The economic growth will remain strong at 6.3 per cent in the current fiscal year, according to the Asian Development Bank’s (ADB) Nepal Macroeconomic Update 2019 released today.
The strong growth, despite poor performance of the agriculture sector caused by late paddy transplantation, is though less than the government projection of 8.5 per cent.
The economy can expand further, if the execution of public capital expenditures, including at sub-national levels, improves substantially and private investment remains strong, according to the report.
“Near normal monsoon this fiscal year, efforts to accelerate the implementation of large infrastructure projects, and increase in tourist arrivals will support high growth,” said ADB country director for Nepal Mukhtor Khamudkhanov.
The floods in early July damaged paddy saplings in many parts of the country, which could lower agriculture growth compared with last fiscal year’s figures, the report reads, adding that the industry sector is expected to expand by 7.9 per cent in the current fiscal year, buoyed by improved electricity supply and efforts to improve investment, including in major infrastructure. “The services sector will likely grow by 6.9 per cent in the current fiscal year with the expansion of wholesale and retail trade, financial intermediation, and travel and tourism subsectors.
The Manila-based development bank – in its report – also said that the gross domestic product (GDP) expansion in the fiscal year 2018-19 that ended on July 16 exceeded the Asian Development Outlook 2019 forecast achieving a growth rate of 7.1 per cent, with growth in all sectors. Agriculture sector grew by 5 per cent on a favourable monsoon that brought a record 8.3 per cent increase in paddy production, it reads, adding that industry advanced by 8.1 per cent on increased electricity production, accelerated earthquake reconstruction, and strong consumer demand. “The services grew at 7.3 per cent as higher remittances supported retail trade and as higher tourist arrivals favoured hotels and restaurants.”
On the demand side, growth in private consumption markedly accelerated in the last fiscal year on higher remittances and agricultural income, contributing to two-thirds of GDP expansion, it reads, “Fixed investment moderated from a year earlier.”
Private investment spending, mostly in energy and services, grew by 27 per cent to account for 29 per cent of the GDP in the last fiscal year. Likewise, public investment increased by 5.5 per cent from the high level achieved in the last fiscal year, but the construction of national pride projects suffered delays, the report reads. “However, floods in early July 2019 delayed paddy planting, which probably means lower growth in agriculture this fiscal year but an increase by almost half in the current budget for capital expenditure promises to offset that shortfall, if realised in actual spending.”
Likewise, inflation slightly exceeded the 2018-19 projection as food inflation accelerated from 2.8 per cent in the fiscal year 2017-2018 to 3.1 per cent on account of flooding and landslides in July that affected some supply channels and a delay in food supply owing to strict tests along the India-Nepal border over concern about pesticides.
“Inflation will likely to rise in the current fiscal year, assuming a somewhat smaller harvest, a marked pickup in government expenditure, and a moderate rise in inflation in India, the main supplier,” the report reads, adding that the inflation is projected to rise to 5.5 per cent in the current fiscal year from 4.6 per cent in the last fiscal year.
However, the fiscal deficit moderated to 5.1 per cent of gross domestic product (GDP) in the last fiscal year, down from 6.7 per cent of GDP in the fiscal year 2017-18, on lower-than-planned capital expenditures. “Likewise, execution of capital expenditures at 75.9 per cent in the fiscal year 2018-99 was less than that of fiscal year 2017-18 at 81 per cent. “Bunching of capital expenditure continued in the last fiscal year 2018-19, undermining the quality of investment.”
The current account deficit, forecast to widen, narrowed substantially instead as implementing large national pride projects experienced delays and markedly curbed import growth. “Export growth exceeded expectations but earnings remained small, allowing the trade deficit to widen by 4.6 per cent.”
Nepal increasingly faces the risk of external sector instability due to large trade and current account deficits, the report reads, adding that the current account deficit moderated to 7.7 per cent of GDP, down from 8.2 per cent in the fiscal year 2017-18, on implementation delays of large national pride projects and markedly curbed import growth. “The current account deficit will slightly narrow to the equivalent of 7.6 per cent of GDP in the current fiscal year 2019-20 from 7.7 per cent of GDP in the fiscal year 2018-19.”
Likewise, merchandise export growth exceeded expectations, but with low export base, earnings remained small, widening the merchandise trade deficit by 4.4 per cent, whereas remittance has shown healthy growth, a substantial rise in the near future is unlikely to offset the rise in the trade deficit.
The growth in workers’ remittances was at 7.7 per cent in the last fiscal year, sufficient to keep the current account deficit stable at $2.3 billion. With financing inflows somewhat down from a year earlier, foreign exchange reserves fell by 5.8 per cent to $9.5 billion, the second year of decline nevertheless leaving import cover for 7.8 months.
The current account deficit is now forecast to be much narrower than projected in the last fiscal year as it continues to shrink in response to measures that curtail imports of low-priority goods, as well as higher hydroelectricity production, which will replace fuel imports for generators, and more workers going to high-income destinations like Japan, the report reads.
Downside risks to outlook in the current fiscal year 2019-20 centers on challenges to the smooth implementation of federalism. “Adequate human resources, mainly technical staff, and capacity in the relatively new sub-national governments coupled with necessary legislative frameworks are required for the smooth implementation of federalism,” it adds.
The theme chapter of this edition of ADB report sheds light on existing implementation challenges of Special Economic Zones (SEZs) in Nepal and suggests measures to overcome them. “SEZs can play a key role in developing economies like Nepal to expand exports, bridge the huge trade deficit and mitigate pressure on external stability,” it reads.
