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Few sectors in the economy were facing pressure until recently. But, the trouble is now brewing across the board.


Nepal’s economy is passing through one of its worst phases in history. Most of the economic indicators point to a looming crisis. While the government is scrambling to bridge the gap between its revenue and recurring expenditure, the private sector's confidence is waning.

The economy, which was on the path of recovery, was upended by COVID-19.  The lockdowns caused by the pandemic disrupted economic activities. As a result, the economy witnessed contraction for the first time in nearly four decades. Most of the businesses suffered a blow due to the pandemic and subsequent containment measures introduced by the authorities.

Tighter monetary policy, the unwinding of pandemic stimulus and global headwinds all are weighing on the economy. The risks, however, do not stop there. In addition to weak capital expenditure, which has become a norm in public finances, the growing pressure on the government revenue is likely to further exacerbate the macroeconomic challenges of the country. For the first time in five years, Nepal’s fiscal balance remained negative in the first half of the current fiscal year. Revenues across all segments fell while expenditures remained flat. This has caused an estimated fiscal deficit of 0.3% of the GDP.

The downturn in revenue growth reflects not only lower trade flows, but sluggish economic activity as well. Continued high international prices, reflected in higher unit prices of Nepal’s imports, present important headwinds to private sector activity.

“Amid measures taken to address pressures on the external sector, the Nepali economy has faced the unintended consequences of slowdown in economic growth and lower fiscal revenue,” says Faris Hadad-Zervos, World Bank Country Director for Maldives, Nepal, and Sri Lanka.

While the external sector has seen some improvement in recent days following the government’s decision to impose restrictions on imports, key areas of the economy, notably construction and manufacturing,  have contracted.  Foreign investment has also fallen.  

Remittance has remained a silverline in these testing times. But, that is something risky to completely rely on, warn experts. Tourism sector has shown some signs of recovery. But it is yet to recover fully to pre-pandemic levels. However, hoteliers are warning that higher borrowing cost or loan servicing costs risk tipping the hospitality sector to the crisis.

Chronic underspending of the capital expenditure budget has limited the progress on development goals. The private sector could have played a crucial role if there was a conducive institutional and regulatory environment. But, that is not the case.

Private investments have cooled as reflected by a decrease in construction activities, the lower registration of new businesses, slower credit growth to the private sector, and lower imports of intermediate and capital goods. There have been protests on the street against the high interest rates and tightening of bank loans. These all indicate turbulent times ahead for the economy.  Some crucial sectors, which were performing well until recently, spell broader concerns over the teetering economy.

Fall in demand
There are growing fears that the economic slowdown is now gradually leading to a slackness in demands. Some experts point to a fall in import growth to a contraction of demands in the market. While the fall in the imports could be attributed to the government’s decision to impose a ban on certain products recently, traders say that there is also a decline in the demands in the market.

According to the Nepal Rastra Bank (NRB), merchandise imports decreased by 19.9% to Rs 919.17 billion in the first seven months of the current fiscal year. During the same period in the previous fiscal year, such imports had surged by 42.8% to Rs 1,147.46 billion. There has not been a significant increase in domestic production, either.  The manufacturing sector is still struggling to increase its capacity utilisation. Lower imports coupled with sluggish domestic production show that the demand is not so strong in the market, say economic experts.

Vishnu Kumar Agarwal, President of the Confederation of Nepalese Industries (CNI), says that the market overall is now observing contraction in demand. He estimates that the demands in the automobile sector have fallen by up to 80%, while beverage and restaurants sectors have seen a decline of at least 30%. “There should be initiatives to lower interest rates. That is an important step toward facilitating the economic recovery. If the government fails to take any concrete measure, there are chances of a rise in the number of blacklisted businesspersons and firms in the days to come,” says Agrawal.

Another indicator that suggests the contraction in demand is a decline in the government revenue collection. It's not only excise and import duties that have fallen in recent months, there is also a decline in the collection of value added tax (VAT).  According to the government data, the collection of VAT has fallen by 14.6% to Rs 153 billion in the first seven months of the current fiscal year compared to Rs 179 billion in the same period of the last fiscal year. The decline in the collection of VAT is an indication of lower demands in the market. VAT is a kind of a tax that the government collects on the consumption of goods or services at each stage of the supply chain where the value is added.

