The economic growth is expected to be moderate at an average of 4.6 per cent in the current fiscal year – fiscal year 2017-18 – and 4.5 per cent in the next fiscal year as agriculture output is expected to drop due to the recent floods and both export growth and remittance growth have been tapering along with the oil price shock in the Gulf countries.
Releasing the ‘Nepal Development Update’ – a semiannual publication of the World Bank to report on key economic development of the country – the multilateral development partner said that severe floods in the southern plains of the country in mid-August has hit the country’s economy.
The World Bank had lowered its forecast following devastations caused by floods, which are expected to affect agricultural output, which contributes to around 30 per cent of the GDP. The floods have affected over 5 per cent of the total population, with several districts recording the heaviest rainfall in 60 years. Over 80 percent of land in southern Tarai, the country’s food basket, was affected. Estimates of destroyed crops at 64,000 hectares will likely lead to a weak agricultural output in the current fiscal year. This will hamper agricultural output in 2017-18, according to the report.
According to the World Bank, service sector is expected to grow by 5.8 per cent, industrial sector by five per cent and agriculture sector by 2.7 per cent in the current fiscal year compared to 6.9 per cent growth in service sector, 10.9 per cent growth in industrial sector and 5.3 per cent growth in agricultural sector in the last fiscal 2016-17.
"Economic activity in Nepal, which rebounded strongly in the last fiscal year, reaching 7.5 per cent following two challenging years, has again been impacted by severe flood affecting more than one-third of the country,” according to the World Bank report.
The Washington DC-based multilateral lender’s forecast is far lower than the government’s target of 7.2 per cent growth in the current fiscal year.
Speaking at a media briefing World Bank economist Sudyumna Dahal – also principal author of the update – said that severe floods in the Tarai are likely to affect agriculture, economic activity, and poverty reduction efforts even up to the current fiscal year 2017-18.
The industrial sector growth is also expected to slow down due to base effect, impact of the floods and slow implementation of electricity generation projects, which can contribute to industrial growth like 465MW-Upper Tamakoshi Hydroelectric project, he said, adding that service sector growth may also be affected due to slowdown in remittance inflow and remittances have been lubricating the economy by stabilising wholesale and retail trade.
Nepal posted 7.5 per cent economic growth in the last fiscal year – the highest since fiscal year 1993-94 – on the account of low base of a fiscal year ago, rise in agricultural output on the back of one the best monsoons in recent years, improvement in industrial growth amid end of power cut and strong revival of growth in tourist arrivals.
However, economic growth in the current fiscal year is likely to face a setback from the recent flooding, according to the development partner. Though there has not been any assessment of the damage and losses caused by the floods, preliminary estimates show that 64,000 hectare of standing crops have been destroyed. Similarly, the floods have had a significant impact on critical infrastructure, with 80 schools across 28 districts destroyed and 710 damaged. Likewise, agricultural output, one of the major contributors in the GDP, is going to be hit worst by the flood.
"Particularly, agricultural output, which was expected to be normal, will be impacted by floods," the report reads, adding that the impact on industry sectors is however expected to be temporary, while construction is likely to remain strong driven by earthquake and flood reconstruction. "The transition to the federal structure is likely to weigh on the economic activity of the country amid challenge on budge execution in the new set-up."
Likewise, an overly ambitious budget has continued into the current fiscal year as well which is going to pose a challenge because of the lack of clarity around spending in the federal structure and several upcoming elections.
"As the country moves to a federal structure, there is lack of clarity regarding the fiscal architecture in the federal context, which can cause unintended interruptions in service delivery and execution of capital projects,” added the report which has a special focus this time on fiscal architecture for federal set-up.
The budget for the current fiscal year has proposed a total of Rs 242 billion in transfers to the local level governments.
"The subnational governments will play an increasingly critical role in Nepal’s public expenditures,” said the World Bank’s Country Manager for Nepal Takuya Kamata. "A system of fiscal transfers that is designed for transparency and predictability and supported by a small set of simple rules, could go a long way in helping meet the development objectives of federal Nepal,” he said.
Likewise, slowdown in remittances will hit private consumption, however, the government’s consumption is expected to grow substantially as the current fiscal is the ‘de-facto year’ in terms of implementing the federal structure as the final phase of local elections as well as provincial and federal elections is going to take place within this fiscal. Export of services is expected to grow along with a rebound in tourism sector, however, export of goods to neighbouring India may slump because Nepali products have become expensive in the Indian market since the implementation of the goods and services tax (GST) in the southern neighbour from July 1.
