Macro-economic indicators of the economy for 9-month of 2017/18; 3 months left for fiscal year to end and 50% estimated expenditure still pending

Nepal Rastra Bank (NRB) has published its 9-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.491.30 billion, which was Rs.305.77 billion in the corresponding period of the previous year. Similarly, the capital expenditure has increased by 47.1 % to Rs. 109.0 billion. Such expenditure was Rs. 74.09 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 9 months, the deficit stands at Rs. 137.7 billion. In the review period, the government revenue collection increased 20.8 % to Rs.505.90 billion. Such revenue had increased 44.4 % to Rs.418.95 billion in the corresponding period of the previous year.

The expenditure clearly surpasses the revenue, but if we are to see the % values – we have completed 75% of this fiscal year, we’ve realized 69.3% of the estimated revenue and 50.3% 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 nine-months’ data of 2017/18 published by NRB, the budget deficit of Government of Nepal has climbed to Rs 112.75 billion as opposed to a surplus of Rs 11.83 billion in the corresponding period of the previous year. The widening hole of deficit is a huge liability to our economy.

The FM 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. But like everything else, going beyond the desirable can be harmful.

Inflation

The y-o-y consumer price inflation increased to 5.3% in mid-April 2018 from 3.8 % a year ago. The increase in food inflation has higher influence in the rise of overall inflation in the 2 review period. However, the average consumer price inflation in nine months of 2017/18 remained low at 4.1 %.

The Mountain region witnessed relatively higher rate of inflation of 7.0 % followed by 6.0 % in Hill, 5.7 % in Terai and 4.3 % in the Kathmandu Valley. In the corresponding period of the previous year, these regions had witnessed inflation rates of 2.8 %, 5.6 %, 3.4 % and 2.7 % respectively.

Interest rates

The weighted average 91-day Treasury bill rate increased to 4.98% in the ninth month of 2017/18 from 0.93 % a year ago. The weighted average inter-bank transaction rate among commercial banks, which was 0.75 % a year ago, increased to 4.12 % in the review month. Likewise, the average base rate of commercial banks increased to 10.4 % in the review month from 8.6 % 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 haven’t gone beyond 8% and 11% for savings and fixed deposits respectively.

Remittance

The workers' remittances has increased 5.6 % to Rs. 540.38 billion in the review period. However, net transfer receipts has remained Rs. 621.66. Such receipts had increased 9.9 % in the same period of the previous year. The amount of remittance has gone up but in a decreasing trend. The increase which is 5.6% was 6.3% in the corresponding period of last fiscal year.

Similarly, the number of Nepalese workers going for foreign employment (except renew entry) fell by 6.8 % in the review period. It had decreased 3.2 % in the same period of the previous year, too.

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).

Import, Export, Current account and BOP

The persistent current account deficits since mid-January 2017 has been posing risk to external sector stability. The current account deficit has widened further to Rs. 171.64 billion in the review period from a deficit of Rs. 10.34 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. 14.60 billion in contrast to a surplus of Rs. 50.60 billion in the same period of the previous year.

Similalry the trade deficit (Exports-Imports) has also increased significantly and most of it owing to India.

Similarly, the flow of foreign direct investment (FDI) amounted to Rs. 14.41 billion compared to Rs. 11.07 billion in the corresponding period of the previous year. The gradual incline in FDI will help in uplifting the domestic industries, but it can also result in outflow of funds in the form of Dividend repatriation. Nonetheless, considering the fact that we are currently facing liquidity shortage in market, foreign funds can ease the situation and create room to wiggle.

Recently, Hongshi Shivam Cement started production with a capacity of 6000 tons, which is remarkably higher than the local industries. In a similar manner, FDI and other joint ventures in days to come might can the face of country.

BFI lending and deposit

Deposits at Banks and Financial Institutions (BFIs) increased 10.1 % in the review period compared to a growth of 8.9 % in the corresponding period of the previous year. On y-o-y basis, deposits at BFIs expanded 15.3 % in mid-April 2018. Out of the total deposits at the BFIs, the share of demand deposit increased from 7.5% a year ago to 8.7% in mid-April 2018. Similarly, the share of fixed deposit rose from 40.6% a year ago to 44.9% in mid-April 2018. However, the share of saving deposits decreased from 36.6% a year ago to 35.8% in the review month.

The share of institutional deposits in total deposit of BFIs stood at 46.1% in mid-April 2018. Such share was 46.8% a year ago.

Similarly, credit to the private sector from BFIs increased 16.9 % in the review period compared to a growth of 15.6 % in the corresponding period of the previous year. In the review period, private sector credit from commercial banks, development banks and finance companies increased 16.2 %, 24.7 % and 10.0 % respectively. On y-o-y basis, credit to the private sector from BFIs increased 19.5 % in mid-April 2018. Of the total outstanding credit of BFIs in mid-April 2018, 61.4 % is against the collateral of land and building and 14.8 % against the collateral of current assets (such as agricultural and non-agricultural products). Such ratios were 60.8 % and 14.0 % respectively a year ago.