Wholesale and retail traders say that they have observed a growing reluctance among consumers to spend like they used to do a few years ago. Sheskant Chhetri, who runs a readymade garment shop in Banasthali, is one such trader. “The business has fallen drastically in recent months. I do not know where the customers have gone,” says Chhetri. “Even those few customers who visit the shop do not want to buy much. The business has dried up. If this situation persists for some months, I do not have any choice except to sell or close the shop,” he says.

He estimates that his business has declined by nearly 50% in the last seven or eight months. Chhetri says he is struggling to pay rent and salary to his two staff. It’s not only Chhetri who is facing the downturn. One can see an uptick on the notices of stores or shops on sale. Similarly, business spaces, commonly known as shutters, displaying the notice of ‘To-Let’ have become ubiquitous in Kathmandu and other cities of the country. The growing number of vacant spaces available for rent is an indication that more businesses are getting closed, say business leaders. They say that consumers are cutting non-essential spending as the prices continue to rise in the market. From construction materials and apparels to electronic gadgets, the demand has either fallen or remained stagnant.

Auto Market hits a Roadblock
The auto dealers were doing brisk business until a year ago. It was considered a vibrant business. However, such is not the case anymore. It is the sector that was hit hard, first by the pandemic and then the liquidity situation of the banking sector. The government’s decision last year to impose a ban on the import of vehicles nearly delivered a death blow to the already struggling automobile market.

According to NADA Automobiles Association of Nepal, 60 car showrooms were closed across the country after the government decision, while 100 more are on the verge of closure. There are some hopes of a revival in the auto market after the government decided to roll back the eight-month ban. However, the market is yet to return to normality even after two and a half months of the removal of the ban. Although imports have resumed, auto dealers are struggling to find buyers. They say that the shortage of loanable funds in the banking system and the central bank’s tightening of auto loans, including the provision to make 50% upfront payment for the financing of the vehicle, is affecting their business. According to NADA, 80-90% of vehicles are sold on bank financing.

“The central bank has increased the risk weightage for auto loans to 150%. They have to put a 50% cash margin for vehicle imports. For buyers, they can get only 50% financing while they have to make 50% down payment for the purchase. These restrictions are deeply troubling for the auto dealers,” says Dhruba Thapa, President of NADA. “We are not hopeful of business revival until the central bank and the government corrects some of its policies.”

While dealers complain about low sales, those in the automotive recondition business say that there is a rise in the sale of used cars. “There are a lot of people coming to our reconditioned house to sell their cars. Earlier, most of the cars used to be the old ones. Now, more and more people are coming to sell their cars that have not been more than one year,” says Hari Ram Shrestha of Motor Recondition House. “But, we are thinking of halting the purchase for a few months, as there are not many buyers in the market currently.”  

However, there has been some attraction on electric vehicles following the government’s decision to lower the customs and other taxes. According to the Department of Customs, a total of 2,198 units of electric vehicles worth Rs 6.16 billion have been imported in the first eight months of the current fiscal year. The import figure is higher than the total imports in the last fiscal year 2021/22 when Nepal imported 1,807 units of electric vehicles.

Construction materials industry suffers
Despite huge potential, the construction materials industry is now suffering from the slowdown. According to industry leaders, their business has fallen by nearly 50% in recent months.

For a few years after the earthquake, construction business was booming. Reconstruction activities following the earthquake were driving the boom in the industry. Even when the reconstruction activities were subsiding after a few years of the 2015 earthquakes, the construction industry leaders were optimistic from the promises and plans of the government to boost its spending on development projects to bridge the infrastructure gap in the country. But, the pandemic not only dampened the confidence of the industry leaders, but also hit their businesses.

The construction materials industry was gradually recovering after the pandemic. However, the demand in the market has slumped in recent months. With the fall in the demand, industries are considering production cuts. They attribute the slump to the tightening of bank loans. As banks have been turning away many clients for home loans and residential buildings, the demand for construction materials has declined. Higher interest rates have also discouraged many to start construction in recent months. This has resulted in lower demands for construction materials like cement, steel, bricks, paints, woods and tiles, among others.  

Mahendra Bahadur Chitrakar, Chairperson of the Federation of Nepal Brick Industries, said the brick manufacturers have lost billions of rupees because of the pandemic. “The brick industries are already facing huge losses. Many of the industries are closed. Even those who are still in operation are facing hard times,” said Chitrakar. “It's difficult for people to get loans from banks. Even if they get, the interest rates are very high. People’s purchasing power has not gone up. So many people have abandoned their plan to build houses. Its difficult to sell bricks in the market. Whatever they sell, it’s at a loss.”

