Asian Development Bank (ADB) Nepal Macroeconomic Update said that Nepal’s economy is anticipated to grow by 5.5% (at basic prices) in fiscal year (FY) 2019, down from 5.9% a year earlier says the latest.
“The growth forecast represents a continued trend reversal but is substantially higher than the average rate of 4.3% in the last 10 years (FY2009-FY2018),” said Sharad Bhandari, ADB’s Principal Economist for Nepal. “Growth will be supported by expectations of greater political stability following the 2017 elections, normal monsoon, and efforts to accelerate implementation of mega infrastructure projects.”
The limited capacity at subnational levels and challenges to smooth implementation of federalism may pose risks to growth. According to the update, some of the major issues affecting the smooth implementation of fiscal federalism are slow progress in requisite legislation and deployment of staff, the need for further clarification of mandates and responsibilities of the three tiers of government, and inconsistencies in revenue mobilization regarding fees and taxes at local levels.
According to a press release issued by ADB, the agriculture sector will likely grow from 2.8% in FY2018 to 3.5% in FY2019, on the back of an anticipated bumper harvest supported by a good monsoon. Industry sector is expected to expand by 7.2% in FY2019 buoyed by improved electricity supply. And the services sector will likely grow by 6.1% in FY2019 with the expansion of wholesale and retail trade, financial intermediation and travel and tourism subsectors.
The update says inflation is projected to rise to 6.0% in FY2019 from 4.2% in FY2018, partly reflecting higher inflation expected in India, a modest rise in oil prices, and higher government expenditures under the new federal structure.
Though revenue collection of Nepalese Rupees 731.4 billion (24.3% of GDP) slightly exceeded the budget target in FY2018, the fiscal deficit widened to 6.7% of GDP with the rise in government expenditures compared to the previous year. While capital expenditures increased by 28.0% in FY2018 with the execution rate at 79.7%, the hasty nature of spending has continued undermining the quality of capital projects, says the update.
Nepal increasingly faces the risk of external sector instability due to a rising trade and current account deficit. The current account deficit of $2.4 billion (8.2% of GDP) in FY2018 is significantly higher than the deficit of $95.7 million, or 0.4% of GDP, a year earlier. The merchandise trade deficit increased on higher import of construction materials and capital goods in FY2018. While remittance has shown a healthy growth, a substantial rise in the near future is unlikely to offset the rise in the trade deficit, leading to further widening of the current account gap.