However, on the brighter side the inflow of tourists will help revive the flagging tourism industry and progress in reconstruction activities will contribute to stimulate economic growth.
Releasing the ‘Nepal Development Update’ – a semiannual publication of the World Bank to report on key economic development of the country – the multilateral development partner said that severe floods in the southern plains of the country in mid-August has hit the country’s economy.
The World Bank had lowered its forecast following devastations caused by floods, which are expected to affect agricultural output, which contributes to around 30 per cent of the GDP. The floods have affected over 5 per cent of the total population, with several districts recording the heaviest rainfall in 60 years. Over 80 percent of land in southern Tarai, the country’s food basket, was affected. Estimates of destroyed crops at 64,000 hectares will likely lead to a weak agricultural output in the current fiscal year. This will hamper agricultural output in 2017-18, according to the report.
According to the World Bank, service sector is expected to grow by 5.8 per cent, industrial sector by five per cent and agriculture sector by 2.7 per cent in the current fiscal year compared to 6.9 per cent growth in service sector, 10.9 per cent growth in industrial sector and 5.3 per cent growth in agricultural sector in the last fiscal 2016-17.
"Economic activity in Nepal, which rebounded strongly in the last fiscal year, reaching 7.5 per cent following two challenging years, has again been impacted by severe flood affecting more than one-third of the country,” according to the World Bank report.
The Washington DC-based multilateral lender’s forecast is far lower than the government’s target of 7.2 per cent growth in the current fiscal year.
Speaking at a media briefing World Bank economist Sudyumna Dahal – also principal author of the update – said that severe floods in the Tarai are likely to affect agriculture, economic activity, and poverty reduction efforts even up to the current fiscal year 2017-18.
The industrial sector growth is also expected to slow down due to base effect, impact of the floods and slow implementation of electricity generation projects, which can contribute to industrial growth like 465MW-Upper Tamakoshi Hydroelectric project, he said, adding that service sector growth may also be affected due to slowdown in remittance inflow and remittances have been lubricating the economy by stabilising wholesale and retail trade.
Nepal posted 7.5 per cent economic growth in the last fiscal year – the highest since fiscal year 1993-94 – on the account of low base of a fiscal year ago, rise in agricultural output on the back of one the best monsoons in recent years, improvement in industrial growth amid end of power cut and strong revival of growth in tourist arrivals.
However, economic growth in the current fiscal year is likely to face a setback from the recent flooding, according to the development partner. Though there has not been any assessment of the damage and losses caused by the floods, preliminary estimates show that 64,000 hectare of standing crops have been destroyed. Similarly, the floods have had a significant impact on critical infrastructure, with 80 schools across 28 districts destroyed and 710 damaged. Likewise, agricultural output, one of the major contributors in the GDP, is going to be hit worst by the flood.
"Particularly, agricultural output, which was expected to be normal, will be impacted by floods," the report reads, adding that the impact on industry sectors is however expected to be temporary, while construction is likely to remain strong driven by earthquake and flood reconstruction. "The transition to the federal structure is likely to weigh on the economic activity of the country amid challenge on budge execution in the new set-up."
Likewise, an overly ambitious budget has continued into the current fiscal year as well which is going to pose a challenge because of the lack of clarity around spending in the federal structure and several upcoming elections.
"As the country moves to a federal structure, there is lack of clarity regarding the fiscal architecture in the federal context, which can cause unintended interruptions in service delivery and execution of capital projects,” added the report which has a special focus this time on fiscal architecture for federal set-up.
The budget for the current fiscal year has proposed a total of Rs 242 billion in transfers to the local level governments.
"The subnational governments will play an increasingly critical role in Nepal’s public expenditures,” said the World Bank’s Country Manager for Nepal Takuya Kamata. "A system of fiscal transfers that is designed for transparency and predictability and supported by a small set of simple rules, could go a long way in helping meet the development objectives of federal Nepal,” he said.
Likewise, slowdown in remittances will hit private consumption, however, the government’s consumption is expected to grow substantially as the current fiscal is the ‘de-facto year’ in terms of implementing the federal structure as the final phase of local elections as well as provincial and federal elections is going to take place within this fiscal. Export of services is expected to grow along with a rebound in tourism sector, however, export of goods to neighbouring India may slump because Nepali products have become expensive in the Indian market since the implementation of the goods and services tax (GST) in the southern neighbour from July 1.
However, on the brighter side the inflow of tourists will help revive the flagging tourism industry and progress in reconstruction activities will contribute to stimulate economic growth.
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