ADB brings down growth projection to 5.5 per cent

Bringing the government's economic growth estimation – of 8 per cent – to lower side, the Asian Development Bank (ADB) claimed that Nepal’s economy is expected to grow by only 5.5 per cent in the current fiscal year 2018-19, down from 5.9 percent a year earlier
According to the Asian Development Bank (ADB) Nepal Macroeconomic Update – released today – the growth forecast represents a continued trend reversal but is substantially higher than the average rate of 4.3 per cent in the last 10 years from fiscal 2009 to 2018.
The agriculture sector is expected to grow at a rate of 3.5 per cent in 2019, up from 2.8 per cent in 2018 on the back of an anticipated bumper harvest supported by a good monsoon, it further reads, adding that the monsoon season that usually lasts from June to September has so far been normal this fiscal year. "The paddy acreage is reported to be above 95 per cent because of timely and well-distributed rainfall."
Likewise, the industrial sector is expected to expand by 7.2 per cent in the fiscal year 2018-19, buoyed by improved electricity supply. The 456 MW Upper Tamakoshi Hydropower Project is expected to be completed within this fiscal year. The addition of electricity produced by the plant to the national grid will relieve Nepal from relying on power imports from India during the wet season.
The manufacturing subsector is expected to do well with the end of load-shedding since May 2018, the ADB said. And the services sector will likely grow by 6.1 per cent with the expansion of wholesale and retail trade, financial intermediation and travel and tourism subsectors.
According to the ADB, inflation is projected to rise to 6 per cent in the current fiscal year from 4.2 per cent, partly reflecting higher inflation expected in India, a modest rise in oil prices, and higher government expenditure under the new federal structure.
The expansionary budget for this fiscal year, an increase of 25.7 percent, and higher government expenditure under the new federal structure will raise inflationary pressure, it said.
Though revenue collection of Rs 731.4 billion amounting to 24.3 per cent of the Gross Domestic Product (GDP) slightly exceeded the budget target in the last fiscal year, the fiscal deficit widened to 6.7 per cent of GDP with the rise in government expenditure compared to the previous year.
While capital expenditure increased by 28 per cent in the last fiscal year with the execution rate reaching 79.7 per cent, the hasty nature of spending has continued, undermining the quality of capital projects, the report adds, "While remittance has shown a healthy growth, a substantial rise in the near future is unlikely to offset the rise in the trade deficit, leading to further widening of the current account gap."
Releasing the report ADB’s principal economist for Nepal Sharad Bhandari said that growth will be supported by expectations of greater political stability following the 2017 elections, normal monsoon and efforts to accelerate implementation of mega infrastructure projects.”
The limited capacity at sub-national levels and challenges to smooth implementation of federalism may pose risks to growth, he added.
"Some of the major issues affecting smooth implementation of fiscal federalism are slow progress in requisite legislation and deployment of staff, the need for further clarification of mandates and responsibilities of the three tiers of government, and inconsistencies in revenue mobilisation regarding fees and taxes at the local level," the ADB report reads. "Nepal increasingly faces the risk of external sector instability due to a rising trade and current account deficit. The current account deficit of $2.4 billion (8.2 per cent of GDP) in fiscal year 2017-18 is significantly higher than the deficit of $95.7 million, or 0.4 per cent of GDP, a year earlier."

Budget to declare next decade as 'Decade of Economic Growth'

The government is declaring the next decade as a 'Decade of Economic Growth' in the budget for the next fiscal year.
Tabling the government's principles and priorities of the budget for the next fiscal year in the parliament today, finance minister Bishnu Poudel said that the government will declare the next decade as the 'Decade of Economic Growth'.
"The next three fiscal years, starting from fiscal year 2016-17, will be called the 'courageous starting' phase for economic growth," he said, adding that another three fiscal years, from 2019-20 to 2021-22, will be called 'encouraging transformation phase' for economic growth.
"Likewise, Fiscal Year 2022-23 to 2024-25 will be called the 'phase for double digit economic growth', and 2025-26 will be called the 'sustainable economic growth phase'," Poudel said, adding that the next decade will spur upward spiral economic growth.
The finance minister also stressed that the government's focus will be on service sector, including agriculture, industry and tourism, claiming that these are the key drivers of economic growth. "The government will help increase production and productivity in these sectors to accelerate growth," he added.
However, the country has been reeling under low economic growth of around 3 per cent in the last decade due to political and policy instability, inefficient bureaucracy and eroding spending capacity of development projects that could have created wealth and helped redistribute the wealth.
Without increasing efficiency of bureaucracy, qualitative spending capacity of development projects, increasing economic growth is a distant dream. The budget for 2015-16 had also declared the current fiscal year as the budget implementation year. But the government has failed to spend capital budget in the current fiscal year.
According to the Financial Comptroller General's Office (FCGO), the government has spent only 20.46 per cent of the capital budget till May 4. Of the total capital budget of Rs 208.87 billion, the government has been able to spend only Rs 42.17 billion so far.
The government is sitting on a cash pile of Rs 100 billion due to its eroding spending capacity which has pulled the economic growth down to 0.77 per cent in the current fiscal year.
Nepal needs to post economic growth of around 8 per cent to achieve developing country status by 2022 from the current status of Least Developed Country (LDC), and also to upgrade to middle-income country by 2030 from the current low-income country.
But the slew of economic reforms programmes and age-old Acts have been blocking the economic growth rate, which had once in the 90's touched 8 per cent due to economic reforms of the 90s post democratic movement. The government has failed to start the second generation economic reform programmes that is the root cause for the low economic growth trajectory.

