The year 2021 was decidedly not as gloomy as the year before in terms of freeing the economy from the clutches of the COVID-19 pandemic. Economic activities accelerated as the spread of the coronavirus gradually slowed. The signs are positive but the economy could sink into a crisis if corrective measures are not implemented on time.
The Nepalese economy, which was heading towards recovery at the end of 2020, following a decline in the impacts of the first wave of the coronavirus, was confronted with the second wave of the pandemic towards the end of April 2021. More economical activities were paralyzed again for months. This has brought down a number of macroeconomic performance indicators, mainly those related to the external sector, raising the question of whether the current situation is a “pre-cyclonic watch” for the impending economic crisis in the country.
Throughout 2021, the sharp fluctuation in bank interest rates, the worsening of foreign exchange reserves with the deterioration of the balance of payments (BoP), the surge in consumer inflation, the shortage of liquidity in the banking system, increasing government borrowing, widening trade deficit and volatility in stock markets have come into the limelight. Experts stressed that the situation calls for the implementation of appropriate public policies. However, there are some indicators that the economy is gradually improving.
After the first foreclosure imposed in March 2020, the economy still has not felt the heat, mainly due to the cushion of a growing influx of remittances, the main source of the country’s foreign exchange earnings that largely fund the landlocked economy based on imports. Just after a year of the first wave, remittances began to chart a downward trend, putting pressure on the country’s foreign exchange reserves.
Nepal Rastra Bank (NRB) records show that in January 2021, foreign exchange reserves with the country stood at US $ 12.78 billion, sufficient to cover the expected 13.9-month merchandise imports and imports. of goods and services for 12.6 months. As of mid-November 2021, the country is left with foreign exchange reserves of $ 10.47 billion, which can finance imports of goods and services in just 7.2 months.
According to Nara Bahadur Thapa, former executive director of NRB, Nepal need not worry unless the foreign exchange reserve is enough to support imports for seven months. “However, if it is declining rapidly each month, it should be a matter of concern and calls for effective government policies,” Thapa said.
Keshab Acharya, former economic adviser in the finance ministry, said the problem occurring in the external sector will certainly create a ripple effect on the domestic sector of the economy.
Over the past almost six months, the country’s banking system has suffered from a shortage of loanable funds that bankers have blamed in large part on the central bank’s shift to providing deposit-credit (CD) to credit-to-deposit ratio. capital base plus deposit (CCD), slowing government investment spending and lower remittances. NRB data shows that aggressive lending by banks and financial institutions (CIBs) against slow deposit collection has been the main cause of the current liquidity shortage.
At the end of December, the total deposits with CIBs reached 4.81 trillion rupees while they provided loans of 4.61 trillion rupees. Due to an excessive flow of loans, the CD ratio reached 91.02%, which was well above the ceiling set by the central bank of 90%.
Because of this, many banks have already stopped issuing loans to potential investors, which economists say has created the risk of an economic downturn. Experts said the lack of loan flow will also affect the government’s goal of achieving economic growth of seven percent. Acharya said the inability of banks to provide loans could have a detrimental effect on economic growth, as economic activities slow down when there is not enough liquidity in the market.
Rameshwor Khanal, former finance secretary, however, ruled out the possibility of an economic recession due to the inability of CIBs to provide loans to the private sector. “In the post-pandemic period, the private sector has taken out excessive lending, which is of course a positive indication as it could help increase aggregate demand while boosting supply,” Khanal said.
BNR records show that there has been a significant increase in bank loans to manufacturing and service industries despite a slow increase in outstanding loans to agricultural production. If central bank records are anything to consider, CIB’s loan portfolios, given lending on imports of consumer goods to the limit, will show positive results in the future, experts say.
Over the past year, Nepal’s trade deficit has widened from Rs 600.45 billion to Rs 735.48 billion (in mid-November), despite the country making a notable gain in revenue export. “It will work better if the spending is made for imports of capital goods,” Khanal said.
During the period, slow growth in revenue collection against a backdrop of increasing government spending increased government deficit financing. Government records show that the public debt has exceeded 1.7 trillion rupees, which represents about 40% of the country’s GDP. The World Bank has predicted that Nepal’s public debt-to-GDP ratio could reach 50% by 2024. Although it is an obligation for a country like Nepal to finance the majority of development projects through Public borrowing, an increase in its amount at an alarming rate, seen at present, is likely to take a toll on the economic progress of the country.
NRB data shows that the government has also failed to control price increases in consumer goods. The consumer inflation rate crossed five percent from around 3.56 percent during the review period. High inflation could cause Nepalese consumers to cut spending while affecting private sector investment, which would be disastrous for a recovery.
Finance Secretary Madhu Kumar Marasini said that the increase in demand after a drop in the impacts of the coronavirus has led to a sharp increase in imports and negative impacts on the country’s BoP. According to him, the government has already started implementing policy measures to cope with the BoP, foreign exchange reserves and remittances as well as injecting the necessary amounts to increase liquidity in the banking system. “We may have to wait a few more months to see the positive results of the impacts of government policies,” Marasini added.