Budget deficit spikes up to 302 billion while balance of payment turns around with a marginal surplus of 960 million: The current macro-economic and financial story of Nepal

Nepal Rastra Bank (NRB) has published its 12-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.680.31 billion, which increased by 32.4% compared to the growth of 40.9% in the corresponding period of the previous year. Similarly, the capital expenditure has increased by 20.4 % to Rs. 239.91 billion. The growth was 72.2% in the corresponding period of the previous year. The capital expenditure in the review year accounted for 71.6percent of the budget estimate of Rs.335.18 billion.

The total expenditure made is 80.5% of the total budget estimates.

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 548.93 billion. Similarly according to the actual figures of expenditure and revenue for 12 months, the deficit stands at Rs. 302.94 billion. In the review period, the government revenue collection increased 19.2 % to Rs. 726.08 billion. The collected revenue is 99.5% of the budget target of Rs 730.06 billion. Such revenue had increased 26.4 % to Rs. 609.12 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 the fiscal year, we’ve realized 99.5% of the estimated revenue and 80.5% of the estimated expenditures.

Thus, we can infer that the government has been successful in reaching the estimated target in terms of revenue. It is an evidence that the country has been able to collect tax and VAT revenue from general public and institutions. VAT revenue collection has occupied the maximum growth of 28%. The most  The expenditure has met the target of 80.5%.

Budget Deficit/surplus

Based on the twelve-months’ data of 2017/18 published by NRB, the budget deficit of Government of Nepal has climbed to Rs 245.22 billion as opposed to a narrow deficit of Rs 10.13 billion in the corresponding period of the previous year. The widening hole of deficit is a huge liability to our economy provided that the country has been importing petroleum products, transport equipment and parts, industrial goods.

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. The Country Partnership Framework with World Bank financed Nepal with a $15 million in order to strengthen the country’s public financial management. The upcoming fiscal year comes as a challenge to the government to make the maximum utilization of the pledged amount.

Inflation

The y-o-y consumer price inflation increased to 4.6% in mid-July 2018, from 2.7% a year ago.

The Mountain region witnessed relatively higher rate of inflation of 5.9 % followed by 4.6 % in Hill, 4.4 % in Terai and 3.3% in the Kathmandu Valley. In the corresponding period of the previous year, these regions had witnessed inflation rates of 4.1 %, 6.4 %, 4.4 % and 3.1 % respectively.

The proposed budget for FY and monetary policy 2075/76 aims for an inflation of 6.5%.

Interest rates

The weighted average 91-day Treasury bill rate increased to 3.74% in the last month of 2017/18 from 0.71 % a year ago. The weighted average inter-bank transaction rate among commercial banks, which was 0.64% a year ago, increased to 2.96 % in the review month. Likewise, the average base rate of commercial banks increased to 10.47 % in the review month from 9.89 % 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 monetary policy’s provision to maintain CRR rate at 4% for all the banks, the liquidity issue has been addressed temporarily.

Remittance

The workers' remittances increased 8.6% to Rs. 755.06 billion in the review period. However, net transfer receipts increased to Rs. 864.67 billion. Such receipts had increased 9.5 % in the same period of the previous year. Similarly, the number of Nepalese workers going for foreign employment (except renew entry) fell by 10.1 % in the review period. The workers preferred Malaysia, UAE and Kuwait whereas the number of workers leaving to Saudi Arabia and Qatar declined.

Thus, we can see the brain-drain is gradually decreasing, which is a good new 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. 245 billion which is 8.2% of the total GDP in the review period from a deficit of Rs. 10 billion in the same period of the previous year. However, the overall BOP has turned into a marginal surplus of Rs. 960 million.

The foreign direct investment (FDI) inflows of Rs.17.51 billion were recorded in the review year.

BFI lending and deposit

Deposits at Banks and Financial Institutions (BFIs) increased 19.2 % in the review period compared to a growth of 14.1 % in the corresponding period of the previous year. On y-o-y basis, deposits at BFIs fell to 34.5% from 35.4% in mid-July 2018. Out of the total deposits at the BFIs, the share of demand deposit increased from 8.7% a year ago to 9.3% in mid-July 2018. Similarly, the share of fixed deposit rose from 43.2% a year ago to 44.8% in mid-July 2018. However, the share of saving deposits decreased from 35.4% a year ago to 34.5% in the review month.

Similarly, credit to the private sector from BFIs increased 22.5 % in the review period compared to a growth of 18.2 % in the corresponding period of the previous year. In the review period, private sector credit from commercial banks, development banks and finance companies increased 22.3 %, 25.6 % and 16.1 % respectively.

With the provided pace of macro economic performance, will our economy be able to attain the growth of 8% and inflation of 6.5% Please provide your views in the comment section below.