The economy is estimated to grow at 7.1 per cent in the current fiscal year 2019-20 primarily driven by private investment and consumption, according to the World Bank. However, the World Bank has projected a slowdown in Nepal’s economy in the next two fiscal years in line with a global downward trend.
The World Bank – in its report ‘South Asia Economic Focus’ published on Sunday – said that the gross domestic product (GDP) growth rate has forecast to grow at 6.4 per cent in fiscal 2020-21 and at 6.5 per cent in 2021-22. The Asian Development Bank (ADB) has, however, projected a growth rate of 6.3 per cent while the Institute for Integrated Development Studies (IIDS) – a domestic research wing of Kathmandu University – has estimated 6.02 per cent growth for the current fiscal year. The government has, however, set a target of 8.5 per cent growth to make Nepal a middle-income country by 2030.
While targeting the economic growth rate, the government mainly considers the supply side and agriculture production in particular, as a base but lack of coordination among the key government institutions and a mechanism to conduct a trend analysis in changing macroeconomic variables has led the government to make rampant projections, though the government targets always remain ambitious.
The World Bank's forecast is based on soaring services and construction activity due to rising tourist arrivals and higher public spending. The government aims to boost tourist arrivals to 2 million during the 2020 with the help of Visit Nepal 2020 campaign. According to the World Bank, the construction of big hotels and the completion of Gautam Buddha International Airport in Bhairahawa will contribute significantly to Nepal’s growth rate.
Likewise, the World Bank expects investment and government consumption to drive the economy to achieve the targeted growth. It has pointed to an increase in public consumption due to increased spending on salary and goods and services. In addition, efforts aimed at building the capacity at the sub-national levels and the implementation of performance-based contracts at the federal level will also result in higher overall public spending.
“The implementation of the 2019 national work plan to minimise the trade deficit along with investment-related initiatives like establishing a one-stop service centre, will support private investment,” the World Bank report reads, adding that the growth of private sector consumption is expected to drop due to increased import tariffs on selected agricultural products and consumer goods.
Government spending will increase to 29.7 per cent of the gross domestic product (GDP) by 2021 due to increased salaries of civil servants, higher social security spending and a pick-up in capital expenditure, according to the report.
The government might not achieve the targeted economic growth rate even with a rise in public expenditure as the capital expenditure is below the level necessary to achieve the growth rate.
However, the World Bank says that the country’s current account deficit is likely to moderate to 5.9 per cent of GDP by 2020-21, as spending on federalism-related infrastructure and post-earthquake reconstruction tapers down and the government starts implementing a work plan for encouraging export-oriented and import-substituting industries.
Meanwhile, the report also reads that the persistently high trade deficits would raise the risks to the external sector, especially if remittance growth slows down due to geopolitical tensions in migrant receiving countries and uncertain oil prices. Similarly, lower remittances could also impact the liquidity in the financial system.
The World Bank report also projects rise in inflation rate marginally with higher public sector wages, increases in import duties on agricultural and industrial goods, and the removal of value added tax exemptions on some intermediate goods and services.
According to the World Bank, Nepal’s inflation will remain between 4.5 per cent and 5 per cent, though the current macroeconomic report published by the central bank revealed that inflation reached a near three-year high of 6.95 per cent in mid-August following a sharp hike in food prices.
The World Bank has attributed the rise in the consumer price index to higher public sector wages, increases in import duties on agricultural and industrial goods, and the removal of value added tax exemptions on some intermediate goods and services. “Regular supply of electricity at low cost and low inflation in India is expected to offset some of the increase.”
Likewise, the South Asia Economic Focus, ‘Making (De)centralisation Work’, reads that strong domestic demand, which propped high growth in the past, has weakened, driving a slowdown across the region. Imports have declined severely across South Asia, contracting between 15 per cent and 20 per cent in Pakistan and Sri Lanka. In India, domestic demand has slipped, with private consumption growing 3.1 per cent in the last quarter from 7.3 per cent a year ago, while manufacturing growth plummeted to below one per cent in the second quarter of 2019 compared to over 10 per cent a year ago, according to the report.
In a focus section, the report highlights how, as their economies become more sophisticated, South Asian countries have made decentralisation a priority to improve the delivery of public services. With multiple initiatives underway across the region to shift more political and fiscal responsibilities to local governments, the report warns, however, that decentralisation efforts in South Asia have so far yielded mixed results.
