27th July, Kathmandu. Inflation increased at a high rate in the market, the report of the Nepal Rastra Bank showed that the inflation rate had reached a six-year high last May. The overall inflation rate has reached 8.56 per cent in June/June of the current financial year.
Prakash Kumar Shrestha, Chief and Executive Director, Department of Economic Research, NRB, says that inflation has reached its peak after the financial year 2072/73.
Inflation in August 2012 was 7.9 per cent. After that, the inflation rate, which was in the required range, has again reached 8.56 points after six years. According to the NRB report, such inflation in the first 11 months of the last financial year was 4.19 percent.
According to the central bank, inflation stood at 7.43 per cent in the food and beverage group and 9.44 per cent in the non-food and services group. The price of Ghee oil has increased by 22.60 percent in June this year as compared to the same month last year.
Similarly, the prices of dairy products and eggs increased by 11.22 per cent. The prices of tobacco increased by 9.70 per cent, while the prices of alcoholic beverages and pulses and nuts increased by 9.68 per cent and 9.13 per cent, respectively.
Under the non-food and services subgroup, transportation reached 25.79 percent, education at 11.64 percent and furnishing and home appliances at 8.21 percent. Similarly, inflation in the entertainment and culture and household sub-sections rose to 8.21 per cent and 7.84 per cent, respectively.
Inflation in Kathmandu has nearly tripled during the review period. Inflation in the first 11 months of the current financial year is 8.32 per cent in Kathmandu Valley, 8.29 per cent in Terai and 9.28 per cent in Hills. Similarly, the inflation rate in the Himalayan region reached 8.92 percent. Such inflation during the review period was 3.87 per cent, 4.47 per cent, 4.32 per cent and 1.73 per cent, respectively.
BOP shrinks, forex rises
While forex reserves have declined, there has been a partial recovery in June. The balance of payments deficit has narrowed. There has been some improvement in the position of foreign exchange reserves and balance of payments due to the government’s provision of cash margins and tightening of imports of various commodities. Similarly, the stock position has also improved with increase in remittances, improvement in service income including tourism.
The country’s balance of payments has reached a deficit of Rs.
From the first year of this financial year, inflows have come down due to higher imports, weak exports, sluggish remittance flows and weak tourist arrivals. This is causing continuous loss of balance of payments.
15.15 billion in the same period last year. According to the Nepal Rastra Bank, the balance of payments, which was at a deficit of USD 148 million in the corresponding period of last year, has been at a deficit of USD 2.26 billion in this financial year.
According to Nepal Rastra Bank, the current account deficit stood at Rs 595.73 billion during the review period. 289.11 billion in the same period last year.
Capital transfers declined by 32.9 per cent to Rs 9.49 billion during the review period. However, net foreign direct investment grew by 7.1 per cent to Rs 17.35 billion. Foreign investment in the corresponding period of last year was only Rs 14.15 billion.
In the 11th month of the current financial year, remittances worth Rs 904 billion have been received. In June alone, remittances worth Rs 93 billion have been received.
According to Nepal Rastra Bank, there has been a growth of 3.8 per cent in remittance flow in the current financial year as compared to the previous financial year. There was an increase of 12.6 per cent in remittance flows in the corresponding period of last year. In US dollar terms, remittance flows grew 1.5 per cent to Rs 7.51 billion. There was an increase of 10.5 per cent in such flows last year.
As of May, the number of Nepalis seeking final labor approval (institutional and individual—new and valid) for overseas employment has reached 313,367. In the corresponding period of the previous year, such numbers had come down by 68 per cent.
Similarly, the number of Nepalis seeking re-employment for overseas employment has doubled to 259,091 during the review period. In the corresponding period of the previous year, there was a decrease of 52.1 per cent in such numbers.
Forex reserves improved slightly in June. The forex reserves stood at Rs 1,176.84 billion as of mid-June.
Such reserves stood at Rs 1,146.88 billion in mid-April. In the same month, there was an increase of Rs 29.96 billion in reserves.
According to data released by Nepal Rastra Bank, total foreign exchange reserves declined by 15.9 per cent to Rs 1,176.84 billion in June 2079.
According to NRB, in US dollar terms, such reserves declined by 19.6 per cent to Rs 9.45 billion in mid-June 2079 from Rs 11.75 billion in mid-July 2078.
Of the foreign exchange, Rs 10.31 billion is with the central bank and the remaining Rs 144.95 billion is with other banks.
Based on 11 months of imports in FY 2078/79, the banking sector’s foreign exchange reserves would be sufficient to support 7.53 months of imports of goods and 6.73 months of imports of goods and services.
In May, the foreign exchange reserves were sufficient to support 7.34 months of imports of goods and 6.57 months of imports of goods and services.
In mid-June 2012/13, the ratio of foreign exchange reserves to GDP was 24.3 percent, total imports were 56.1 percent and the broad money supply was 22.0 percent.
Bank interest rates the old fashioned way
Loan interest rates in banks and financial institutions have come close to ‘pre-covid’. According to Nepal Rastra Bank, the weighted average interest rate on deposits of commercial banks reached 11.54 per cent in mid-June of the current financial year. In mid-April 2076, the weighted average interest rate on loans from commercial banks stood at 11.77 percent.
The average base rate of commercial banks has reached above pre-covid. The base rate for commercial banks has increased from 9.36 per cent in March 2012 to 9.39 per cent. In July 2012, the base rate for commercial banks was slashed to 6.86 per cent.
The reduced interest rates coupled with increased liquidity in the banking system during the COVID-19 period, has been rising gradually from the second quarter of the current financial year. The weighted average interest rate on loans, which stood at 8.43 per cent in mid-July 2012/13, has risen by 3.11 per cent over the past nine months. The interest rate on investment loans continues to rise. NRB officials say that the interest rate on new loans has reached above ‘pre-Covid’.
As interest rates on deposits have risen, so have interest rates on loans. The weighted average interest rate on deposits declined to 6.65 per cent in mid-July 2078 from 6.74 per cent in mid-April 2076. However, the weighted average interest rate on deposits increased to 7.34 per cent in May 2012.
The interest rate on deposits has also reached above ‘pre-covid’. NRB Governor Maha Prasad Adhikari has said that the interest rate should be increased to control it. This is likely to push interest rates up further.
What is Expanded Money Supply?
In the current monetary policy, the Nepal Rastra Bank has projected broad money supply expansion to 18 percent and private sector credit expansion to 19 percent, with a target to keep inflation within 6.5 percent. However, as the fiscal year comes to a close, inflation has crossed 8 per cent despite credit expansion and a slowdown in the broader money supply.
In the 11 months of FY 2078/79, the broad money supply grew by only 3.9 percent and the monetary sector’s claims against the private sector increased by 15 percent.
Since the credit expansion of banks has not increased much in June, there is no possibility of increasing the monetary sector’s claims on the private sector. However, while deposits in the banking system are improving, the broad money supply will remain below target, albeit slightly higher.