Macroeconomic and Financial Situation Report

Current account, BoP slip into deficit

Published On: September 23, 2017 04:17 AM NPT

KATHMANDU, Sept 23: Current account and balance of payment (BoP) of the country slipped into deficit in the first month of the current fiscal year 2017/18, aggravating the country's external sector vulnerabilities.

According to the 'Current Macroeconomic and Financial Situation of Nepal (Based on First Month's Data of 2017/18), released by the Nepal Rastra Bank (NRB) on Friday, the current account registered a deficit of Rs 5.43 billion in the first month (mid-July/mid-August) of the current fiscal year while the overall BoP reached Rs 3.29 billion in the same period. 

The current account and BoP both were on a negative side in the corresponding period in the last fiscal year 2016/17. The current account was in deficit of Rs 2.32 billion in the same period last year while the BoP had registered deficit of Rs 2.11 billion. 

Current account and BoP are major indicators of the economic health of a country. While the BoP refers to the sum of all transactions between a nation and all of its international trading partners, while the current account position is the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers.

The Current account and BoP deficit are attributed to the widening trade deficit of the country. While the country's merchandise import has continued to climb up at a faster pace, export has fallen to the level of pre-earthquake period of 2015. Nepal's merchandise imports grew by 9.3 percent to Rs 77.28 billion, while merchandise exports fell by 3.9 percent to Rs. 6.68 billion in the review month. In the same period last year, merchandise imports had gone up by 13 percent, while export has fallen by 7.7 percent.

NRB officials say that the deficit of two major macroeconomic indicators in the first month shows the vulnerability of external sector stability. “If these indicators continue to become a trend, it is going to hit the external sector stability of the country,” Nara Bahadur Thapa, an executive director of the NRB, told Republica. He says that that merchandise export, which has fallen to a negative level in the first month of the current fiscal year, is the main culprit behind current account and BoP deficits. 

“Merchandise exports generally mirrors the manufacturing sector of the country. The merchandise export falling to the pre-2015 level indicates that the industrial base of the country has weakened in recent months,” Thapa, who is also the chief of the Research Department of the NRB, told Republica. “The combination of continuous surge in merchandise import and export growth turning negative does not bode well for the country's external sector stability,” he added. 

Such warning of Thapa is manifested also in the macroeconomic outlook of the central bank. 

“The growth in government revenue has remained less than targeted.  Merchandise exports have fallen. Trade deficit has widened. Both current account and overall BoP are in deficit,” reads the monthly report of the NRB. “These developments, in case they continue, pose policy challenges for macroeconomic management in the future,” the periodic report added. 

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