Government spending has begun to increase, but most of the money is being used to pay recurrent expenses, says the Central Bank's economic report for the first three months of fiscal 2001/02. Regular spending was up almost 30 percent compared with the same period last year, while spending on development programs grew very slowly, at just over one percent. The Nepal Rastra Bank said regular spending was high because of payments of overdue pensions, medical allowances and increased expenditure on security. The relatively static development spending resulted from slow approval and release of funds. Revenue collection was sound, growing by about 19 percent, but the government was unable to mobilise the volume of cash grants it had anticipated, resulting in a budget deficit of Rs 3.66 billion. According to the National Urban Consumer Prince Index, prices rose by 2.2 percent year-on-year, reflecting mainly the upward shift in prices of goods in the food and beverage basket, which were up by 3.8 percent compared to the 4.6 percent decline during the same period a year ago. Inflation would have been worse but was reined by a drop in the prices of goods in the non-food category. The prices in the non-food basket rose by just 0.4 percent compared to the 12.7 percent growth in the same period last year.

Exports have begun tumbling in a big way: there was a decline by 0.3 percent to Rs 13.5 billion in during the first quarter of fiscal 2001/02, compared with the 28 percent growth in the corresponding year-earlier period. Exports to India have also slowed down, and the overall trade deficit reached Rs 13 billion. Despite all this, foreign exchange reserves remain sound, thanks mainly to remittances from overseas: Rs104.7 billion in mid-October. However, the percentage of reserves in foreign currency is shrinking and now stands at 76 percent.