KATHMANDU, Aug 1: Rising economic and policy uncertainty has adversely affected Nepal’s overall economy.
A study report unveiled by the Nepal Rastra Bank (NRB) on Friday concludes that increasing policy uncertainty negatively affects gross domestic product (GDP), imports, private sector credit expansion, and the Nepal Stock Exchange (NEPSE) index.
The report, published as NRB Working Paper No. 65, titled The Aggregate Impact of Economic Policy Uncertainty: Evidence from Nepal, has, for the first time, constructed the Google Trends Uncertainty Index (GUI) based on internet search activity in Nepal and examined its economic impact.
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The study was prepared by NRB researchers Birendra Bahadur Budha, Rohan Byanjankar, and Swastik Nepal. As the NRB’s working paper presents preliminary research findings, it states that the conclusions are based on the authors’ independent research and do not represent the official views of the NRB.
The study measured the level of economic policy uncertainty in Nepal from January 2011 onward. To do so, it used Google Trends search activity data based on 56 keywords related to economic policy, monetary policy, trade policy, and other economic topics.
“As uncertainty increases, the confidence of economic decision-makers weakens, investment and consumption are affected, and economic activity shrinks,” the study states. Economic policy uncertainty was found to increase particularly around the announcement of the government’s annual budget and the NRB’s annual monetary policy.
Similarly, uncertainty was also found to rise during major political events, international conferences, periods of pressure on foreign exchange reserves, economic crises, and other unusual circumstances.
According to the study, the uncertainty index was particularly high during the SAARC Summit held in Kathmandu in November 2014, the BIMSTEC Summit in August 2018, and the period of pressure on foreign exchange reserve adequacy in 2022.
The NRB study shows that a one-standard-deviation increase in economic policy uncertainty can lead to a decline of about 2 percent in gross domestic product (GDP), 15 percent in imports, and up to 5 percent in private sector lending.
According to the study, the impact of uncertainty on production is not immediately visible. Its effects begin to emerge in the second quarter and become most pronounced in the third quarter.