Economic growth plunges to 13-year low at 0.77 per cent

The economic growth for the current fiscal year has squeezed to almost zero, according to the Central Bureau of Statistics (CBS).
Releasing the gross domestic product (GDP) estimate for the current fiscal year today, the CBS said that the economy will grow by a mere 0.77 per cent – which is a 13-year low – in the current fiscal year. In the fiscal year 2001-02, the country – under the King Gyanendra's rule – had recorded economic growth of 0.16 per cent. Likewise, the CBS has also revised last fiscal year's economic growth downward to 2.32 per cent from earlier estimation of 3.04 per cent.
The subpar monsoon that resulted in weak agricultural output, almost five months of economic blockade, and stalled reconstruction work in the aftermath of the last year's devastating earthquakes have pulled the economic growth down to a 13-year low, according to CBS director general Suman Raj Aryal.
The economy did not plunge into negative zone also due to better performance by the service sector including health and education sectors, he added.
The largest contributor to the economy, agriculture, is estimated to grow by only 1.14 percent, though its contribution to the economy is 31.19 per cent, whereas the lowest contributor – fisheries' sector – has just 0.5 per cent share in the economy.
The report also revealed that the total size of the economy is going to grow to Rs 2.25 trillion in the current fiscal year, from Rs 2.12 trillion in the last fiscal year.
Likewise, the largest contributors to the economy are agriculture (31.19 per cent); followed by wholesale and retail trade (14.23 per cent); real estate (9.16 per cent); transportation, communication and storage (8.42 per cent); construction (6.88 per cent); education (6.76 percent); and production (5.53 per cent) sectors, according to the CBS.
However, of the 15 sectors that are used to calculate the GDP growth, some six sectors are going to record negative growth in the current fiscal year.
Various national and international institutions have projected the Nepali economy to grow between -0.9 per cent and 2.2 per cent, whereas the government has in its white paper projected the growth at around 2 per cent, during the current fiscal year. The central bank had projected a negative growth for the economy whereas UNESCAP yesterday projected that the economy will grow by 2.2 per cent.
According to Aryal, various institutions are involved in making projetctions about GDP growth, but the CBS' projection is the authentic and most dependable one. "The CBS has projected the economic growth on the basis of nine months' data of the current fiscal year," he said, adding that the remaining 3 months could see some increment in economic activities, which could lead to improved economic growth.

Has gross national income increased?
Despite low economic growth, the CBS has projected an increment in per capita gross national income (GNI) to Rs 80,921 in the current fiscal year from last year's Rs 77,079. The increment of Rs 3,842 is 4.98 per cent compared to the last fiscal year, the CBS said. However, the increment in GNI per capita covers only half the inflation rate for the year, which is around 10 per cent, according to the central bank.

Savings lowest in last 22 years
Likewise, gross domestic savings as percentage of gross domestic product (GDP) is the lowest in the last 22 years, according to the CBS. The gross domestic savings as percentage of gross domestic product (GDP) is likely to stand at 5.26 per cent in the current fiscal year, as the country has failed to enhance its productive capacity. The figure is the lowest since fiscal year 1994-95.

