Former Finance Minister Yubaraj Khatiwada Highlights Persisting Economic Weakness Despite External Improvements

Summary: Former Finance Minister Dr. Yubaraj Khatiwada has pointed out that although external economic indicators have improved, the real economy remains unhealthy. He emphasized that monetary measures alone cannot resolve the issues and major structural reforms are necessary. Additionally, he noted that the lack of investment security has discouraged the private sector, and simply lowering interest rates will not boost credit flow.

April 27, Kathmandu – Former Finance Minister Dr. Yubaraj Khatiwada stated that while some external indicators of the economy have improved, the real economy is far from fully healthy. Speaking at an event marking the anniversary of Nepal Rastra Bank, he observed that although the external sector is balanced and inflation is under control, the economic growth rate is limited to 2-3 percent, which is not a highly positive scenario.

According to him, economic growth could have reached four to four and a half percent, which would have been preferable; currently, the growth rate is merely average. While past issues related to excessive debt and liquidity have been partially managed, complete recovery has not yet been achieved. Khatiwada emphasized that small monetary adjustments, likened to ‘physiotherapy,’ are insufficient to tackle current problems and that large structural reforms or ‘surgery’ are necessary.

He identified Nepal’s main challenges as a weak business environment and the absence of investor confidence in the security of investments. Khatiwada cautioned that unless the government creates an investment-friendly environment, lowering interest rates alone will not increase credit flow. He explained that Nepal is currently in a ‘liquidity trap,’ where interest rates are at historic lows but credit demand has not risen as expected.

He cited the example that, in the past, even with interest rates between 18-22 percent, credit expansion reached 20 percent. It is unusual that now, with interest rates around 6 percent, credit demand is not increasing. Former Governor Yubaraj Khatiwada stated, ‘Looking at the economy now, the external sector appears sound, inflation is controlled, and economic growth is between 2 and 3 percent. Growth of 4 to 4.5 percent would be better. We also discussed credit overhang and spillover, which have improved. However, it is necessary to analyze whether the economy is truly healthy or only appears so externally.’