State of the Economy

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State of the Economy

With dismal capital expenditure and slowing revenue collection, the government has been forced to revise the budget size for the current fiscal year. Finance Minister Dr Yubaraj Khatiwada made the downward revision of the budget while unveiling the mid-term review of the budget on February 12. 

This is the second time in as many years that the government has revised the budget size. The budget size has been trimmed to Rs 1.38 trillion from the original Rs 1.53 trillion.

As per the new revision, Rs 944.68 billion has been earmarked for recurrent expenditure, Rs 326.81 billion for capital expenditure, and Rs 154.69 billion for financing provisions. 

The government's overall spending remained dismal during the first-half of the current fiscal. It managed to spend Rs 422 billion or 27.6 per cent of the allocated budget for the current fiscal in the first six-months. According to the Finance Ministry, only 32.4 percent  (Rs309 billion) has been spent under the recurrent expenditure heading while the capital expenditure is much worse as only 15.4 percent (Rs62.76 billion) has been utilised.

First Six Months
Inflation on Rise
The year-on-year consumer price inflation stood at 6.82 percent in mid-January 2020 compared to 4.58 percent a year ago. Food and beverage inflation stood at 10.21 percent whereas non-food and service inflation stood at 4.25 percent in the review month. 

Within the food and beverage group, prices of vegetables, spices, pulses and legumes and fruits sub-groups rose significantly. Similarly, the cost of education, clothes and footwear, and furnishing and household equipment subgroups increased moderately in the non-food and service group. 

Wholesale Price Inflation also on higher side
The year-on-year wholesale price inflation stood at 7.88 percent in the review month compared to 6.04 percent a year ago. In the review month, price of food under primary group and price of food, beverage and tobacco, and leather and leather products under manufactured group rose significantly. 

The year-on-year price of consumption goods, intermediate goods and capital goods increased by 10.20 percent, 7.58 percent and 2.50 percent respectively. The wholesale price of construction materials dropped 5.06 percent in the first half of the current fiscal year.

Some improvement in trade
Nepal's merchandise exports in the first six-months of 2019-20, increased 26.1 percent to Rs 57.28 billion compared to an increase of 11.5 percent during the same period last year. 

Exports to India surged by 45.8 percent whereas exports to China and other countries decreased by 8.5 and 3.8 percent respectively. 

Mainly exports of palm oil, cardamom, jute goods, medicine (ayurvedic), pulses, among others, increased whereas exports of zinc sheets, wire, readymade garment, juice, copper wire rod, among others, decreased during this period.

In the first six-months, merchandise imports declined by 4 percent to Rs 694.69 billion against an increment 30.5 percent in the same period last year.

Imports from China and other countries increased 12.1 percent and 0.4 percent respectively whereas imports from India decreased 9.1 percent.

Mainly imports of crude palm oil, hot rolled sheet in coil, chemical fertilizer, other machinery and parts, electrical equipment, among others, increased whereas imports of MS billet, petroleum products, gold, transport equipment and parts, cement, among others, decreased.

Meagre growth in Remittance Inflow
Remittance inflow increased 0.9 percent to Rs 447.26 billion in the review period compared to 30.2 percent in the same period of the previous year.

In terms of the US Dollar, such inflows increased 1.3 percent in the review period compared to an increase of 17.6 percent in the corresponding period of the previous year.

BOP in Surplus
Balance of Payments (BOP) remained at a surplus of Rs 26.65 billion in the first half of the current fiscal year against a deficit of Rs 63.68 billion in the same period of the last year. 

In US Dollar terms, the overall BOP recorded a surplus of 235.3 million in the review period against a deficit of 559.5 million in the same period of the previous year.

Forex Reserves up by 5.2 percent 
Gross foreign exchange reserves increased to Rs 1095.98 billion as of mid-January 2020 from Rs 1038.92 billion of mid-July 2019. In US Dollar terms, the gross foreign exchange reserves increased to 9.69 billion as of mid-January 2020 from 9.50 billion as of mid-July 2019.

The foreign exchange reserve of the banking sector is sufficient to cover the prospective merchandise imports for 9.6 months, and merchandise and services imports for 8.4 months. The ratio of reserve-to-GDP, reserve-to-imports and reserve-to-M2 stood at 31.6 percent, 70.2 percent and 29.1 percent respectively as of mid-January 2020. 

Such ratios were 30 percent, 64.9 percent and 29 percent as of mid-July 2019.

Deposit Mobilization up by 6.2 percent
Deposits at Banks and Financial Institutions (BFIs) increased 6.2 percent in the review period compared to an increase of 7.7 percent in the corresponding period of the previous year. On y-o-y basis, deposits at BFIs expanded 16.3 percent in mid-January 2020.

Credit Disbursement up by 8.6 percent
Credit to the private sector from BFIs increased 8.6 percent in the review period compared to a growth of 12.7 percent in the corresponding period of the previous year. On year-on-year basis, credit to the private sector has increased 15.1 percent in mid-January 2020. Of the total outstanding credit of the BFIs, 64.9 percent is against the collateral of land and buildings and 13.5 percent against the collateral of current assets (agricultural and non-agricultural products). Such ratios were 63.1 percent and 14.5 percent respectively a year ago.

Inter-bank Transaction
In the review period, inter-bank transactions among commercial banks amounted to Rs 926.53 billion and among banks and financial institutions (excluding transactions among commercial banks) to Rs 91.42 billion. Such transactions were Rs 691.49 billion and Rs 103.45 billion respectively in the corresponding period of the previous year. 

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