ECONOMY A Slowdown

Three international multilateral banks announce that Nepal’s economic growth will be likely to go below five percent next year

Oct. 15, 2017, 10:59 a.m. Published in Magazine Issue: VOL.11, No.06,October 13- 2017 (Ashwin 27, 2074)

After recording a high growth of over 7 percent last year, Nepal is likely to see a slowdown in economic growth for this year. Largely due to the damage caused by floods, the pace of economic growth will be below 5 percent instead of the 7.2 percent growth the government is expecting.

“The pace of growth of Nepal’s economy will slow down to 4.7% in fiscal year 2018, compared to 6.9% seen in FY2017," according to the latest economic report. The FY2018 growth forecast has been revised down from an earlier estimate of 5.4% in the wake of severe floods and landslides in August that affected one thirds of the country, resulting in the loss of human lives and livelihoods, and destruction of crops, says the Nepal Macroeconomic Update 2017. Asian Development Bank, Nepal Resident Mission, recently released the second edition of the Update for September 2017 with a forecast for FY2018 growth and inflation.

The report also analyzes Nepal’s performance in real, fiscal, monetary and external sectors in FY2017. GDP is forecast to grow by 4.7% in FY2018, down from a preliminary estimate of 6.9% in FY2017, largely due to heavy rainfall during this monsoon that affected paddy and other major crops in the Terai belt of Nepal.

This will likely depress farm output and economic growth in FY2018 and contribute to inflationary pressure.  Inflation is expected to rise to 6.5% in FY2018. With widening trade deficit and falling growth in remittances, current account deficit is expected to widen to 2.2% of GDP in FY2018 from a deficit of 0.4% of GDP in FY2017. The Issue Focus of this edition sheds light on prospects of Nepal’s services trade and suggests sector-specific policy recommendations. 

According to Asian Development Bank, Nepal Resident Mission, the second edition of  Nepal Macroeconomic Update (September 2017), says the agriculture sector was badly hit, and will likely expand by just 2.4% in FY2018, compared to 5.3% in FY2017 owing to destruction of paddy plantation and other major crops in the Terai belt of Nepal. But the industry sector is expected to expand by 6.6% in FY2018 thanks to a better supply of electricity and availability of construction materials. The services sector, meanwhile, is projected to grow by 5.5% in FY2018, resulting from an expansion of the financial intermediation, wholesale and retail trade, and tourism subsectors.

“The economy rebounded strongly in FY2017 from FY2016, a difficult year with external shocks. This year we expect economic growth to revert somewhat to the trend growth rate, partly because of floods. Reforms to improve the quality of public and private investment and to encourage a competitive private sector would reduce the economy’s dependence on external factors such as the monsoon and prospects for remittances,” said Sharad Bhandari, Principal Economist and Officer-in-Charge of ADB’s Nepal Resident Mission.

The Update says inflation is expected to rise moderately to 6.5% in FY2018 from 4.5% in FY2017, partly reflecting lower inflation in India and the expansionary FY2018 budget. The fiscal transfer and election expenditures compounded by depressed farm output will exert inflationary pressure in FY2018.

Despite improved revenue collection at NPR609.1 billion (23.4% of GDP), the fiscal deficit widened to 5.2% of gross domestic product (GDP) in FY2017 following the rise in government expenditure compared to a year earlier. While the execution rate of capital expenditures has hovered around 72.1% for FY2012-2017, its year-on-year growth has remained solid. The low execution rate could well be an indication of an overambitious target set by the government, the report says.

Growth in merchandise exports has been weaker than the rise in imports, leading to a widening merchandise trade deficit. The growth in remittances is expected to drop following a decline in the number of workers going abroad in FY2017. Nepal increasingly faces the risk of external sector instability with a slower rise in remittances and ballooning merchandise trade deficit.

The growth in services exports, on the other hand, has been brighter. The services sector accounted for 66% of the total exports and 14% of the total imports in FY2017, indicating its growing importance in external trade. But because of infrastructural, institutional, legal, and procedural barriers, the services trade in Nepal has yet to achieve its full potential, the report says.

Similarly The World Bank also predicted that Nepal’s growth will slow down to 4.6 percent this year. According to the World Bank, Nepal has seen an impressive economic recovery after disruptions from earthquakes and a trade blockade. Economic activity is expected to rebound to 7.5 percent in 2017 through increasing government resources, spending, and remittances from abroad. Growth is expected to slow in 2018 due to the heaviest floods in decades, slow recovery of exports, and an increase in lending rates.

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