October 18: The country’s economy, which was affected by the impact of the Covid-19 pandemic and the Russia-Ukraine war, is gradually starting to return to normalcy.

The Economic Research Department of Nepal Rastra Bank (NRB) published a report on Tuesday that showed that the external sector of the economy has become stronger and the internal sector is also gradually catching up in the first two months of the current fiscal year.

The Current Macroeconomic and Financial Situation Report of NRB based on data of the first two months of the current FY mentions that the indicators of the external sector including the balance of payments, foreign exchange reserves have reached a comfortable level. Similarly, as the deposits and credit flows of banks and financial institutions have been positive, it indicates that the internal economy is also starting to return back on track. Due to the increase in service income from tourism and other inflow of remittances, the foreign currency reserves have reached the highest point so far. Similarly, as the deposits and credit flow of the banks have also started to increase, there are signs that the internal economy is gradually returning to normalcy.

Banking expert Parshuram Kunwar Chhetri added, “Some signs of improvement are seen in the economy. Now NRB should work to ease the situation through monetary policy.”

Remittances continue to grow

According to the data of NRB, the remittance inflow increased by 22.1 percent and reached Rs 228 billion by mid-September of the current year. In the same period of the previous year, the remittance inflow increased by 19.8 percent. Similarly, the remittance inflow in US dollars increased by 17.7 percent and reached 1.73 billion, which were 11.3 last year.

Post-Covid-19 pandemic, there has been a positive impact on remittances due to the increase in the number of people going to work abroad and the government's policy of encouraging remittances through formal channels. In the same way, when the remittance received formally is kept in the bank, arrangements have been made to give an additional 1 percentage point of interest.

The remittance sender is also encouraged by reservation given in the ordinary shares issued by public companies.

Abroad study increasing the loss of service income

Although there has been some relief in the trade deficit, as the number of Nepalis going for studies abroad is high, the travel expenses have started to increase at a high rate. In the 2nd month of the current fiscal year, travel expenses increased by 76.5 percent and reached Rs 35.6 billion. Out of this, the expenditure towards education is Rs 23.33 billion, according to the NRB report. By mid-September, the tourism income increased by 53.9 percent and reached Rs 9.34 billion, which was Rs 6.7 billion in the same period of previous year.

As expenses are higher than income, the net service income is at a loss of Rs 25.34 billion as of mid-September, which was Rs 19.26 billion last year. During the same period, the total trade deficit decreased by 4.7 percent and remained at Rs 233.30 billion.

Exchange rates and foreign exchange reserves high

As of August of the current fiscal year, the current account remained at a surplus of Rs 53.61 billion, which was at a loss of Rs 20.81 billion last year.

The total foreign exchange reserves, which stood at Rs 1539 billion till mid-July, increased by 3.9 percent and reached Rs 1598 billion in mid-September. With the increase in foreign exchange reserves, the country’s ability to meet the import of goods and services has also strengthened. Based on the data of two months of the current FY, the foreign exchange reserves of the banking sector are sufficient to support 12.6 months of import of goods and 10.3 months of import of goods and services, according to the report of NRB.

Earlier last year, NRB and the government took a policy of tightening the imports after the foreign exchange reserves fell to a low point and the imports were restricted for 6 months. In addition, to the government banning the import of luxury goods, NRB also adopted a strict policy on loans used for imports and going to non-productive sectors. As the external indicators of the economy eased, the government and NRB have become flexible. The NRB has already reviewed its tight monetary policy.

With the external indicators of the economy becoming comfortable, the internal situation is showing signs of returning to normalcy, deposits and loans of banks and financial institutions have started to increase, while interest rates have been decreasing.

Pressure on inflation

Although the indicators of the external sector of the economy are strong, there is pressure on inflation. In the month of September, the consumer price increase is 8.19 percent. Compared to the same period last year, inflation has decreased, but it has increased compared to the previous month this year. Last year, the consumer price inflation in September was 8.64 percent. Similarly, in August of the current year, the consumer price inflation was 7.52 percent.