The situation is no different for other construction materials industries like cement and steel. They are also cutting production as the supply outstrips demand in the market. They say that they are currently in a ‘wait and watch’ mood. According to manufacturers, construction materials industries are operating a way below their capacity. They estimate that most of the industries are operating at 20-40% of their capacity.  

If the government spending on the development projects had gone up, it could have provided some relief to these industries facing slump from the demands for private sector construction projects. However, the government’s weak capital expenditure has further exasperated the woes.  

The slowdown in the business is something that rating companies are now considering as a risk for many industries who have to get the rating to acquire loans above Rs 1 billion from banks. In credit rating statements of many construction-based companies, ICRA Nepal has been adding its concern about the slowdown. “The concerns remain heightened given the tight banking sector liquidity, high interest rate environment, high debt burden on the company and general moderation in construction-related activities in the recent quarters,” read ICRA Nepal’s rating statement for one of the companies.

Real estate under pressure   
Real estate sector had remained bullish for a long time. Even when other sectors were under pressure, land or real estate prices were rising continuously. While there has not been a correction in the prices, real estate business has remained stagnant in recent months. Real estate dealers say that the shortage of the loanable fund in the banking system has put the business of buying and selling properties and land plots under pressure.

Some of the top businesses, including a five-star hotel, were trying to sell its land to get rid of the pressure from the banks for loan servicing. However, they are struggling to find buyers of the land even after offering it at half of the market price. In Kathmandu Valley alone, the real estate transactions have gone down by 60%. According to the data of the Department of Land Reform and Management (DOLRM), a total of 24,138 property transactions were conducted in the first seven months of the current fiscal year 2022/23, down from 61,838 in the same period of the last fiscal year.

Shantabir Lama, a real estate agent in Bhaisepati of Lalitpur, told NewBiz that he has been struggling to find buyers for over 25 land plots, many of which were sold multiple times immediately after the ‘plotting’ in 2018.

“I never thought that the land transactions would cool off like this. Landowners do not want to sell their property at a price lower than their procurement cost. The price has not increased either. It's stagnant,” said Lama. “If bank loans continue to remain tight and interest rates remain high, people facing cash shortage will have no option to sell even at lower prices,” he added.

Stock market correction
Even when most of the sectors of the economy were suffering during the pandemic, the stock market was performing well. The stock market was on a bullish trend. Stocks were rising. The bull run was not only gaining attention, but also attracting new investors in the market.

From an all-time-high of 3,025.83 points on June 14, 2021, Nepal Stock Exchange (Nepse) benchmark index tumbled to 1,908 points on March 30 this year. Most of the listed companies have witnessed a fall in their stocks while many investors have faced losses or at least decline on their paper value.

It’s not only the performance of the listed companies that has plunged the market. Stock investors and analysts attribute the fall in the market to the rising interest rates as well as the stress on the economy. The uncertainties resulting from the worsening performance of the country’s macroeconomic indicators have weakened the confidence of the investors. As the stock market is considered a mirror to reflect the economic position of a country, some economists warn that the current bearish trend could be a flash sign for the beginning of the recession. They blame the government’s reluctance to address various challenges facing the stock market including the liquidity issue.

Nepal Rastra Bank has remained cautious to curb the excess flow of the bank loans toward the stock market, which was largely benefitting from ‘cheaper and easy loans’ available until 2021. With the tightening of the financial condition, share prices have started to decline. The daily turnover has also declined significantly, reflecting a fall in the trading volume and transactions. Compared to a daily turnover of Rs 5 to 10 billion in 2021, the average turnover in recent days stands at Rs 1 billion. Stockbrokers say that the trading floors are also getting quieter in recent months as many investors have quit the trading after facing losses due to heavy correction in the market.

The exodus of the investors from the market who had entered the market during the pandemic is also blamed for the fall in the stock market. According to Nepse, the number of demat accounts has reached over 5 million. Out of the total dormant accounts, 1.5 million accounts were opened in the fiscal year 2020/21 alone.

Even those companies that were planning to go public have currently paused the process due to the bearish trend. Worried with the possibility that their offering may not be fully subscribed, these companies want to wait until the market situation improves.  Public offerings of over two dozen companies worth Rs 24 billion are in the pipeline, according to the data of Securities Board of Nepal (Sebon).

Stock market leaders and organisations are now putting pressure on the government to take measures to address the challenges of the stock market. They believe the government initiatives—even the symbolic gestures—could provide a relief to the market. However, economists say that there is a need for broad reforms that can boost the economy. The improvement in the economic indicators could help reverse the current bearish trend, they say.

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