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Nepal’s foreign reserves improve on remittances from Middle East

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Rates have risen after Nepal's central bank upped its benchmark lending rate to 8.5% from 7% in July to tame inflation

Nepal’s gross foreign exchange reserves rose 10.2 percent to $10.50 billion in mid-February, boosted mainly by remittances from overseas, to a level that will cover about nine months of imports, the central bank said in a report.

Reserves rose from $9.54 billion in mid-July 2022, as Nepalis working abroad sent money home, data showed. A large part of the flows came from the Middle East, South Korea and Malaysia.

Data from Nepal Rastra Bank (NRB) showed remittance inflows increased 16.4 percent to $5.30 billion in the mid-July 2022 to mid-February 2023 period against a decrease of 5.3 percent in the same seven-month period in 2021/22.

Nepal typically follows a mid-July to mid-July fiscal year based on a local calendar.

The central bank has stated in the past that its goal is to maintain external reserves that are adequate to cover more than seven months of imports.

“We are in a comfortable position in the external sector, but there is pressure on internal front of the economy,” Prakash Kumar Shrestha, chief of the Economic Research Department of the central bank, told Reuters.

Nepal imports most essential commodities. A lack of manufacturing facilities due to a shortage of power and reduced fund flows to industries have been hurting the economy.

Businesses and industry officials have protested in recent weeks against high lending rates, which have now risen to more than 16 percent compared with around 12 percent a year ago.

Rates have risen after Nepal’s central bank upped its benchmark lending rate to 8.5 percent from 7 percent in July to tame inflation, which hit a six-year high of 8.56 percent in June.

Annual inflation eased to 7.88 percent in mid-February, the bank said.

Businesses want to see interest rates in single digits.

Many small borrowers from microlending institutions have said they are unable to repay their loans due to high interest rates and this could trigger a series of defaults.

Analysts said there are no “quick fixes” to the economic problems in the real sector.