Nepal stares at recession amid depressing market conditionsEconomists and market analysts warn instability in the government could make matters worse.
At most of Kathmandu’s apparel stores, one poster is common nowadays: SALE.
But that’s not helping rev up sales.
The apparel stores have witnessed a slowdown in discretionary spending by consumers over the past few months, primarily because of inflationary pressures, reflecting how a slowing economy has dampened the market’s mood.
A credit crunch, real estate slowdown, tumbling stock market and rising unemployment have rattled the economy even as a new government was formed.
It’s summer now. And the demand appears to be even worse. Nepal’s economy seems weaker than many economists had thought.
The economy is entering a pronounced slowdown due to the impact of the months-long import ban and the government's low capital spending. Political instability has added to the woes.
In this year’s annual budget, the government targeted eight percent economic growth. But after six months, the mid-term review slashed the projected growth to nearly half that.
The International Monetary Fund (IMF) has also lowered Nepal’s growth rate from its initial estimates. The IMF said Nepal’s economy is expected to expand by 4.4 percent this fiscal year—from mid-July 2022 through mid-July 2023.
“The consumers spent cautiously due to high inflation,” said Govinda Nepal, an economist. “Nepal’s economy is weaker than many had thought.”
Nepalis are not buying cars, furniture, gold and clothes. They are spending less at restaurants and purchasing less goods for their homes.
“The consumers are cutting their budgets almost everywhere,” said Nepal.
The politicians seem unbothered. The newly-formed government lost confidence within two months, sending everything into the doldrums.
“We see the country gradually moving to recession,” Nepal said.
According to the Nepal Rastra Bank, the year-on-year consumer price index of goods and services increased by 8.68 percent and furnishing and household equipment rose by 8.33 percent during the first half of the current fiscal year.
Clothes and footwear inflation increased by 6.43 percent, while transport inflation went up by 16.43 percent in the review period.
Economists say the deceleration in retail sales could slow economic growth further.
Traders say the high-interest rates and depreciation of the Nepali rupee have turned the market sentiment gloomy.
“After slowing winter sales, we may suffer this summer too. There is no business at all,” said Ashok Kumar Shrestha, president of the Nepal Trans-Himalayan Border Commerce Association.
“The high-interest rate has made traders think twice before importing goods.”
Although the burden of the increased dollar and transport costs are added to the goods’ price and passed on to the consumers, traders are increasingly worrying that people are not buying because of a recession-like situation.
According to the Central Bureau of Statistics, the economy grew at 0.8 percent in the first quarter of the current fiscal year as compared to the same period last fiscal year. It is the lowest year-on-year growth in the past seven years, triggered by slowed trade and deceleration of the construction and mining sectors.
According to the bureau, if the growth rate of the first quarter of the current fiscal year is compared with the fourth quarter growth rate of the last fiscal year, it is -1.21 percent.
“This winter, jackets and other apparel didn’t sell much. They are now being kept on sale,” Shrestha said.
“No sales means traders are cash-strapped. They are worrying about managing their funds to import summer clothes, footwear and accessories,” he added.
The traders said immediately after the Covid-19-related restrictions were lifted, the goods ordered for winter from China used to come in summer and vice-versa due to China’s “unofficial trade embargo.”
Now, traders say whether they are summer items or winter items is a secondary concern, since demands have slumped. “The sales are subdued,” said Sampath Sharma, proprietor of Planet Fashion, a women's clothing store at Khichapokhari, New Road.
The customer flow in his shop has halved.
“I have been running this shop for 20 years and I have never seen such a slowdown in the market,” Sharma said. “I also incurred heavy losses from winter clothing.”
The major markets like New Road, Mahabauddha, and Durbarmarg have started sales offers, but people are still not showing up.
According to traders, there is no issue with the import of goods from the northern border nowadays, as traders have ordered fewer goods for summer. However, they anticipate price hikes.
“The price of apparels is not going to come down. It will rise further. We cannot say by how much,” said Naresh Katwal, president of Nepal National Traders Federation.
The Nepal National Traders Federation, plus nine other trade federations and 50 associations, have been protesting against a sharp rise in interest rates since mid-January and have been demanding a reduction in the bank interest rates.
The Nepal Rastra Bank on February 9 continued with its tight monetary policy aimed at controlling credit expansion. It feared that easy availability of credit could again fuel imports, leading to a rapid depletion of its modest foreign exchange reserves.
The Nepal Bankers Association reduced the interest rate by one percent on fixed deposits. Even though the interest rate was reduced on deposits, no changes were made in the lending rates.
The bankers have been saying that interest rates in Nepal have increased due to the global economic situation, inflationary pressures, an import-based economy and the strengthening of the dollar.
Last July, the central bank released the monetary policy for the fiscal year 2022-2023, increasing bank rates, policy rates and deposit collection rates by 1.5 percentage points each to 8.5 percent, seven percent and 5.5 percent, respectively.
“We have been protesting against the high-interest rate of the banks since mid-January,” said Katwal.
The IMF has flagged concerns about the large boom-bust credit cycles in Nepal’s financial sector. This means credit may have grown to excessive levels and borrowers' repayment capacity may have eroded due to higher lending rates.
“A new and dangerous trend has emerged. Entrepreneurs are resorting to suicide,” said Katwal. “The government should not let the situation get out of control.”