In its latest update, IMF revised Nepal’s economic growth to 6.5 percent in the current fiscal i.e. more than what it said in its last review. The earlier IMF projections in its World Economic Outlook report show only 5 percent growth for Nepali economy.

“Following a prolonged period of subdued growth, economic activities in Nepal have picked up in recent years. Supported by greater political stability and reliable supply of electricity, the growth is expected to reach 6.5 per cent in 2018-19, on expanding post-earthquake reconstruction activity, services and manufacturing,” reads a statement in the Article IV Consultation Report of IMF released on December 13, 2018.

An IMF team led by Geert Almekinders visited Nepal on December 2, 2018 for discussions on the 2018 Article IV consultation.

The new outlook recommended Nepal to balance its economic growth trajectory, alongside keeping a close watch on the rising fiscal and current deficits that increased outflow of foreign reserves.

IMF also recommends tight policy measures to keep up with the current economic scenario, deal with the internal & external pressure and achieve a durable economic expansion; it suggests higher interest rates, smaller fiscal deficit and tighter macro-prudential policies (than the budgeted).

It also cautions the government to ensure that the general budget won’t increase further in the process of implementing fiscal federalism.

Lauding the government for its efforts towards taxation and consolidation of expenditure through the Public Expenditure Review Commission, IMF suggests to slow-down on distribution of resources and responsibilities to the provinces and state governments.

IMF urged the government to also control the credit growth stating, “while credit growth has helped spur growth over the past several years, high pace of expansion raises stability concerns,” and also suggested to deny any measures that cause credit rise.

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Citing to Monetary Policy 2018-19 unveiled on July 12, 2018, bankers stated that the new provision of borrowing in Indian currency will not serve the purpose because of the 25 percent threshold limit set on the same.

Bankers expected the revision of the threshold limit set on core capital in the new policy and that did not happen concerning the bankers.

Perennial Challenges & Deep Crunch
While core capital of the Nepali banking industry stands at Rs 320 billion, banks can only get 25 percent of it in loan i.e. Rs 80 billion.

“The provision will have limited impact as the ceiling of 25 percent has not been revised,” says Anukool Bhatnagar, Managing Director, Nepal SBI Bank.

Nepali banks have been facing perennial problems due to credit crunch, which resulted in high lending rates. To address this concern, SBI had proposed to borrow from India to meet the full requirements of the Nepal’s banking industry.

In response, the Nepal Rastra Bank (NRB) came up with a special provision dealing away with concerns related to exchange rate risk in borrowing the convertible foreign currency, by facilitating ways for fixed interest rate with Indian side.

“The country does not have strong reserve position of Indian currency. While repaying loans borrowed in Indian currency, the country might have to sell dollars in the Indian market to provide Indian currency to the banks to pay back their loans,” says Nara Bahadur Thapa, Executive Director, NRB.

According to Thapa, the exchange rate risk in convertible foreign currency is similar to that in case of dollars though Nepal and India enjoy a fixed exchange rate regime.

As per the Central Bank records, Nepal has been investing in dollars to borrow Indian currency, which currently stands at INR 257 billion i.e., 23 per cent of Nepal’s total foreign currency reserve.

Addressing Gaps
To get away with this risk of borrowing Indian currency, Nepal is looking at increasing its reserves in Indian currency.

Exports, tourism and Nepali migrants in India are currently acting as major sources of Indian currency for Nepal.

However, the country has been spending its Indian currency reserve owing to large concentration of imports on Indian side and payments being made in Indian currency for transport logistics, medical and study visits to India, among others.

Let’s hope the Nepal Central Bank will create a level-playing field to address the local economic concerns while also balancing the growing credit crunch of Nepali banks with foreign currencies, especially the Indian currency.

Also Read: Nepal Monetary Policy 2018-19

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