Economy on recovery path: NRB

By A Staff Reporter,Kathmandu, Apr. 25: Domestic macroeconomic situation has shown signs of recovery, although challenges still persist. 

The Financial Stability Report for the fiscal year 2023/24 made public by the Nepal Rastra Bank on Wednesday showed positive trends, including subdued inflation, a robust external sector, and an improvement in GDP growth compared to the previous fiscal year.

Despite risks and vulnerabilities to the economic outlook, the domestic financial system remained resilient during the review year. 

The banking sector demonstrated its ability to withstand turbulences arising from both domestic and global financial conditions. 

This resilience was reflected in key financial soundness indicators such as capital adequacy, liquidity, and leverage, all of which remained well above regulatory standards. However, the steady decline in asset quality has raised concerns.

 In this context, maintaining financial stability while sustaining a high growth trajectory will require cautious, proactive, and prudent oversight from all regulators of financial system, read the report.

The banking system experienced ample levels of liquidity, which has led to a decline in interest rates on deposits and loans, it said. 

However, the credit growth has remained lower than the projections. 

"While these domestic indicators signal the resilience, the combination of subdued credit growth and fiscal underperformance underscores the need for targeted sector-wise policies to sustain recovery and address structural challenges," said the report.

Nepal's economic growth improved during the review year, said the report. 

According to the National Statistics Office (NSO), economic growth stood at 3.87 per cent in the fiscal year 2023/24, higher from the growth of 1.95 per cent the previous year. 

The growth is largely attributed to the food services, electricity and gas, and transportation and storage sectors. On contrary, the construction and manufacturing sectors experienced contraction during the review year.

The agriculture sector grew by 3.05 per cent, and the non-agriculture sector by 2.9 per cent in the fiscal year 2023/24, compared to a growth of 2.7 per cent and 2.1 per cent, respectively, in the previous year. 

The industrial sector's growth remained weak in the non-agriculture sector. 

The manufacturing and construction sectors witnessed ups and downs during, before and after the pandemic, said the NRB. 

These sectors were on the rise before the pandemic, aligning with the period of stable economic activities. 

The manufacturing sector contracted by 9.03 per cent, the construction sector contracted by 4.39 per cent, and the GDP decreased by 2.42 per cent during the pandemic period. 

It highlights the severe impact on GDP caused by lockdowns, business closures, disrupted supply chains and shutdowns in the construction sites during the pandemic period.

The consumer price inflation showed a disinflationary trend driven by non-food inflation during the later months of the review year. 

The inflation which started to surge during the pandemic and continued its upward trend in the fiscal year 2022/23 recovered in the fiscal year 2023/24.

 The annual average consumer price inflation remained at 3.57 per cent in the fiscal year 2023/24, compared to 7.44 per cent a year ago. 

The non-food inflation showed slower growth than in the previous year, mainly driven by the lowering demand of the non-essential items and stability in energy prices.

The monetary sector expanded mainly with the support of external sources, it said. 

The broad money grew by 13 per cent in the fiscal year 2023/24 compared to 12.7 per cent in the previous fiscal year. 

The expansion of the monetary sector is shown by the surging up of credit to GDP ratio, said the report. 

The credit to GDP ratio which stood at 64.9 per cent in 2015, surged to 91.20 per cent in fiscal year 2023/2024. 

The total deposits of banks and financial institutions grew by 13 per cent from 12.3 per cent in the previous year.

The external sector demonstrated resilience as the remittance inflows, balance of payments, and foreign exchange reserves followed an increasing trend. 

The external sector remains stable, supported by 16.5 per cent increase in remittance inflows and favourable balance of payments.

The cautious accommodative monetary policy adopted by NRB, along with inflation and declining market interest rates, contributed to the growth of the monetary sector. 

The number of Banks and Financial Institutions (BFIs) has been gradually decreasing over the years due to the merger and consolidation policies implemented by the NRB. 

With the consolidation of microfinance institutions, the number of financial institutions decreased and has aided in strengthening the resilience of the financial system. 

During the review period, 10 microfinance institutions undergone the mergers and acquisitions process. As of mid-July 2024, the total number of BFIs stood at 107.

During the review year, the share of assets of BFIs in the financial system decreased slightly to 78.26 per cent as compared to 79.84 per cent in mid-July 2023.