Tuesday, December 4, 2012

Economic growth to contract to 3.8 per cent: IMF

Increasing political uncertainty, erratic monsoon and slower services activity due to 'possible' slowdown of remittance growth, coupled with spillover effects from declining growth in India will pull economic growth for the current fiscal year down to 3.8 per cent against last fiscal year's 4.6 per cent, according to International Monetary Fund (IMF)'s projection.
"The outlook for 2012-13 is challenging," it said, adding that spillover effects from declining growth in India — through lower export demand, weaker inward investment, and possibly less remittance — and the dampening effect of continued political uncertainty will also present further challenges to growth. "Inflation is also on the rise, and upward pressure on prices may increase in line with projected developments in India over the next few months."
After a team of IMF 2012 Article IV consultation meeting that visited Nepal on November 16 submitted the report to the IMF board, the board focused on downside macroeconomic risks and addressing financial sector vulnerabilities.
Though IMF welcomed improved macroeconomic performance and progress on structural reforms despite the difficult political environment, it noted that downside risks are increasing because of spillover effects from the slowing Indian economy, a protracted political transition, and stresses in the financial sector.
The IMF emphasised continued commitment to sound policies and structural reforms, particularly in the financial sector to secure macroeconomic stability and to foster sustainable and inclusive growth.
Likewise, it advised continued fiscal prudence, consistent with the objective of keeping public debt roughly constant over the medium term. It also called on the authorities to act expeditiously to pass a full-year budget for 2012-13, and to strengthen public financial management to ensure full execution of the capital budget.
It also stressed on the need to address quasi-fiscal liabilities arising from financial losses at Nepal Oil Corporation and Nepal Electricity Authority, and has urged the authorities to build consensus to gradually adopt an automatic price adjustment mechanism — that it has been suggesting since long and which the government has been delaying on due to some vested interests — while putting in place well-targeted subsidies to protect the vulnerable.
IMF has also suggested reforms in the pension system, and tax and customs administration. It has, though, commended the enhanced revenue mobilisation efforts.
The IMF also emphasised on the need for a targeted and well sequenced acceleration of financial sector reforms, including the amendment of NRB Act to improve the governance of the financial sector and the broadened prompt corrective action framework to address underlying vulnerabilities and to strengthen the system.
Enhancing supervision and improving the quality of data will also be necessary for increasing financial sector stability, it said, also suspecting the reliability of reported data.
The IMF has called for further progress on AML/CFT framework and hailed the authorities’ interest in the Financial Sector Assessment Programme.
The IMF considered that a tightening of monetary policy appears warranted to signal commitment to price stability and support the exchange rate peg, which has served the country well, and also agreed that open market operations and regular auction of T-bills should be used to mop up excess liquidity.
However, the IMF concurred that accelerating the pace of structural reforms will be important to address competitiveness challenges, and achieve higher and more inclusive growth. "Efforts should focus on enhancing the business environment, removing infrastructure bottlenecks, increasing transparency, and improving governance," it suggested.
The central bank has, however, projected an economic growth of 4.67 per cent for the current fiscal year, despite poor harvest due to the late monsoon and shortage of chemical fertilisers during the harvesting season, and also despite the lack of a budget that could have helped the economy grow.

Growth rate
2009-10 — 4.8 per cent
2010-11 — 3.9 per cent
2011-12 — 4.6 per cent
2012-13 — 3.8 per cent
(Figures for fiscal year 2011-12 is an estimate, and for fiscal year 2012-13 a projection. Source: IMF)

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