Better business environment key to growth: ADB

Promoting an enabling business environment and political stability are key to improving economic performance in Nepal, according to a new Asian Development Bank (ADB) report.

"We all agree Nepal has huge potential for growth but there are also substantial hurdles to overcome in triggering the high growth process," said ADB’s country director for Nepal Kenichi Yokoyama.

"Developing infrastructure bases, particularly power, strengthening institutional capacities, and promoting strategic and proactive policies are urgently needed to improve investor confidence in Nepal," he said, during the release of ADB's flagship annual economic publication, Asian Development Outlook 2013 (ADO 2013) here today.

The ADB has projected Nepal’s gross domestic product (GDP) growth to slow to 3.5 per cent in fiscal year 2013 due to a shortage of fertilisers, poor monsoon season, low investor confidence and the lack of a full budget, which has caused funding shortages for ongoing development activities.

The prospects of a lower agriculture harvest, wage pressures, further upward adjustment of administered fuel prices, continued power shortages and other supply-side constraints are expected to push inflation to 10.5 per cent in 2013, it said, adding that on the external front, the widening trade deficit and a more moderate remittance growth will likely result in a current account deficit of 0.5 per cent of GDP in 2013.

"In 2012, growth rebounded to 4.5 per cent, boosted by a favourable monsoon and robust services growth despite a slowdown in the industry sector and political uncertainties. Agricultural output grew by about five per cent, the highest rate in four years, while the high growth in services reflected a pickup in tourism and remittances-backed consumer spending."

With a favourable monsoon, adequate fertiliser supplies, timely adoption of a full budget, and moderate expansion of remittance, ADO 2013 forecasts GDP growth to rebound to 4.2 per cent in 2014.

Assuming a good harvest and cautious monetary policies, inflation in 2014 is projected to ease only slightly to nine per cent as most of the underlying pressures of the previous year persist.

The ADO 2013 projects the current account to slide more slowly to a 1.8 per cent deficit in 2014. While the recent regulatory and monitoring directives by the central bank to deal with banking sector issues are steps in the right direction to handle the sector’s immediate problems, the report says that much more needs to be done, if Nepal is to address structural changes required to shield the banking sector and the economy from internal and external shocks.

"It includes consolidating financial institutions, ensuring sound corporate governance, strengthening internal project and loan analysis, more effective monitoring and control, and better understanding and monitoring of the activities of cooperatives."

Government expenditures continue to suffer stress from subsidies, including on diesel and liquefied petroleum gas, the report said, adding that prices should be rationalised, while making provisions to protect the welfare to the poor.

"The 2014 budget needs timely passage to allow for the revision of tax rates, authorisation for domestic borrowing, and provision of funding to accelerate development activities, along with measures to address governance issues," it added.