Should we worry about Nepal's economy? Here is the Economic Update in 25 Charts (March, 2023)

In streets, conferences, coffee shops, and board meetings, you will consistently hear the word 'cash-strapped' followed by ominous predictions about the Nepalese economy. The 'external' hasn't been in favor since the earthquake in 2015. We've always been in crisis or in recovery.

Despite all that and not meeting the per capita income criteria, Nepal is set to graduate from the category of Least Developed Countries (to Developing Countries) in 2026. IMF has recently projected Nepal's economy to grow by 4.4% in 2023 (while forecasting other emerging market economies to grow by 3.9%). After almost a year of worrying we were becoming Sri Lanka, our foreign currency reserves have stabilized adequately to cover imports of more than 10 months.

So, how exactly is our economy doing? Presenting a lot of charts and indicators.

Government Finances: the burning issue

• The dismal revenue collection and the substantial increase in recurrent expenditure have led to a revenue deficit of NPR 219 billion as of mid-March 2023. Blame this on an overly optimistic budgetary expectation.
• The government revenue has fallen 14% year-on-year but expenses have increased by 19%.

• Recurrent expenses cannot be reduced. The worrying part is that the emptying of government coffers could mean capital expenditure (which is traditionally poor in comparison to budgeted figures) is further impacted.
• The biggest hit has been felt by contractors whose books have billions worth of receivables from the government but are defaulting on bank loans. The impact of this is being felt across the economy leading to a liquidity shortage for everyone.

Remittances: the biggest positive

• One of the reasons for a surplus Balance of Payment this year has been increasing remittances.
• Annual remittances are expected to increase by 20% this year. And, it has been exactly one year since monthly remittance figures have been optimistic. Comparing cumulative figures up to March 2022 and March 2023, remittances grew by a staggering 25%.

Nepalese Going Abroad: dreams lie elsewhere

• This is a strange statistic. More people going abroad for employment means more stability in remittance in the years ahead.
• Yet, should we be happy? This is in itself a dire reflection of how people do not have economic aspirations to stay in Nepal.

Current Account BOP: and how we have no other savior

• The good has obviously been fewer imports but it is sad that we haven't been able to generate income through any other means other than remittances.

• In fact, looking at the services BOP, we haven't been able to generate a lot of economic activity. Travel is positive, but only slightly.

• Net Travel payments have almost always exceeded receipts. We have a lot of potential in Tourism, but the impact is yet to be felt in the BOP.
• Tourist arrivals have improved. And the optimism can be seen in the rising Kathmandu skyline thanks to a lot of international hotel brands seemingly opening doors in the coming years.

Credit: It hasn't contributed to GDP

• The fact that private sector credit is very close to 100% GDP shows that credit hasn't been a contributor to the economy. Most of our credit has clearly funded non value-added trade and speculation.

• Our Credit-to-GDP ratio is the highest - and by a large margin - in the region. This has clearly attracted the Central Bank's attention and recent policy triggers discouraging margin lending, real estate and trade.

Agriculture: it hasn't added to GDP.

• The contribution of agriculture to GDP is reducing over the years despite the sector being a major priority for the government. The central bank has mandated banks to gradually lend at least 15% of their portfolio to agriculture. If this flow of credit hasn't improved the sector, what will?

Real Estate: the sector is feeling the burn

• Monthly real estate transactions (and revenue for the government) has reduced by almost 50% in the last eighteen months.
• Increasing capital charge for lending to real estate, tightening of central bank regulations, and an overall liquidity challenge has impacted the real estate sector.
• Real estate is a major collateral for bank loans and how this might impact bank's own assets and impairment levels is to be seen.

Non Performing Assets: If this doesn't scare you, what will?

• While the NPL levels are still okay compared to many other economies, we should be carefully watching this trend. With a lot of banks operating at a tight capital base, increasing NPL levels is a major indicator of the stress being felt across the industry.

Debt to GDP

• The Debt to GDP ratio of Nepal continues to be around 40% - around 20% Domestic debt and another 20% External Debt.
• The Debt level is not a concern as it is relatively low in comparison to other countries in the region. However, the deficit in revenue collection this year may force the government to increase debt to manage funds for recurrent as well as capital expenditure increasing the leverage.

Foreign Direct Investment (FDI): It hasn't been a major source

• We need a major overhaul in policies and practices if we are to bring FDI for a positive change in the economy. It is alright to be choosy about sectors, but we need to open up.

Imports and Exports: Imports have reduced and therefore exports too.

• One of the reasons why we had a positive BOP was because imports fell mainly due to restrictions and policies that discouraged imports as well as lending towards imports.
• Our exports have also fallen mainly because some of our exports are directly linked to our imports - mainly palm oil and other oils.

Capital Formation to GDP: could be better with FDI

• Net capital formation for Nepal has been average. The level of net capital formation can indicate the level of investment activity in a country's economy, as it measures the level of investment that is being made in the creation of new physical capital. This investment is important for the long-term growth of an economy, as it increases the capacity of a country to produce goods and services in the future.

Electricity Production: The biggest glimmer of hope

• Nepal has an electricity production capacity of 2,500 MWs and is well placed to increase by another 500 MWs in the next few months. Another 3,000 MW is in the pipeline for the medium term.

Investment and Business: Optimism is low

Conclusion

It is a mixed bag. While the foreign reserves have improved, internal finances have caused a lot of worry and concern. Rising NPL levels and a cash-strapped economy are major concerns but improving liquidity and growing tourist numbers in addition to stability in remittances provide a lot of hope. Our fundamentals remain okay as we continue to navigate the external challenges and internal deficiencies. If we can wither this storm, we will only rise.

Avish Acharya