section below.