Covid-19 impacts have become detrimental to Nepal alike the biggest and least developed economies facing in the pertinent situation. Now the Prominent role of the state is to contain this deadly virus and minimize the various spheres of losses. Meantime, there is huge challenge for government to contain the virus alongside reopening the economy.
The Government has made an arrangement to stay at home from 11 March 2020 for the prevention of infection. Despite the precautionary measures taken for the prevention of infection, 777 people have been infected with COVID-19 in Nepal till May 26, 2020. Meanwhile, managing the economy has become challenging in the face of a health crisis. The global damage caused by the economic crisis created by the health crisis is estimated to be unimaginable. Expansion, management and mobility of the economy has also become challenge for Nepal, which has been on the path of high economic growth for the past three consecutive years with average GDP growth rate of 7.3%.
The comparison of the pre and post COVID economic situation and indicators of Nepal signals towards gradual downturn of the economic growth and development. IMF has projected that the world economy will shrink by 3 percent by 2020. In the current fiscal year, and Nepal's economic growth rate will be 2.28 percent. Recent Economic survey of Nepal from Government of Nepal has projected Growth rate of 2.3% on the current fiscal year.
This fiscal year and the following will be tough test for Government, Ministry of Finance and Central Bank (NRB) to contain the economic destruction, manage the economic spheres and re-normalize the economy taking it back to static growth rate as before. The risk of imbalance in the commodity market, labor market and financial market has increased due to sluggishness in foreign employment and unrest disruption in the supply chain. Notwithstanding different spheres losses, the monetary expansion remained within the target range for the first nine months of the current fiscal year relaxing the pressure on prices and external sector stability.
Overall inflation rate of Nepal has risen form 4.6% of FY 2075/76 to 6.74% as of Baisakh 2077. Food inflation has risen from 3.1% on FY 2075/76 to staggering 9.7% on Baisakh 2077 and has been under pressure recently due to uncertainty in production, black marketing, impeded supply arrangements and open border informal transactions occurring predominantly amid lockdown.
The ratio of consumption to production and the ratio of total national savings, total fixed capital formation and resource gap have been decreased. The ratio of consumption to GDP has increased to 81.9% from 81% in the last fiscal year. Similarly, the total national saving ratio decreased from 48.9 % last year to 46 % in the current fiscal year.
Wide data published by NRB of the current fiscal year bearing the existing capacity to sustain imports of goods and services of 8.4 months and target of 7 months the situation in the external sector is normal and estimated that the Balance of Payments (BOP) of the Nation will remain on surplus to the end of this fiscal year.
Furthermore, along with the reduction on remittance flow, we can expect sharp rise on imports after opening of the economy which will lead to huge trade deficit in Nepal. Sharp devaluation of 10.2% of Nepalese currency against US dollar amid lockdown in comparison to 2.8% devaluation before lockdown reiterates the alarming signal of expensive imports and low valued exports.
Fiscal deficit is seen to be under deficit as the expenditure of the government has increased from 66.4 billion to 85.8 billion and expected to be more on expenses towards COVID containment measures. On the Revenue side, the tax revenue has undergone sharp decline from 43.9 billion on Falgun end 2076 to 16.1 billion as of Baisakh 2077 BS. Government seems unable to collect the targeted tax revenue, which is giving huge pressure for Government to effective and optimal mobilization on Public debt. Public debt has risen to 1.139 trillion as of Falgun 2076. Furthermore Government is issuing bonds and bills through central bank to mobilize more domestic debt.
Reduced government income, remittance flow, depleted foreign currency incomes, economic slowdown, reduced credit expansion, distorted economic activities, staggering unemployment , reduced FDI and other dismal economic and financial indicators have aroused question on Public Debt sustainability of the government and possible debt trap on enduring pandemic situation .
Exports increased by 12.9 percent and imports declined by 7.5% reducing the trade deficit by 8.9 percent as of Baisakh 2077. The balance of payments remained in surplus due to increase in exports, contraction in imports, reduction in tourism expenditure, mobilization of external debt and increase in foreign direct investment. The third quarterly review of Monetary Policy conducted by Central Bank for the current fiscal year has revealed that the Covid-19 epidemic has added challenges to the economy which has been moving at a natural pace for the first eight months of the current fiscal year.
Central Bank has devised various policies and has given several containment measures directions to Bank and Financial Institutions to prevent pressure on price and external sector stability from the aggregate demand side and to maintain interest rate stability by managing effective liquidity and encourage availability of financial resources for production, employment and entrepreneurship development.
Central bank had reduced the mandatory cash reserve ratio and bank rate with the objective of creating more loanable funds and liquidity of around 30 billion thereby reducing the interest rate by making the liquidity more comfortable. Moreover provisions like 2% discount on interest rate not going less than the base rate, deferments of EMI’s and loan obligation , fast loan processing and disbursement have been made to revitalize , re-operate and smoothen the primary business and industries hard hit by pandemic.
Keeping in view the demand for cheap loans in productive and priority sectors, the limit of refinancing has been increased to Rs 100 million. A policy has been taken to gradually increase fund to Rs. 60 billion. Arrangement has been made to give priority to small and medium enterprises affected by COVID-19 in refinancing facility. Emphasis will be given on promotion of domestic production by encouraging financial means towards small, medium and medium enterprises, job creation and entrepreneurship development. Through the development of payment system, the work of reducing the time and cost of financial intermediaries, increasing the financial access of the public and consolidating the financial sector will be continued. Considering the additional impact of the Covid-19 epidemic, the annual policy is in line with the policies, programs and Monetary and financial measures. Along with the central Bank, Government should adopt rational public, development and foreign policies step on the little brighter side of the situation triggered by the pandemic.
Pradip Baniya, Assistant Director, Nepal Rastra Bank