Sectoral growth (compared to last fiscal year)
1. Agriculture and Forestry – 1.14 per cent
2. Fisheries – 11.76 per cent
3. Mining and quarrying – 6.54 per cent (negative growth)
4. Manufacturing – 9.86 per cent (negative growth)
5. Electricity, gas and water – 1.66 per cent (negative growth)
6. Construction – 3.98 per cent (negative growth)
7. Wholesale and retail trade – 1.13 per cent (negative growth)
8. Hotels and restaurants – 4.85 per cent (negative growth)
9. Transport, storage and communications – 2.55 per cent
10. Financial intermedeation – 3.30 per cent
11. Real estate, renting and business activities – 3.72 per cent
12. Public administration and defence – 5.78 per cent
13. Education – 6.69 per cent
14. Health and social work – 8.85 per cent
15. Other community, social and personal service activities – 5.60 per cent

Shadow economy expands thanks to government fecklessness

The shortage of essential goods in recent weeks and months, caused by the Tarai-Madhesh unrest and the Indian blockade, has spawned a shadow economy. The increasing reach of the shadow economy – also due to structural deficiencies and market anomalies – is going to bring about another catastrophe in the country, warn economists.
The spread of the shadow economy will hurt the country in the long run as the country will slip out of the government's hand, if the current situation continues, they said.
Former finance secretary Rameshwor Khanal said the economy is slipping out of the government's hands. "The economy is being hijacked by black-marketeers, smugglers and criminals," he said, adding that in the long run these elements will run the economy into the ground and that will also be bad for cross-border trade. "The economy in criminals' hands will eventually hit the cross-border trade too."
According to the Central Bureau of Statistics (CBS), Nepal's economy is worth around $21 billion.
"That is also about the size of the shadow economy," claimed economist Prof Dr Madan Kumar Dahal. "In economic parlance it is called the parallel economy," he said, adding that earnings from smuggling, corruption and black-marketteering are all part of this parallel or black economy, which will ruin the economy and country in the run long run.
Government fecklessness has not only left consumers helpless but also boosted the shadow economy.
Thus, suggesting that the government declare an emergency in view of the increasing shadow economy, Dahal said, "Nepal has turned into a banana republic." According to him, the country is suffering because of its complete dependency on one country and failure at trade diversification over the past few decades.
The prolonged Indian blockade has pushed the prices of essential commodities, includes petroleum products, to more than double. People are forced to pay anything between Rs 250 to Rs 500 per liter of petrol that costs only Rs 104 per liter. Consumers have been paying Rs 10,000 for a cylinder of cooking gas, which is priced at Rs 1,400. Likewise, the price of edible oil has increased to Rs 250 per liter from Rs 120 a month ago, whereas rice, lentils and pulses have also doubled in price. "But the government is nowhere to be seen," said president of Nepal Retailers Association (NRA) Pabitra Man Bajracharya, during an interaction with Nepal Republic Media today.
Admitting that the prices of some commodities have jumped, he said, wholesalers have been charging retailers high prices, citing supply constraints and increased transportation charges due to the fuel shortage.
The government has been doing nothing to control these market anamolies, he said, adding that officials at the Department of Commerce and Supply Management (DoCSM), who are responsible for controlling such malpractices in the market and maintaining uniformity in prices, are in no mood to intervene. "They just say that the need of the hour is to get supply of goods," he added.
President of Consumer Rights Investigation Forum Madhav Timalsina seconded Bajracharya's views. "Nepali consumers are probably going through the toughest time ever," he said, accusing traders of creating artificial shortages to push up price. "As the government has been doing nothing, unscrupulous traders are having a field day," he added.
Despite the open black-marketeering, the government has done nothing, Timalsina said suggesting the government to scrap the consumer laws altogether, if it cannot enforce them.
The shortage has created opportunity for corrupt bureaucrats, black-marketeers and smugglers to earn illegal money distorting the market.
"The distortion in the market could be corrected, if government could monitor and regulate market, and also normalise the supply system," Khanal said, however, adding that government should let the market function smoothly, without intervention.
Likewise, Finance Secretary Suman Prasad Sharma also accepted that high demand and low supply had encouraged black-marketeering. "But the government has to act fast to stop the economy from going to the dogs," Sharma said, claiming that the government is trying to build confidence in the market by regularising the supply-side.

Former finance ministers urge government to bring full budget without policy shift, drastic changes in tax rates

Former finance ministers today said that the incumbent government that has been formed to hold election should bring a full fledged budget without any policy shift and changes in the tax structures, except the international obligations.

Speaking at an interaction here today, they said that the budget should be accepted to all the political parties and a document that could be owned by an elected government.

However, former finance minister and UCPN-Maoist leader Barsa Man Pun said that the government should not be excited and bring a shift in current policy of three pillar economy; public, private and cooperatives. The government should also not change the tax rates drastically, he added.

The finance minister has promised the private sector that the budget will be private sector friendly and promote liberal market economy.

But another former finance minister and Rastriya Prajatantra Party (RPP) leader Prakash Chandra Lohani said that the pillars are not that important rather private sector encouragement is key to boost economic growth. “The budget must encourage private sector to invest more,” he said, adding that along with the private sector, the public spending is also very crucial to propel economic growth.

