Nepal will witness a growth of 4.5 per cent in the current fiscal year due to the hope that the peace process will be concluded and also normal weather conditions have boosted agriculture production, according to a report released here today by the Asian Development Bank (ADB).
However, growth will slow down to four per cent in the next fiscal year which is around the speed limit for an economy inhibited by long-standing structural bottlenecks and policy issues, said the Asian Development Outlook 2012.
"The improvement from a year earlier will come from faster growth in agriculture and services," it said, adding that strong remittance and rebounding tourism earnings — foreshadowed in the early months of the fiscal year — will buttress services. "With no improvement expected in power supply, industrial performance will, however, remain sluggish."
The expansion of agriculture in the last fiscal year 2010-11 and the current fiscal year 2011-12 reflected a recovery that provided a fillip to growth in the sector and to gross domestic product but that upturn masks deep-seated problems in raising low productivity and growth to the sector’s higher potential, the annual flagship publication of the ADB said, adding that inflation gently declined in the first half of the current fiscal year pointing to an annual average of eight per cent.Food inflation has been on check from better harvests as well as mitigated global price pressures.
The high base effect of the previous year and supportive monetary policies will also keep price rises down. Despite pressure from needed upward revisions in fuel prices, inflation is expected to ease to seven per cent in the next fiscal year, broadly in line with India’s, it projected, hoping that the central bank will maintain its focus on encouraging financial sector consolidation, reforming poorly performing banks, enhancing financial inclusion, and strengthening its own supervisory capacity. "Managing the liquidity of commercial banks will still remain tricky with a need to strike a balance between containing inflation and supporting growth," it said.
The trade deficit will widen over the next two years, with faster growthin imports than exports spurred by sustained high oil prices, and bya rise in non-oil imports. "Yet, the current account is projected to moveto a surplus owing to stronger remittance and tourism receipts. Remittance will accelerate because of the high number of migrant workers going for foreign jobs last year and wage increments in destination countries; tourism receipts are on the rise, apparently reflecting the delayed impact of the Nepal Tourism Year campaign," according to the report.
This fiscal year saw timely budget for the first time since the Constituent Assembly elections in 2008. "But still the government faces an uphill task in fiscal management," the report suspected, suggesting the government to create a fiscal cushion, and bring the informal sector into the formal tax base.
"Expanding the tax base is necessary to reduce dependence on foreign aid, which finances about three-fifths of government capital spending," said country director of ADB for Nepal Kenichi Yokoyama launching the report.
Politically induced market distortions are a challenge the country will have to face, as in recent years, the economy has suffered from several market distortions, originating mainly in the fragile political environment and compounded by poor law enforcement.
In the last fiscal year, growth slowed down to 3.5 per cent on weaker remittance inflows, a downdraft in real estate, fuel and power shortages, and continued political uncertainty, it said, adding that inflation hovered around the double-digit threshold, and the banking system came under stress.