Nepal Rastra Bank Governor Maha Prasad Adhikari said on Thursday that Nepal is facing an economic slowdown largely due to interest rates that have remained for an unusually long time and resulted in a slowed demand for credit.

He said that the economic slowdown has resulted in increased loan defaults in the financial system.

“As economic activities have slowed, we have responded by lowering policy rates,” said Adhikari, speaking at the 39th Asian Bankers Association’s general meeting and conference in Kathmandu on Thursday.

Adhikari said there was a need to boost savings for higher capital formation, which is how to lift Nepal from a low economic growth trap. “The role of the banking and financial institutions is key to boosting saving for higher capital formation.”

Nepal’s savings remain below 10 percent, which is insufficient to boost economic growth, he said.

Nepal’s economy is estimated to grow at 1.9 percent in 2022-23, below its potential. The country’s growth has been sluggish, averaging 4 percent annually in the last 10 years.

The economic growth had been picking up in the post-earthquake recovery phase and even amid prolonged political instability. However, the Covid-19 pandemic in 2020, followed by Russia's invasion of Ukraine the next year, took a heavy toll on the global economy. The ripples have hit Nepal too, said Adhikari.

The theme of the two-day Asian Bankers Association general meeting and conference is ‘Asian Banking: Roadmap for Recovery and Sustained Growth’.

Asian Bankers Association, headquartered in Taipei City, Taiwan, aims to provide a forum for advancing the cause of the banking and finance industry in the Asia-Pacific region and promoting regional economic cooperation.

The global financial system that remained resilient even during the Covid-19 crisis is now facing challenges. The symptoms were seen earlier this year when some banks faced turmoil in advanced economies, Adhikari said.

Asian banks were highly resilient to shocks though vulnerabilities still exist, Adhikari said.

The global economy is still limping along amid growing divergence as mentioned by the International Monetary Fund's recent world economic outlook. “This indicates that the spillover of global financial risk to the domestic market is still prevalent,” he said.

Inflation is moderated in most advanced economies but will still be above the central bank’s target, Adhikari said. Many central banks continue to tighten their monetary policy due to the sustained higher interest rates, he said.

Finance Minister Prakash Sharan Mahat urged the Asian banking sector to support investments in Nepal’s hydropower sector as the market has been assured with India agreeing to buy up to 10,000 MW of electricity and Bangladesh also showing interest in buying electricity from Nepal.

“Low-income economies are confronting the effects of the Russia-Ukraine conflict. But now I think there is a need for easing monetary policy,” said Mahat.

The high interest rate has not only weakened the economy, but it has also hit investor confidence and deterred private investors, said Mahat. It has also affected all major drivers of growth including productivity, trade and employment.

“The global economy is becoming increasingly digitalised and some of the emerging technologies have the potential to be truly transformative even if they pose new challenges to bankers,” said Eugene Acevedo, chairman of the Asian Bankers Association.

At the same time, fintech innovators have come onto the scene equipped with capital, he said. New consumer trends continue to reshape the evolving roles of banks, said Acevedo. To avoid an increase in fraud or cyber risk, banks should look to scale up their risk management capabilities, he said.