“The government need not bring any new programmes as there are many programmes of the past governments that have not yet been implemented, he added.

Likewise, former finance minister and CPN-UML leader Bharat Mohan Adhikari urged the government to bring the full-fledged budget but without changing tax rates. He also suggested encouraging investment, and particularly, spending more capital budget. “Capital expenditure and import substitution should get priority,” Adhikari added.

Former energy minister and Nepali Congress leader Prakash Sharan Mahat, on the occasion, said that the current government should change the tax rate for products which need to be discouraged.

Chief economic advisor at the Finance Ministry Dr Chiranjeevi Nepal said that the budget will hike the government employees’ salary but is looking for the resources.

Developing Asia faces new era of moderate growth

The Asian Development Bank (ADB) is significantly scaling back 2012 and 2013 growth forecasts for developing Asia, saying that after years of rapid growth, the region must brace for a prolonged period of moderate expansion amidst an ongoing slump in global demand.
“Developing Asia must adapt to a moderate growth environment, and countries will need to do more to reduce their reliance on exports, rebalance their sources of growth, and increase their productivity and efficiency,” said ADB’s chief economist Changyong Rhee. “These measures are critical if the region is to continue lifting its people out of poverty.”
In its Asian Development Outlook 2012 Update, released today, ADB projects the region’s gross domestic product (GDP) growth dropping to 6.1 per cent in 2012, and 6.7 per cent in 2013, down significantly from 7.2 per cent in 2011. The deceleration of the region’s two giants – the People’s Republic of China and India – in tandem with the global slowdown, is tempering earlier optimism.
The report notes that the ongoing sovereign debt crisis in the euro area and looming fiscal cliff in the US could have disastrous spillovers to the rest of the world, particularly developing Asia.
The projected slowdown is likely to ease price pressures, however, with inflation falling from 5.9 per cent in 2011 to 4.2 per cent for both 2012 and 2013, assuming there are no spikes in international food and fuel prices.
The People’s Republic of China (PRC) is forecast to grow 7.7 per cent this year and 8.1 per cent in 2013, a dramatic drop from the 9.3 per cent posted in 2011. The slowdown in the PRC is having a knock-on effect elsewhere in East Asia, with diminished demand for intra-regional exports. Weak demand from industrialised countries is impacting East Asia’s exports, and growth in the sub-region are now forecast at 6.5 per cent in 2012, with an uptick to 7.1 per cent in 2013.
For India, GDP growth will slow to 5.6 per cent in 2012, down from 6.5 per cent in 2011. The downward revision in India’s prospects, due in significant part to weak investment demand, is expected to slow South Asia‘s growth to 5.6 per cent and 6.4 per cent for 2012 and 2013, respectively.
Growth in Southeast Asia is expected to quicken to just over five per cent in 2012, mainly due to Thailand’s recovery from severe flooding in 2011. Higher levels of government spending have contributed to growth in Malaysia and the Philippines, while investment and private consumption in the sub-region are generally buoyant with inflationary pressures abating.
Economic activity in Central Asia is moderating as oil prices stabilise and external demand cools. GDP growth is now projected at 5.7 per cent in 2012 and is expected to edge up to six per cent in 2013.
The growth forecast remains unchanged for the Pacific region at six per cent for 2012, where the resilience of larger Pacific countries, such as Papua New Guinea, is masking the weakening of some smaller economies.
If an extreme shock were to materialize, most economies in the region have room to use fiscal and monetary tools to respond. However, there is currently no region-wide need to pursue aggressive demand management. Rather, efforts should focus on the medium-term issue of continued soft external demand.
Developing a vibrant service sector in the region can supplement growth.
Asian Development Outlook and Asian Development Outlook Update are ADB’s flagship economic reports analyzing economic conditions and prospects in Asia and the Pacific, and are issued in April and October, respectively.