The World Bank – in its report ‘South Asia Economic Focus’ published on Sunday – said that the gross domestic product (GDP) growth rate has forecast to grow at 6.4 per cent in fiscal 2020-21 and at 6.5 per cent in 2021-22. The Asian Development Bank (ADB) has, however, projected a growth rate of 6.3 per cent while the Institute for Integrated Development Studies (IIDS) – a domestic research wing of Kathmandu University – has estimated 6.02 per cent growth for the current fiscal year. The government has, however, set a target of 8.5 per cent growth to make Nepal a middle-income country by 2030.
While targeting the economic growth rate, the government mainly considers the supply side and agriculture production in particular, as a base but lack of coordination among the key government institutions and a mechanism to conduct a trend analysis in changing macroeconomic variables has led the government to make rampant projections, though the government targets always remain ambitious.
The World Bank's forecast is based on soaring services and construction activity due to rising tourist arrivals and higher public spending. The government aims to boost tourist arrivals to 2 million during the 2020 with the help of Visit Nepal 2020 campaign. According to the World Bank, the construction of big hotels and the completion of Gautam Buddha International Airport in Bhairahawa will contribute significantly to Nepal’s growth rate.
Likewise, the World Bank expects investment and government consumption to drive the economy to achieve the targeted growth. It has pointed to an increase in public consumption due to increased spending on salary and goods and services. In addition, efforts aimed at building the capacity at the sub-national levels and the implementation of performance-based contracts at the federal level will also result in higher overall public spending.
“The implementation of the 2019 national work plan to minimise the trade deficit along with investment-related initiatives like establishing a one-stop service centre, will support private investment,” the World Bank report reads, adding that the growth of private sector consumption is expected to drop due to increased import tariffs on selected agricultural products and consumer goods.
Government spending will increase to 29.7 per cent of the gross domestic product (GDP) by 2021 due to increased salaries of civil servants, higher social security spending and a pick-up in capital expenditure, according to the report.
The government might not achieve the targeted economic growth rate even with a rise in public expenditure as the capital expenditure is below the level necessary to achieve the growth rate.
However, the World Bank says that the country’s current account deficit is likely to moderate to 5.9 per cent of GDP by 2020-21, as spending on federalism-related infrastructure and post-earthquake reconstruction tapers down and the government starts implementing a work plan for encouraging export-oriented and import-substituting industries.
Meanwhile, the report also reads that the persistently high trade deficits would raise the risks to the external sector, especially if remittance growth slows down due to geopolitical tensions in migrant receiving countries and uncertain oil prices. Similarly, lower remittances could also impact the liquidity in the financial system.
The World Bank report also projects rise in inflation rate marginally with higher public sector wages, increases in import duties on agricultural and industrial goods, and the removal of value added tax exemptions on some intermediate goods and services.
According to the World Bank, Nepal’s inflation will remain between 4.5 per cent and 5 per cent, though the current macroeconomic report published by the central bank revealed that inflation reached a near three-year high of 6.95 per cent in mid-August following a sharp hike in food prices.
The World Bank has attributed the rise in the consumer price index to higher public sector wages, increases in import duties on agricultural and industrial goods, and the removal of value added tax exemptions on some intermediate goods and services. “Regular supply of electricity at low cost and low inflation in India is expected to offset some of the increase.”
Likewise, the South Asia Economic Focus, ‘Making (De)centralisation Work’, reads that strong domestic demand, which propped high growth in the past, has weakened, driving a slowdown across the region. Imports have declined severely across South Asia, contracting between 15 per cent and 20 per cent in Pakistan and Sri Lanka. In India, domestic demand has slipped, with private consumption growing 3.1 per cent in the last quarter from 7.3 per cent a year ago, while manufacturing growth plummeted to below one per cent in the second quarter of 2019 compared to over 10 per cent a year ago, according to the report.
In a focus section, the report highlights how, as their economies become more sophisticated, South Asian countries have made decentralisation a priority to improve the delivery of public services. With multiple initiatives underway across the region to shift more political and fiscal responsibilities to local governments, the report warns, however, that decentralisation efforts in South Asia have so far yielded mixed results.
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