Soybean oil accounts for 30% of country’s exports, inflation stabilises

The Nepal Rastra Bank released its eight-month macroeconomic and financial data this week. It also marks the eighth month of the Oli-led government, which is currently preparing the upcoming fiscal year’s budget. Here’s a highlight:

Overall stable inflation recorded this month

Inflation decreased by 3.75% this March, which was 4.82% in the previous year. Similarly, both food and beverage inflation as well as non-food and services inflation have risen by 3.49% and 3.97% this year compared to 5.59% and 4.07% respectively last year.

Under the food and beverages categories, prices of spices, vegetables and fish deflated by 5.17%, 1.24% and 0.74% respectively. Last year, the prices of these essentials had inflated by 28.17%, 14.07% and 0.98% respectively. 

The prices of other essential food items like pulses and legumes, milk and egg products, and fruits have increased by 7.80%, 3.19% and 6.82% respectively. Last year, their prices had risen by 11.22%, 7.1% and 2.2% respectively. The oil and ghee prices which had deflated by 11.79% last year has increased by 13.74% this year.

The non-food and services include essential service categories like health, housing utilities, transport, education and communication—their prices increased by 2.24%, 2.18%, 5.07%, 3.08% and 2.38% respectively. Last year, health increased by 3.43%, housing utilities by 2.76%, communication by 0.19%, education by 7.13% and transport decreased by 1.15%.

Overall, the inflation has remained stable this month despite the central bank’s continuation of expansionary monetary stance in its mid-term review which also had also targeted a 5% inflation rate. 

Soybean oil drives exports but trade deficit is still on the rise

Total exports have increased by 57.2% to NRs 158.17 billion compared to a decrease of 4% in the same period last fiscal year. Soybean oil now accounts for 30.3% share in the total exports of the current review period, which was just 19% in the last six months.

Its export value increased by over 500% from NRs 7.9 billion last year to NRs 47.9 billion. India remains the top export destination with nearly 100% of the refined soybean oil exported to India. The country imported crude soybean oil—a key input for the soybean oil exports—amounting to NRs 50.4 billion this eight month from NRs 9.3 billion in the previous fiscal year—an increase by 441.6%.

Meanwhile, total imports increased by 11% to NRs 1.15 trillion from NRs 1.03 trillion in the previous year. Import of petroleum products, the country's top import with a share of 16%, decreased by 3.6% this fiscal year. 

The decline can be attributed to the growing popularity and imports of electric vehicles despite the 10% increase in customs duty during last year’s budget.

According to data from the Department of Customs, China and India dominate the country’s EV imports with a respective market share of 79% and 20% in the total import amounting to 16.7 billion rupees.

The overall trade deficit increased by 6.2% to almost a trillion (NRs 987.4 billion) from NRs 929.6 billion in the previous year. While deficits increased with China and other countries, the country’s deficit with India has decreased by 1.1%.  It dominates foreign trade with 62.4% share in total trade value of NRs 813.7 billion between the two countries—61.9% share in total imports and 61.3% in total exports.

Meanwhile, PM Oli recently concluded the first official state visit to Thailand in its 65 years of bilateral ties. The visit is considered a stepping stone in view of the country’s limited economic relationship with Thailand despite historic ties.

Remittance still a key driver of the current accounts

Remittance continues to increase—this time by 9.3% reaching NRs 1,051.8 billion, which is half less than the increase of 18.3%  [NRs 961.2 billion] last year. In dollar terms, remittances have increased by a relatively modest 6.9% to $7.74 billion compared to an increase of 16.1% in the previous year. 

The number of Nepali workers taking first-time approval and renewing their entry has risen to 317,068 and 217,403, reflecting increases of 11.1% and 18.9% respectively. Last year workers taking first-time approval and renewing entry had decreased by 18.42% and 5% respectively.  

The current account of the country remains at a surplus of NRs 180.08 billion compared to a surplus of Rs 167.45 billion last year. 

The Foreign Direct Investment (FDI) has increased by 50.8% to NRs 8.49 billion this year from NRs 5.63 billion last year. Remittance remains a key driver of current account surplus with 67.5% share in the current accounts, similar to its previous year’s share of 68%.

The Balance of Payment (BoP) remained at a surplus of NRs 310.37 billion this year compared to NRs 327.55 billion last year.

Fiscal deficits decline but budget targets remain unachievable

The country saw a decreased fiscal deficit of NRs 119.01 billion in mid-March this year compared to a deficit of NRs 162.53 billion in the same period last year. 

Total expenditure has grown by 4% to NRs 839.36 billion this year. Recurrent expenditure has grown minimally by only 0.3% from NRs 582.11 to NRs 582.13 billion when compared between the two years.

Capital expenditure which had decreased in the previous year by 3.6% has increased by a modest 1.4% in this year’s review period from NRs 81.21 to NRs 82.24 billion. 

Meanwhile financial expenditure grew by 25.1% this review period from NRs 138.26 to NRs 172.89 billion. 

On the revenue side, Nepal’s revenue has increased by 12.7% to NRs 720.35 billion from NRs 639.05 billion last year. Tax revenue with a share of 88.7% makes up the majority of total revenue. Due to Nepal’s high imports, VAT, customs and income tax make up the majority of the tax revenue — 29%, 20% and 24% respectively. 

The country’s initial targeted expenditure for the current fiscal year was NRs 1.86 trillion which was slashed to NRs 1.69 trillion. Yet the budget performance is underwhelming. In eight months the country has spent just 50% of the revised target expenditure. Similarly target revenue collection was also reduced from 1.59 trillion to 1.48 trillion — only 48% of it collected till the end of eight months. 

Yet, the expenditure ceiling for the next budget is set at NRs 1.9 trillion, which is 12.4% more than the current revised and reduced budget. This creates concerns about this year’s budget following the same norm of unrealistic targets, only to revise later.

Additionally, the government had earlier targeted an ambitious growth rate of 6% for the fiscal year 2024/25, which was impractical at the outset. Now both the IMF and the ADB are forecasting a growth around 4.2%.