Sneak Peek into the Economy

“Nepal plunged into recession after 60 years”, this line made headlines in almost every newspaper last April. Nepal’s economy is faced with inflation of 7.44% mid-march, which has raised the cost of living of people making survival very difficult. Businesses are facing loss and they admit that trade has declined compared to pre-covid scenarios. 

The Nepal government has predicted Economic growth of 2.16% this fiscal year which seems to be an underestimate compared to the Asian Development Bank and World Bank which have predicted an Economic growth rate of 4.18%. This does give some hope to the citizens but the dampened market does not show emerging rays of hope. Nepal is facing a slowdown in spending and manufacturing and trade is also negative. Even investments seem to be dampened. Businesses seem to be pessimistic which makes the condition even worse. The decreasing GDP growth (5.61% in 2022) to (1.86% in 2023) shows how spending has decreased along with net exports. People are hesitant to buy goods and services. People have started to think twice before buying as the prime concern now is to buy food and basic necessities. Imports continue to be restricted. The revenue collected in 2022 was around 800 billion Nepalese rupees which has decreased to around 690 billion Nepalese rupees signalling that there is a shortage of funds for the government to invest. 

The market seems to be facing a chaotic scenario as there is a huge uncertainty on “where is the money going?” Many experts believe that black money is not reinvested in the economy which means that banks lack deposits. When deposits are lacking, banks are not able to provide loans which raises the question of “Where is the money going?” This has somewhat contributed to rising interest rates. According to NRB (Nepal Rastra Bank), the interest rate of lending was 8.46% in mid-June 2021 which rose to 11.54% in mid-June 2022. This rising interest rate of lending increases the cost of borrowing which discourages spending in an economy, contributing to the worsening of the economy. 

Amidst all this, there is still some room for improvement. Remittance is said to have increased by 27% as of March. The government is said to have received funds from various international organizations. This has helped increase foreign exchange reserves. Last few days, some green signals have been seen in the stock market after severe depletion. On Sunday 18th June 2023, NEPSE increased by 52.26 points and reached 2094.33. This has boosted confidence among the people and in the economy. 

So what should the government do in such a scenario? The government needs to stimulate the economy so expansionary fiscal policy is recommended. Expansionary fiscal policy is when government spending is increased. This will stimulate spending in an economy which will increase aggregate demand and will shift to the right. This will help the economy to obtain economic growth and also helps increase employment. The government mostly uses this to close the recessionary gap i.e.: when potential GDP is greater than actual GDP. Government spending will increase the money flowing in an economy which will encourage spending. 

Tourism needs to be prioritized further, which is one of the major sources of income. The graph below was referred to from the Asian Development Bank Nepal, report. It shows that tourism has increased in Jan 2023 compared to Jan 2021, but it still hasn’t reached the before covid scenario. Tourism will increase the money in the economy and will stimulate its flow. This will encourage spending ultimately leading to economic growth. 

All in all, people believe that by the end of the year, the economy will be stabilized and will return back from the recession. 

-Preeti Pantha