Nepal Rastra Bank (NRB) has reported some improvement in the flow of loans from banks and financial institutions to the private sector, indicating a modest recovery in the domestic market’s economic activities.
For a prolonged period, banks and financial institutions have faced high liquidity due to weak demand for loans. Consequently, the interest rates on both deposits and loans have declined. The accumulation of funds in banks has contributed to lackluster economic activities, preventing the government from achieving its revenue targets.
However, according to the Current Macroeconomic and Financial Situation Report of the country published by NRB on Tuesday, loans from banks and financial institutions to the private sector increased by Rs 73.39 billion during the first two months of the current fiscal year 2024/25. This reflects a 1.4 percent increase in lending compared to the same period last year. In contrast, during the same period last year, credit to the private sector increased by only Rs 33.60 billion, representing a mere 0.7 percent growth.
Leaders in the private sector expressed concerns that they are reluctant to take additional loans due to a lack of market demand. The National Statistics Office reported that both the manufacturing and construction sectors experienced negative growth last year.
To stimulate credit expansion, NRB adopted a more flexible monetary policy for the current year.
NRB has eased its stance on interest rates, guidelines for working capital loans, real estate financing, share trading, and provisions related to improving the operating profits of banks and financial institutions.
The central bank believes that these policy measures will promote credit expansion, as evidenced by the slight improvement in loan disbursements in the first two months of this fiscal year.
Despite the private sector’s claim that demand remains stagnant, the impact of weak demand is visible in the inflation rate. According to NRB, the year-on-year consumer inflation in August 2024 stood at 3.85 percent, significantly lower than the 8.19 percent recorded in the correpsonding month last year. In August, inflation in the food and beverages group was 5.03 percent, while inflation in the non-food and services group was 3.19 percent. Generally, low demand for goods and services results in subdued price increases. Additionally, inflation in Nepal is influenced by price trends in India and the country’s supply situation.
Meanwhile, the external sector of the economy remains strong. By August, remittance inflows rose by 15.2 percent to Rs 263.14 billion. In the same period last year, remittance inflows had grown by 18.7 percent. Remittances continue to be the primary source of foreign exchange for the country.
NRB reported that foreign exchange reserves have reached an all-time high. The country’s reserves increased to Rs 2152 billion in mid-September 2024 from Rs 2041 billion in mid-July 2024. According to NRB, the foreign exchange reserves of the banking sector is sufficient to cover the prospective merchandise imports of 16.8 months, and merchandise and services imports of 13.7 months.
The rise in remittances has bolstered foreign exchange reserves, even though imports have seen only a modest increase. In the first two months of the fiscal year, total goods imports grew by 1.1 percent to Rs 262.54 billion.
The current account remained at a surplus of Rs 49.69 billion in the review period compared to a surplus of Rs 23.97 billion in the same period of the previous year.
Similarly, Balance of Payments (BOP) remained at a surplus of Rs 101.77 billion in the review period compared to a surplus of Rs 55.1 billion in the same period of the previous year.