The strong growth, despite poor performance of the agriculture sector caused by late paddy transplantation, is though less than the government projection of 8.5 per cent.
The economy can expand further, if the execution of public capital expenditures, including at sub-national levels, improves substantially and private investment remains strong, according to the report.
“Near normal monsoon this fiscal year, efforts to accelerate the implementation of large infrastructure projects, and increase in tourist arrivals will support high growth,” said ADB country director for Nepal Mukhtor Khamudkhanov.
The floods in early July damaged paddy saplings in many parts of the country, which could lower agriculture growth compared with last fiscal year’s figures, the report reads, adding that the industry sector is expected to expand by 7.9 per cent in the current fiscal year, buoyed by improved electricity supply and efforts to improve investment, including in major infrastructure. “The services sector will likely grow by 6.9 per cent in the current fiscal year with the expansion of wholesale and retail trade, financial intermediation, and travel and tourism subsectors.
The Manila-based development bank – in its report – also said that the gross domestic product (GDP) expansion in the fiscal year 2018-19 that ended on July 16 exceeded the Asian Development Outlook 2019 forecast achieving a growth rate of 7.1 per cent, with growth in all sectors. Agriculture sector grew by 5 per cent on a favourable monsoon that brought a record 8.3 per cent increase in paddy production, it reads, adding that industry advanced by 8.1 per cent on increased electricity production, accelerated earthquake reconstruction, and strong consumer demand. “The services grew at 7.3 per cent as higher remittances supported retail trade and as higher tourist arrivals favoured hotels and restaurants.”
On the demand side, growth in private consumption markedly accelerated in the last fiscal year on higher remittances and agricultural income, contributing to two-thirds of GDP expansion, it reads, “Fixed investment moderated from a year earlier.”
Private investment spending, mostly in energy and services, grew by 27 per cent to account for 29 per cent of the GDP in the last fiscal year. Likewise, public investment increased by 5.5 per cent from the high level achieved in the last fiscal year, but the construction of national pride projects suffered delays, the report reads. “However, floods in early July 2019 delayed paddy planting, which probably means lower growth in agriculture this fiscal year but an increase by almost half in the current budget for capital expenditure promises to offset that shortfall, if realised in actual spending.”
Likewise, inflation slightly exceeded the 2018-19 projection as food inflation accelerated from 2.8 per cent in the fiscal year 2017-2018 to 3.1 per cent on account of flooding and landslides in July that affected some supply channels and a delay in food supply owing to strict tests along the India-Nepal border over concern about pesticides.
“Inflation will likely to rise in the current fiscal year, assuming a somewhat smaller harvest, a marked pickup in government expenditure, and a moderate rise in inflation in India, the main supplier,” the report reads, adding that the inflation is projected to rise to 5.5 per cent in the current fiscal year from 4.6 per cent in the last fiscal year.
However, the fiscal deficit moderated to 5.1 per cent of gross domestic product (GDP) in the last fiscal year, down from 6.7 per cent of GDP in the fiscal year 2017-18, on lower-than-planned capital expenditures. “Likewise, execution of capital expenditures at 75.9 per cent in the fiscal year 2018-99 was less than that of fiscal year 2017-18 at 81 per cent. “Bunching of capital expenditure continued in the last fiscal year 2018-19, undermining the quality of investment.”
The current account deficit, forecast to widen, narrowed substantially instead as implementing large national pride projects experienced delays and markedly curbed import growth. “Export growth exceeded expectations but earnings remained small, allowing the trade deficit to widen by 4.6 per cent.”
Nepal increasingly faces the risk of external sector instability due to large trade and current account deficits, the report reads, adding that the current account deficit moderated to 7.7 per cent of GDP, down from 8.2 per cent in the fiscal year 2017-18, on implementation delays of large national pride projects and markedly curbed import growth. “The current account deficit will slightly narrow to the equivalent of 7.6 per cent of GDP in the current fiscal year 2019-20 from 7.7 per cent of GDP in the fiscal year 2018-19.”
Likewise, merchandise export growth exceeded expectations, but with low export base, earnings remained small, widening the merchandise trade deficit by 4.4 per cent, whereas remittance has shown healthy growth, a substantial rise in the near future is unlikely to offset the rise in the trade deficit.
The growth in workers’ remittances was at 7.7 per cent in the last fiscal year, sufficient to keep the current account deficit stable at $2.3 billion. With financing inflows somewhat down from a year earlier, foreign exchange reserves fell by 5.8 per cent to $9.5 billion, the second year of decline nevertheless leaving import cover for 7.8 months.
The current account deficit is now forecast to be much narrower than projected in the last fiscal year as it continues to shrink in response to measures that curtail imports of low-priority goods, as well as higher hydroelectricity production, which will replace fuel imports for generators, and more workers going to high-income destinations like Japan, the report reads.
Downside risks to outlook in the current fiscal year 2019-20 centers on challenges to the smooth implementation of federalism. “Adequate human resources, mainly technical staff, and capacity in the relatively new sub-national governments coupled with necessary legislative frameworks are required for the smooth implementation of federalism,” it adds.
The theme chapter of this edition of ADB report sheds light on existing implementation challenges of Special Economic Zones (SEZs) in Nepal and suggests measures to overcome them. “SEZs can play a key role in developing economies like Nepal to expand exports, bridge the huge trade deficit and mitigate pressure on external stability,” it reads.
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