World Bank predicts 3.5 per cent growth

The World Bank has estimated Nepal's GDP growth rate for fiscal year 2009-10 at 3.5 per cent.

This is less than a high growth rate of 5.3 per cent in 2007-08. "Political uncertainties, a cooling down of new construction and energy shortages have constrained growth rates," said the World Bank's report.

The country ended a decade-long conflict in 2006 and has since been working to establish a 'new' Nepal with inclusive and accountable governance structures. However, the transition remains complex and political uncertainty can lead to a deterioration of security hurting the economic performance.

"Fiscal management has remained prudent: there has been progress in revenue administration," it said adding that service provision, especially in education and health, is improving as community and user groups are increasingly involved in taking decisions that affect their lives.

The government expects agriculture to grow by 1.1 per cent, against the earlier projection of 3.3 per cent. Non-agricultural growth is expected to nearly halve to 3.6 per cent from the 6.6 per cent projected earlier.

Prolonged drought and unseasonal rains adversely affected Nepal's agriculture, which contributes 33 per cent to gross domestic product (GDP). A grain deficit of 400,000 tonnes is expected in the fiscal year and there has been little or no new investment to mitigate the effects of weather. Investment in agriculture and irrigation remained at low average of 0.55 per cent of GDP in fiscal year 2009, said the report.

Industrial production growth has been negatively impacted by power shortages, strikes, transport disruptions, and other disputes. The appreciating real exchange rate has also hurt manufacturing exporters. The government, nonetheless, projects a recovery of manufacturing growth to 2.7 per cent for this fiscal year, again, on the back of the construction boom.

The service sector has become an important engine of growth, it's contribution to GDP is now up to 52 per cent over 46 per cent 10 years ago buoyed by increased in tourism receipts, telecommunications, and increase in investments in social services including health and education.

Strong revenue efforts and generous foreign aid have helped to finance rising spending. Foreign aid rose from 3.6 per cent of GDP in fiscal year 2006-07 to 4.7 per cent of GDP in fiscal year 2008-09.

Imports have risen fast from $1.6 billion (26 per cent of GDP) in the fiscal year 2000-01 to $3.6 billion (30 per cent of GDP) in fiscal year 2008-09 -- largely due to thriving consumption made possible by remittances. Exports have remained under $1 billion, and as a share of GDP, have continuously declined from 13 per cent to seven per cent. Exports of readymade garments, carpets and Pashmina - the main exports have declined.

Official remittances rose from about 13.8 per cent of GDP in fiscal year 2007-07 to 22 per cent of GDP in fiscal year 2008-09. This is less than the total amount as it does not account for inflows from India and informal channels. Fueled by high remittances, monetary growth has been high in the last two years.

Meanwhile, the Bank said that Nepal's economic prospects are clouded by political uncertainty that is expected to continue until key stakeholders reach consensus on the type and shape of the new government. Business confidence is expected to remain low with continued law and order problems, extortion, occasional strikes, and uncertainty about private property.

Infrastructure bottlenecks would likely remain. It could be difficult to design and effectively implement key structural reforms that address matters such as labour regulations and financial sector weaknesses. Nepal, as a result, is unlikely to enjoy the full benefits of the growing Indian and Chinese markets, at least in the immediate future.