With moderation in inflation and comfortable foreign exchange reserves, the Nepal Rastra Bank (central bank) adjusted its monetary policy stance by lowering the policy rate by 50 basis points to 6.5%, which is expected to help lower commercial interest rates and stimulate economic activities. Services are expected to perform well with expansions coming from real estate, wholesale and retail trade and accommodation and food services. Agriculture growth may however decelerate owing to deficient rainfall in June and erratic weather patterns, further aggravated by lumpy skin outbreak in cattle.
The report projects annual average inflation to fall to 6.2% in FY2024 from 7.7% in FY2023 on subdued oil price increases and a decline in inflation in India, Nepal’s main source of import.
Despite some progress in restoring price and external sector stability, fiscal challenges persist. While the estimated fiscal deficit for FY2024 is moderate at 2.4% of GDP, much lower than the deficit of 6.1% in FY2023, the actual deficit could be substantially higher if the government does not meet its ambitious revenue target for FY2024,” said ADB Principal Economist for Nepal Jan Hansen.
External risks remain relatively well contained. Considering the recent trends and the central bank’s prudent monetary policy stance, the target of maintaining foreign exchange reserves sufficient to sustain at least 7 months of imports seems achievable. Amid stable remittances and higher imports, the current account deficit is expected to widen to 1.8% of GDP as growth revives in FY2024.
Downside risks to the economic outlook in FY2024 may arise from more contractionary economic policy by the authorities to stem price rises given the uncertainties centered around geopolitical tensions. This may dampen consumption and domestic production and adversely affect growth.
