Nepal’s economic trends: inflation, trade, and monetary shifts in focus

KATHMANDU: The Nepal Rastra Bank (NRB) has unveiled its latest analysis of the country’s macroeconomic and financial landscape, offering insights into the economic activities of the first four months of the fiscal year 2024/25. Compiled by the Economic Research Department at its Baluwatar headquarters, the report reflects key trends in trade, inflation, remittances, and fiscal performance based on data up to mid-November 2024.

Nepal’s economy witnessed significant developments in the review period of mid-November 2024, with consumer price inflation rising year-on-year (y-o-y) to 5.60 percent, compared to 5.38 percent in the same period last year. This moderate increase highlights inflationary pressures across various sectors, influenced by rising food and beverage prices, stable non-food services, and a marginal recovery in trade.

Inflation Insights
The overall inflation rate of 5.60 percent y-o-y is driven largely by food and beverage inflation, which surged to 9.10 percent compared to 5.98 percent in the previous year. Key contributors included:

Vegetables: Prices soared by 33.99 percent, indicating supply chain challenges or seasonal production issues.
Pulses and Legumes: Increased by 10.78 percent.

Cereal Grains and Products: Prices rose by 10.15 percent.
Ghee and Oil: Witnessed a 9.29 percent increase.

Conversely, certain sub-categories experienced deflation. The price of spices dropped by 1.41 percent, sugar and sugar products decreased by 1.28 percent, and meat and fish remained almost stable with a slight decrease of 0.02 percent.

Non-food and services inflation stood at 3.65 percent, lower than the 4.99 percent recorded a year earlier. Notable increments included:

Miscellaneous Goods and Services: Up by 10.41 percent.
Alcoholic Drinks: Increased by 6.35 percent.
Clothing and Footwear: Prices rose 4.57 percent.
Tobacco Products: Up by 4.24 percent.

Regional Inflation Trends
Inflation varied significantly across Nepal’s geographic and administrative divisions. In rural areas, the y-o-y consumer price inflation was 6.19 percent, surpassing the urban rate of 5.39 percent. Regionally, the highest inflation was recorded in the Mountain region at 6.78 percent, while Gandaki Province reported the lowest at 4.69 percent.

Among provinces:

Koshi led with a high 7.19 percent.

Madhesh and Sudurpashchim recorded 5.72 percent and 6.57 percent, respectively.
Bagmati Province posted 5.35 percent, while Karnali experienced the lowest inflation at 3.21 percent.

Wholesale Price Dynamics

Wholesale Price Inflation (WPI) reached 5.16 percent y-o-y in mid-November 2024, a substantial increase from 2.09 percent a year ago. The breakdown reveals:

Consumption Goods: Up 9.02 percent.
Intermediate Goods: Increased by 3.39 percent.
Capital Goods: Marginally rose by 2.86 percent.
Construction Materials: Declined 4.62 percent, reflecting subdued activity in infrastructure projects.
Trade and External Sector Performance

Merchandise Trade
Nepal’s merchandise trade showed a mixed recovery during the first four months of FY 2024/25:

Exports: Increased by 4.2 percent, totaling NPR 52.67 billion. Exports to India rose by 8.4 percent, while exports to China and other countries declined by 18.3 percent and 3.0 percent, respectively.

Imports: Slightly increased by 0.2 percent to NPR 513.39 billion. Imports from India and China grew by 0.9 percent and 2.9 percent, respectively, while imports from other countries fell by 5.0 percent.

Major export gains were recorded in soybean oil, tea, and polyester yarn. However, palm oil, zinc sheets, and readymade garments faced declining demand. On the import side, vehicles, edible oils, and telecommunication equipment saw rising trends, while petroleum products and gold imports decreased.

Trade Deficit and Export-Import Ratio
Nepal’s trade deficit narrowed marginally by 0.3 percent to NPR 460.72 billion. The export-import ratio improved slightly to 10.3 percent from 9.9 percent in the corresponding period of the previous year, indicating modest progress in balancing trade.

Fiscal and Monetary Developments
Government Expenditure and Revenue
Government expenditure during the review period totaled NPR 415.02 billion, with:

Recurrent Expenditure: NPR 292.53 billion.
Capital Expenditure: NPR 34.53 billion.
Financial Expenditure: NPR 87.96 billion.
Revenue mobilization amounted to NPR 323.24 billion, including NPR 289.90 billion in tax revenue and NPR 33.34 billion in non-tax revenue.

Remittance Inflows
Remittance inflows continued to play a pivotal role in Nepal’s economy, rising by 9.1 percent to NPR 521.63 billion. This marks a slower growth compared to the 22.5 percent increase a year ago. In US dollar terms, remittance inflows reached $3.87 billion.

Balance of Payments and Foreign Reserves
Nepal maintained a positive Balance of Payments (BOP) surplus of NPR 205.83 billion, higher than the NPR 150.24 billion recorded in the previous year. Gross foreign exchange reserves increased by 10.5 percent to NPR 2255.35 billion, sufficient to cover 18 months of merchandise imports and 15.1 months of total imports, including services.

Exchange Rates and Global Market Trends
Nepali currency depreciated by 1.02 percent against the US dollar during the review period, with the exchange rate standing at NPR 134.74 per dollar in mid-November 2024. Internationally, crude oil prices fell by 5.5 percent to $73.45 per barrel, while gold prices surged by 29.9 percent, reaching $2571.80 per ounce.

Banking Sector Performance
The financial sector displayed stable growth:

Deposits at Banks and Financial Institutions (BFIs): Increased by NPR 149.84 billion (2.3 percent).
Private Sector Credit: Grew by NPR 128.47 billion (2.5 percent).
Broad money supply (M2) expanded by 3.0 percent, reflecting improved liquidity conditions. However, reserve money saw a slower growth of 2.7 percent compared to 6.6 percent a year ago.

Outlook
While Nepal’s inflation rate remains moderate compared to historical trends, challenges persist in addressing disparities between urban and rural areas and tackling food price inflation. The trade deficit continues to weigh on the economy, despite encouraging signs of export growth. Strengthening remittance inflows and maintaining a healthy foreign exchange reserve are critical to sustaining macroeconomic stability.

The government’s ability to manage fiscal discipline, coupled with targeted monetary policies, will be pivotal in navigating these economic challenges and ensuring sustained growth in the coming quarters.