Earlier, The World Bank (WB) had projected Nepal's economy to grow by 3.7 per cent prior to the trade disruption. The World Bank's January 2016 Global Economic Prospects published today has identified ‘an escalation of existing tensions in Nepal’ as the key risk to the country. Stating that budget execution, particularly capital spending, has been a longstanding challenge in Nepal, the report says ‘slow progress in post-earthquake reconstruction, coupled with political tensions, could dampen any post-earthquake rebound’.
In Nepal, the cost of earthquakes in the spring of 2015 is estimated at about one-third of the nation's Gross Domestic Product (GDP), the World Bank said, adding that reconstruction efforts have been held back by political uncertainty and the closure of land routes through India in the second half of 2015.
This has led to acute fuel and food shortages, and put a halt to reconstruction efforts. Moreover, investment and other economic activities have been hit hard.
“Plans to build major hydropower projects in partnership with China and India are likely to see considerable delays in the current environment,” as per the report.
But the economy could grow by 5.8 per cent in the next fiscal year, it said, adding that activity should gradually recover as government reconstruction spending is ramped up in the later years of the forecast period. "Nepal's planning to substantially increase spending for reconstruction and is in turn expected to push the fiscal balance into a modest deficit."
Likewise, the bank has hailed South Asia's economic growth. "South Asia was the fastest growing economy in 2015 among developing regions and is expected to expand even faster in 2016, thanks to strengthening investment as well as government and central bank policies that support economic growth," the World Bank said.
Seeing mainly domestic risks to its forecasts, the report also forecast economic growth in South Asia accelerating to 7.3 per cent in 2016 from 7 per cent in 2015. The region's economic prospects are bolstered by its relative lack of trade exposure to slowing demand in China, and by standing to benefit from lower global energy prices due to being a net importer of oil.
"South Asia is a relative bright spot compared to the general outlook for emerging and developing economies," said World Bank chief economist Kaushik Basu. "This good news is made possible by a confluence of factors, from low oil prices to a positive policy environment. But it is also a great responsibility given the growing importance of this region in driving global development and ending poverty."
India, as South Asia's biggest economy, is projected to grow at a faster 7.8 per cent in 2016-17, which begins on April 1, after 7.3 per cent the year before and would be helped in part by progress on infrastructure building and government measures aimed at boosting investment, it added.
"South Asia's economic growth should be seen as an opportunity to take the region to the next level in ending extreme poverty and increasing shared prosperity," said regional vice president for South Asia at the World Bank Annette Dixon. "For South Asia to move to the next level it would need to sustain economic growth levels of more than 7 per cent a year while making sure that growth is sufficiently inclusive to address the unresolved issues of inequality and prosperity that is not widely enough shared."
The report saw external risks to the outlook as less pressing than domestic risks. Economic activity in the region could be hurt if there is a disorderly slowdown in major emerging market economies or if tighter global financial conditions produce financial market stress. Any further downturn of oil prices or growth slowdown that shrinks remittances from workers in the Gulf Cooperation Council countries could dent consumption in the region.