BoP, current account slip into deficit

Published On: January 19, 2018 01:48 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, Jan 19: Both Balance of Payment (BoP) and Current Account positions of the country slipped into deficit in the first five months of the current fiscal year 2017/18 amid widening trade imbalance of the country. 

According to the 'Current Macroeconomic and Financial Situation of Nepal (Based on Five Months' Data of FY 2017/18' released by Nepal Rastra Bank on Wednesday, the overall BOP remained at a deficit of Rs 9.27 billion in contrast to a surplus of Rs 28.78 billion in the same period of the previous year. Similarly, the current account registered a deficit of Rs 41.95 billion in the review period in contrast to a surplus of Rs 3.49 billion in the same period of the previous year.

BoP summarizes transactions between a country and the rest of the world. It classifies transactions under two headings -- capital account and current account. Current account refers to the difference between the import and export of goods and services.

“While the proximate cause has been the widening current account deficit, the underlying drivers of deficit have been the elevated level of imports and the decline in the migrant workers' remittances,” read the periodic report of the central bank. “However, the country has a comfortable level of international reserves which underpin the external sector stability.”

One of the underlying drivers of deficits is the ballooning trade imbalance of the country. The data shows that the trade deficit increased by 13 percent in the review period to Rs 397.79 billion.  While remittance was one of the factors that were helping to keep the BoP in a surplus situation for a long time, the slowdown in the workers' transfer has also contributed to the deficit.

According to the data, remittance flow decreased by 0.8 percent to Rs 285.48 billion in the review period in contrast to a rise of 6 percent in the same period of the previous year.
Though the external sector is under stress due to BoP deficit, the central bank is optimistic about the country's economic outlook. 

The available data indicate that the overall economic activities remain on track, according to the NRB.  “Rise in the industrial capacity utilization, growth in the import of raw materials, rebound in tourist arrival and pick up in reconstruction activities are reflective of this,” read the report. “However, agriculture is the key to determine the traction of growth outlook going forward.”

Meanwhile, inflation, as measured through consumer price index, is mildly on an upward trend in recent months. “Inflation rose to 4.2 percent in mid-December 2017 from 3.8 percent a year ago,” the report stated. According to the report, the rise in domestic fuel prices and the recent hike in prices of construction materials pose upside risk to inflation outlook in the near term.  “However, the annual average rate of inflation is expected moderate and remain below the annual forecast level,” it added.

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