Monday, January 23, 2017

IMF forecasts 5.5 per cent economic growth

The International Monetary Fund (IMF) has revised Nepal’s economic growth forecast upward to 5.5 per cent for the current fiscal year. The IMF had previously predicted Nepal’s economy to expand by only 4 per cent in the current fiscal year 2016-17. However, it has upgraded the growth forecast on the back of expectations of a big jump in agricultural output due to a good monsoon and higher government spending.
The growth estimate of the IMF, however, is lower than government’s target of 6.5 per cent, but higher than the World Bank’s projection of 5 per cent and the Asian Development Bank’s estimate of 4.8 per cent.
Nepal’s economy is rebounding following the slowdown caused by the 2015 earthquakes and trade disruptions, and supported by the government’s efforts to revitalise the reform agenda,” head of IMF’s Article IV mission to Nepal Geert Almekinders said here today.
The economic growth was looking down in the last two fiscal years due to devastating earthquakes of of April 25, 2015 and cascading effects of the earthquake coupled with almost five-month-long Indian trade embargo, which made the economy grow by only 2.3 per cent in the fiscal year 2014-15 and to 0.77 per cent in 2015-16.
The economy will bounce back in this fiscal year owing to normalisation of economic activities, increased agriculture output due to favourable monsoon, accommodative monetary policy and accelerated post-earthquake reconstruction, Almekinders said, adding, "most importantly, the base-effect – low base of economy due to low growth – of last fiscal year will be supportive for the economy to achieve the aforesaid growth rate."
The paddy production, which makes a contribution of around 6 per cent to the gross domestic product (GDP) is projected to jump by 21.66 per cent in the current fiscal year due to a good monsoon which has also raised some hopes of economic rebound.
"Accommodative monetary policy and rising government spending are also supporting economic activities to normalise,” he said, adding that Nepal must put appropriate policies in place to sustain growth rate that is likely to be achieved in the current fiscal year.
Strong policies are needed to enhance confidence amid ongoing political uncertainty, and to meet the authorities long-term goal of becoming a middle-income country by 2030, the mission noted.
"Strengthening of key institutions and administrative capacity which are critical for overcoming the chronic under-implementation of the budget and boosting private investment and growth is key," he added.
Almekinders also prescribed the government to give momentum to the economic reforms. "The medium-term outlook for Nepal critically depends on the authorities’ efforts to sustain and deepen the nascent reform momentum,” he said, warning that the growth would likely revert to average of the past decade – that is around 4 per cent – and fall short of substantially improving living standards and social indicators, in the absence of strong policies.
Lately, Nepal has made some efforts to introduce policy reforms. The government has introduced new Industrial Enterprise Act, Special Economic Zone Act and Bank and Financial Institution Act. The parliament is also reviewing drafts of Labour Bill and Foreign Investment and Technology Transfer Bill, which are expected to be endorsed soon.
Along with this initiative, the government should do more to implement the capital budget, the IMF prescribed.
Though, the government has brought a populist and expansionary budget – that also in time – it has failed to spend. By the end of the six months of the current fiscal year, the government has been able to spend only a quarter of the budget.
Ogf the total spending, the capital spending stood at mere 11.03 per cent of the total allocation in the first half of this fiscal year, reflecting the inefficiency and government’s indifference attitude towards bridging the infrastructure gap, which has emerged as the major binding constraint for growth.
The IMF also stressed on the need to introduce a realistic budget that effectively prioritises spending with the largest growth dividends, including in social spending areas of highest importance, for inclusive growth. "In scaling up public spending, care should also be taken not to exceed the economy’s aggregate absorptive capacity."
"Nepal should also come up with a fiscal policy that could be implemented rather than an aspirational budget,” Almekinders said, adding that the monetary policy should also chart out medium-term inflation path, rather than one-year target, so that Nepal doesn’t lose competitiveness with India. "Nepal can however meet the inflationary target in the current fiscal year."
The mission also stressed on the need for accelerated financial sector reforms and strong supervision of the financial sector to mitigate macrofinancial risks and increase access to finance. It also emphasised on enhancing the regulatory capacity of the central bank through strengthening several aspects of the regulatory framework.
“It would include enhancing loan classification and provisioning and upgrading banks’ risk management," it added.
In the context of recent lobbying by bankers seeking the central bank to revise the existing credit-to-deposit (CCD) ratio, which is 80:20 at present, the IMF mission showed strong reservations. "The ceiling on the loan-to-deposit ratio should be maintained as this alone can contribute in moderation of credit growth and normalisation of interest rates." It noted.
Nepal’s external position remains strong as international reserves with the central bank reached a record high of $8.7 billion in December 2016, equivalent to about 10 months of prospective imports and goods and services," the IMF mission said. "However, following large surpluses in recent years, the external current account is now broadly in balance, which reflects recovering imports and moderating growth of remittances."
The International Monetary Fund (IMF) team, led by Almekinders, visited Nepal from January 11-23 to hold discussions for the 2017 Article IV consultation. The team met deputy prime minister and finance minister Krishna Bahadur Mahara, Central Bank governor Dr Chiranjibi Nepal and other high-level government officials, apart from representatives of the private sector, labour unions, and the donor community.

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