Path To Nepal’s Economic Recovery In FY24 Likely To Be Bumpy One: Report

In a recent report, CareEdge Ratings has said that the path to Nepal’s economic recovery in FY24 is likely to be a bumpy one. While a revival in the tourism industry, pick up in remittances and replenishing of forex reserves bodes well for the economy, there are several headwinds that could offset the positive impact. 

Elevated inflation, high import dependency amidst soaring global food prices, declining exports, and discouraging foreign direct investment flows pose a threat to the economic outlook, the report mentioned.

Retail inflation rose to 7.4 per cent YoY (YoY) in July, from 6.8 per cent a month ago, taking the fiscal year average to 7.7 per cent, 70 bps higher than the central bank’s target of seven per cent.

The uptick in headline inflation in July was led by food inflation, driven by vegetable and protein items. Inflation in ‘cereal grains and their products’, which accounts for 11 per cent of the CPI basket, however, eased marginally. In contrast, non-food and services inflation moderated to 7.5 per cent YOY in July, from 7.8 per cent in the previous month.

In FY23, the increase in the prices of cereals, dairy products, spices, household consumables, imported goods, and fuel along with the depreciation of the Nepalese Rupee generated pressure on inflation. 

"Going ahead, the uptick in global food prices, especially that of edible oils, and crude oil prices is likely to play out on imported inflation," the report added.

In FY23, Nepal’s trade deficit narrowed to Rs 1,455 billion compared to a deficit of Rs 1,720 billion in the previous year. The narrowing of the deficit was on account of a fall in both exports (-21 per cent YoY) and imports (-16 per cent YoY). 

The decline in imports in FY23 can be attributed to the import bans that the government imposed in an effort to build its foreign exchange reserves and control inflation. A 33 per cent (YoY) decline in crude oil prices in the international market in July has also supported the trade balance position.

"Improvement in the trade position helped Nepal’s current account deficit narrow significantly this year. The current account deficit narrowed to Rs 72.16 billion in FY23, lower than the gap of Rs 623 billion reported last year," the report stated.

Meanwhile, remittances continued to record healthy growth in FY23. For the full fiscal year, workers’ remittances stood at Rs 1,221 billion, up 21 per cent from the previous year. 

This can be attributed to the 40 per cent rise in the number of Nepalese going for foreign employment. "Going ahead, however, Nepal Rastra Bank expects the growth rate of remittance inflows in 2023-24 to moderate given the higher base of remittance inflows in 2022-23," according to the report.