Yuba Raj Khatiwada: Overview of Nepal's recent macroeconomic
performances
Speech by Dr Yuba Raj Khatiwada, Governor of the Central Bank of Nepal, at the 43rd Asian
Clearing Union (ACU) Board of Directors Meeting, Kish Island, Iran, 23 May 2014.
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Honorable Chairperson Mr. Valiollah Seif, Fellow Governors and members of the ACU Board
of Directors, ACU Secretary General Mrs. Lida Borhan-Azad, Other attending delegates and
observers, ladies and gentlemen
Let me join fellow governors to express my sincere thanks to Governor Mr. Valiollah Seif and
the entire team of Central Bank of Islamic Republic of Iran for the warm hospitality extended
to us and also for the excellent arrangements made for the meeting in this beautiful Kish
Island. I also thank the Governor of State Bank of Pakistan for successfully handling the
chairpersonship of ACU for 2013 and the Secretary General of ACU for efficiently managing
the Union's operation during the same period.
Fellow governors and distinguished delegates,
We are meeting at this forum to foster regional trade through the promotion of a credible
payment system. While talking regional trade, we have our eyes on the global recovery from
the crisis, as it has significant bearing on our trade and investment activities. As we know,
the global economic growth has shown marginal improvements in the later part of the last
year and early part of the current year, impetus coming especially from advanced economies
with supportive monetary conditions and fiscal consolidation; but their growth remains
uneven. Inflation in these economies, however, has undershot projections reflecting
commodity price decline and output gaps. Activities in emerging market economies and
developing economies have not shown very encouraging trend, although they continue to
contribute more than two-thirds of global growth. The challenges of the emerging market
economies and developing economies have increased with financial volatility posed by
unexpected normalization of US monetary policy. Despite that low-income countries have
succeeded in maintaining strong growth reflecting better macro-economic policies, their
external environments remain challenging. In essence, the global recovery is still fragile
despite improved prospects and significant downside risks. The challenge to growth has
further fueled by recent geo-political risks, a sort of deflation in Euro zone and external
environment, which could result in further financial turmoil.
Fellow governors and distinguished delegates,
I take this opportunity also to shed some lights on Nepal's recent macroeconomic
performances. As an upshot of the economic and financial slowdown of the world economy
in recent years and its subsequent repercussion on the Nepalese economy coupled with
prevailing political instability, Nepal is grappling with the challenges of low economic growth,
inflationary pressure and vulnerable external sector. However, on the basis of recent
improvements in the domestic political and economic environment along with improvements
in world financial market and prospective outlook of the global economy in the year 2014, a
positive impact is expected in some major areas of the economy specially tourism, foreign
employment, foreign investments and exports. The outlook for 2014 is a higher growth of
around 5.5 percent, compared with less than 4 per cent in 2013, contributed mainly by sound
performance of agriculture sector. The consumer price inflation is expected to remain at
around 9 percent in 2014. On the external front, exports have increased slower than imports
thus further widening the trade deficit to nearly 30 percent of GDP. However, improvements
in the service incomes, grants and remittance inflows exceeding 31 per cent of GDP have
contributed to a surplus in the current account amounting to 4 per cent of GDP estimated for
2014. The overall balance of payments has registered a surplus for the last several years
and is estimated to remain at USD 1.05 billion in 2014. As a result of the balance of
payments surplus, gross foreign exchange reserves of the banking system have reached to
US$ 6.7 billion at April 2014; and the reserves of the banking system are sufficient for
financing merchandise imports of more than 11 months and merchandise and service
imports of more than 10 months.
Fellow governors and distinguished delegates,
In the fiscal sector, a higher rate of growth in resource mobilization relative to government
expenditure has resulted in budget surplus. Fiscal prudence over the last several years has
helped to confine outstanding domestic debt at 12.9 percent of the GDP. The country
remains lowly indebted, as outstanding total public debt, both domestic and foreign together,
accounts for little over 31 percent of GDP.
Due to strong balance of payments situation mostly contributed by high remittance inflows,
liquidity in the banking system has remained high for some time now. Monetary growth has
remained at 18 per cent in April 2014 on point to point basis while most interest rates have
come down to single digit. Despite high monetary liquidity, growth of credit to the private
sector remains within targeted band. Further, the degree of financialization is still low and
total credit of banks and financial institutions stands at just 63 per cent of GDP.
The financial sector strategy of the Nepal Rastra Bank has now been to consolidate the
institutional expansion along with ensuring wider and better access to financial services.
Hence, while merger of urban-centered institutions is encouraged, expansion of micro
finance institutions in the rural areas establishment of bank branches in the underserved
areas is given a priority. On the whole, financial policy comprises of a two-pronged strategy -
consolidating the urban financial institutions and expanding the institutional presence in the
rural areas. Bank licensing, bank branch expansion, refinance, and credit policies are geared
towards this direction. The NRB is of the view that the expansion of the financial sector will
be constrained without the growth of the real sector. Thus, priority has been accorded to the
productive use of bank credit to the promotion of the real sector through judicious use of
credit and macro-prudential policies. As a competitive, efficient and healthy financial system
is vital for enhancing economic growth, ensuring economic efficiency and maintaining
macroeconomic stability, a reasonable growth of the real economy is equally important to sustain
the expansion of the financial services.
As financial stability has been a primary concern of Nepal Rastra Bank, it has been
addressing pertinent issues such as productive use of credit, enhancing access to financial
services, deposit guarantee, exercise of macro-prudential measures, strengthened bank
supervision and enforcement of good governance measures. It has introduced some
measures such as early warning, prompt corrective actions, know-your customer, stress
testing and risk based supervision to ensure resilience of the financial system. We are also
embarking on a strong legal framework for anti-money laundering and financial crisis
management.
Fellow governors and distinguished delegates,
While going through the overall ACU transaction, trade routed through ACU in last three
years has declined significantly by about 30 percent, 37 percent and 8 percent in 2011, 2012
and 2013 respectively. Similarly, following the trend of preceding years, total transactions
have declined by about 12 percent during the first three months of the current year on y-o-y
basis compared to the figure of last year. Further, the trade is concentrated, primarily, within
a few member countries. All these facts warrant member countries to evaluate the trend; and
I urge all the fellow governors to rethink on how we can better serve the enshrined objectives
of establishment of the ACU mainly promoting regional trade and monetary co-operation
amongst the members.
As regards to our activities under ACU, the share of Nepal on total transactions of the ACU
member countries routed through ACU mechanism accounts for roughly 0.40 percent, which
is fluctuating around same figure over the last few years and its transactions during 2013 has
declined by about 30 percent compared to 2012. Similarly, there is a decline of its
transactions by about 23 percent over the first three months of the current year compared to
the same period of the previous year. Its exports to ACU member countries is hovering
around 5 percent of our total exports and the share of imports from ACU member countries
has been around half percent of our total imports excluding the trade data with India. As
more efforts are needed to promote trade through the ACU mechanism, Nepal Rastra Bank
is committed to work together with other member central banks towards creating an enabling
environment for the same.
In this opportune occasion, I would reiterate Nepal rastra Bank's commitment and belief in
the mission of our Union. I am confident that this meeting would be instrumental in exploring
new avenues of co-operation and further simplification in the existing payment mechanism in
the pursuit of fostering its effectiveness for facilitating trade amongst member countries and
enhancing monetary as well as technical co-operation among us. Before concluding, I would
like once again to thank Dr. Seif and the Central Bank of IR of Iran for the kind hospitality and
excellent arrangements made in hosting this meeting.
Thank you Mr. Chairman.