ADB director-general reiterates commitment to support economic development

The Asian Development Bank (ADB) will continue to work closely with the government of Nepal in helping to reduce poverty and promote inclusive growth for all Nepalis, said director-general of ADB’s South Asia department Juan Miranda at the end of his two-day visit to Nepal here today.
Miranda said that he has been following developments in Nepal with keen interest.
“ADB appreciates that Nepal has maintained steady economic growth and macroeconomic stability despite challenging conditions,” he said, stressing the importance of staying the course on economic reforms and development to address poverty and other development challenges as well as achieve higher economic growth.
During Nepal visit Miranda met with finance minister, vice-chair and members of the National Planning Commission (NPC), chief secretary, other senior government officials, development partners, private sector representatives, and the media.
His discussions focused on the need for addressing infrastructure bottlenecks with accelerated development project implementation and private sector investments, and building stronger capacities, governance systems, and enabling environment to support these ends.  
He sought the government’s support and active participation by all stakeholders in the formulation of ADB’s new Country Partnership Strategy for Nepal.  In this context it was agreed that ADB’s support would be more selective and focused addressing the country’s development constraints including energy, transport, urban and rural infrastructure, and skills development. In support of these priorities, ADB will also promote governance, private sector development, regional integration, gender and social inclusion, and climate change adaption.
Miranda also discussed the Melamchi Water Supply Project. “We had a productive discussion with the Ministry of Urban Development on the specific actions to move forward, including the smooth settlement with the outgoing contractor, and swift selection of an internationally reputed, committed and dedicated contractor who can deliver high quality infrastructure in a timely and efficient way,” he said, adding that ADB remains fully committed to providing the necessary support to the government to ensure that the project is completed by early 2016 or earlier, given the importance of the project to alleviating acute water supply shortages for the 2.6 million people in the Kathmandu Valley.
Miranda also discussed the country’s critical energy shortages and reiterated ADB’s commitment to supporting the Government in resolving the issue.
In meetings with the secretaries of the Ministries of Energy and Finance, he discussed the proposed 140MW Tanahu Hydropower Project, which is at an advanced stage of preparation. Discussion focused on the financing structure, and the need and steps to engage highly qualified construction supervisors and contractors to achieve timely construction of this critical infrastructure.      
During his meetings with development partners and private sector representatives, Miranda discussed the current situation in Nepal and highlighted the importance of closer collaboration between development partners and private investors in helping the government create a conducive environment for development.
ADB has worked in partnership with the government of Nepal since the country joined ADB as a founding member in 1966. As of 31 August 2012, Nepal has received 158 loans/grants —122 sovereign Asian Development Fund (ADF) loans ($2,775.88 million), 5 non-sovereign loans ($58.64 million), and 31 ADF grants ($742.25 million) - totaling $3,576.77 million in support.

Sustainable, inclusive growth key

Sustainable and inclusive growth is more important than the double digit growth, according to the experts.
"Economic growth alone does not guarantee people's welfare," said senior economist Prof Dr Bishwhembher Pyakuryal, at an interaction organised by Institute for Integrated Development Studies (IIDS) here today.
On one hand the government has been talking of double digit growth and on the other, the country lacks resources, he said, adding that rate and return of public sector spending has been unsatisfactory leading to the uneven growth.
The country needs to invest heavily on infrastructure, education, healthcare and other basic amnesties for economic growth, said executive director of the IIDS — one of the leading private sector and non-partisan think tanks — Dr Bishnu Dev Pant.
"Unfortunately the country relies heavily on foreign aid and loans to meet such public expenditures, which is not sustainable, he said, adding that the government must raise sufficient revenues for public expenditures via efficient and fairer tax policies.
Political instability has slowed down the pace of economic growth, Pant said, adding that capital expenditure is largely dependent on foreign aid making the government unable to spend on the development expenditures.
Lack of better public expenditure management and result-oriented budget has made the budgetary system redundant, said former economic advisor of the Finance Ministry Keshav Acharya.
Donor-driven propriety, rising non-budgetary expenses and arrears, weakness in various funds and government assets management and public procurement are some of the hurdles in the national development process, he said, adding that the current budgetary system needs reform.
The government's capacity to spend on development works has been eroding, Acharya added.
Declining capital expenditure has greatly affected the key infrastructures coupled with affordable and reliable electricity supply and poor transport network that have contracted the economic growth prospects.
However, the government's ability to spend more on development works will push the economic growth over five per cent from current over three per cent growth, according to a research 'Nepal Economic Outlook, 2011-12 conducted by IIDS.
If the government can increase capital expenditure from current eight per cent to 15 per cent and decrease recurrent expenditure from 18 per cent of current trend to 10 per cent — concentrating on development works and investment — the economic growth rate could climb up to 5.1 per cent in the next year 2012 and 4.6 per cent in an average in the next three years, the research revealed.
However, the current trend coupled with policy measures as well as external factors remain unchanged, Nepal Economic Outlook Model projected the economic growth to remain between 4.6 per cent in 2012 and 4.3 per cent in an average the next three years.
The report also suggested boosting the confidence of domestic investors not only to build the domestic goods competitive but also to attract foreign direct investment that would create employment in the country that has been witnessing an exodus of both brain and muscle drain hurting the country's growth prospects further.