Nepal Rasta Bank’s FY24 monetary policy aims to boost recovery amid economic challenges: CareEdge

According to CareEdge Ratings, the government has set an annual expenditure target of NPR 1.75 trillion for FY24, representing a 2.4% decrease from the previous fiscal year’s allocation but reflecting a substantial increase of over 16% compared to the revised estimate. Within the allocation, NPR 1.14 trillion (65%) has been earmarked for current expenditure, NPR 302 billion (17%) for capital expenditure, and NPR 308 billion (18%) for financing.

It also noted that the government intends to achieve its revenue targets through a series of initiatives, including leveraging digital technology for revenue administration, curbing revenue leakages, broadening the tax base, and updating 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 improvement in revenue mobilization, 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, which now stands at 6.5%, is designed to stimulate growth amidst the prevailing economic slowdown.

In its report, the rating agency highlighted that while the policy rate has been lowered, the bank rate remains unchanged at 7.5%. Notably, 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 reported 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. However, food inflation registered a slight increase, standing at 5.7% year-on-year, with specific food items experiencing noteworthy price upticks.

Regarding external trade, CareEdge Ratings pointed out that Nepal’s trade deficit has demonstrated improvement, with imports declining by 8% year-on-year in June. On the other hand, 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 commended 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 a repricing of US Federal Reserve rate hike expectations and the Nepali rupee’s pegging to the Indian currency.

Despite the positive developments, CareEdge Ratings acknowledges the economic challenges that persist 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 emphasized that the coordinated efforts of the prudent fiscal policy and the supportive monetary policy by Nepal Rasta Bank are expected to provide the much-needed impetus for economic recovery in the forthcoming fiscal year.

Updated: 27 Jul 2023, 07:15 PM IST