To boost economic recovery, the Nepal Rasta Bank (NRB) has introduced its monetary policy for the fiscal year 2023-24, with a key focus on managing inflation, stabilizing interest rates, and meeting credit demand. This policy aligns with the government’s wise fiscal plan aimed at optimizing expenditure and enhancing domestic revenue mobilization.
According to CareEdge Ratings, the government has set a target of NPR 1.75 trillion for annual expenditure in FY24, which represents a 2.4% decrease from the previous fiscal year’s allocation but reflects a substantial increase of over 16% compared to the revised estimate. The allocation allocates NPR 1.14 trillion (65%) for current expenditure, NPR 302 billion (17%) for capital expenditure, and NPR 308 billion (18%) for financing.
To achieve revenue targets, the government plans to leverage digital technology for revenue administration, reduce revenue leakages, broaden the tax base, and update tax rates for certain goods. The revenue target for FY24 is NPR 1.3 trillion, indicating growth compared to the previous fiscal year’s target of NPR 1.1 trillion.
Given the fiscal policy’s prudence and the expected revenue improvement, CareEdge Ratings predicts a decline in the fiscal deficit for FY24. This optimistic outlook is further supported by the NRB’s monetary policy measures, which include a 50 basis points reduction in the policy rate. The revised policy rate, now standing at 6.5%, is intended to stimulate growth amid the current economic slowdown.
The rating agency notes that while the policy rate has been lowered, the bank rate remains unchanged at 7.5%. Additionally, the deposit collection rate has been adjusted downwards from 5.5% to 4.5%, a move that is expected to influence credit demand and liquidity within the banking system.
CareEdge Ratings also reports on Nepal’s retail inflation, which has shown a positive trend, easing below 7% for the first time in 16 months, settling at 6.8% year-on-year in June. This decline in inflation is attributed to a moderation in the non-food and services segment, while food inflation registered a slight increase, standing at 5.7% year-on-year, with specific food items experiencing notable price upticks.
In terms of external trade, CareEdge Ratings highlights that Nepal’s trade deficit has shown improvement, with imports declining by 8% year-on-year in June. Concurrently, merchandise exports increased by 2% year-on-year, leading to a narrowing of the trade deficit to NPR 132 billion, the lowest in 11 months. This positive trend is further supported by robust remittances, which have grown by 23% year-on-year to reach NPR 1,112 billion in the first eleven months of FY23.
The rating agency commends the Nepalese rupee’s resilience in July, as it appreciated against the US dollar following a minor depreciation in the previous month. The strengthening of the Nepali currency is attributed to repricing US Federal Reserve rate hike expectations and the Nepali rupee’s pegging to the Indian currency.
Despite these positive developments, CareEdge Ratings acknowledges the ongoing economic challenges in Nepal, particularly concerning government finances, revenue collection, and decelerating exports. The effective implementation of reforms and measures will be crucial in achieving the targeted GDP growth of 6% in FY24.
The agency emphasizes that the coordinated efforts of the prudent fiscal policy and the supportive monetary policy by the Nepal Rasta Bank are expected to provide the much-needed impetus for economic recovery in the forthcoming fiscal year.
