Macroeconomic Situation: satisfactory but weak foundation for growth

Favourable indicators but no growth

Macroeconomic situation of Nepal is satisfactory, but the foundation of growth is weak due to structural impediments and institutional challenges. The government’s present target to graduate to middle-income country by 2030 is difficult to achieve.

Nepal has made remarkable progress in reducing poverty and improving social indicators in the last two and half decades. The incidence of poverty has declined from 38% in 2000 to 21.6% in 2015. Similarly, infant mortality rate (per 1,000 live births) and maternal mortality rates (per 100,000 live births) declined from 64, and 415 to 33 and 258 during the same period. Gender equality and empowerment of women related indicators and universal primary education achievements have shown excellent progress.

Total outstanding public debt-GDP ratio has declined from 46.1% to 24.1% during the last decade and average budget deficit as a percentage of GDP declined by 3.5% in the last decade compared to above 7% in the early 1990s. Inflation has also remained in the modest level and the financial sector remained stable. Revenue growth has been remarkable. Balance of payment situation has also remained favourable mainly because of high level of remittance.

However, there are challenges. Nepal is one of the slowest growing economies in Asia. Its average growth rate of about 4% during the last decade, low productivity, large scale migration, high dependence on remittance, and skyrocketing trade-deficit are making the economy highly vulnerable. The government has to undertake significant reforms to move towards higher trajectory of sustained and inclusive growth.

Drivers of growth revisited

The current favourable position--reduction in poverty, improvement in social indicators, good macroeconomic indicators, cushion of foreign exchange and comfortable fiscal space--provides promising opportunities to reinvigorate Nepal’s economy and develop strong foundation for economic development. Sustained higher growth, improved export performance, job creation and reduced dependence on remittance can be achieved by changing the growth drivers and improving institutions.

Agriculture is a critical component of the Nepali economy. The share of agriculture is about 32% in GDP and close to 75% of the population depends on it for their livelihood; but it is growing only by about 3% per annum and the productivity growth is one of the lowest in the region. The gap between actual and potential yields can be narrowed by increasing irrigation facilities, as only about 21% arable land has year-round irrigation. Rapid diversification from cereal crops to high value crops like, fruits, vegetables, herbs, medicinal plants and similar crops along with commercialisation of production provides enormous opportunity to improve productivity growth and farmers’ income.

Nepal has not been able to tap benefits from vastly available water resources and opportunities provided by its two giant neighbours--world’s second largest economy, China and the ninth largest economy, India. Investment in hydropower resources--potential of which is huge--could help significantly in improving productivity, increasing the competitiveness of the economy, creating jobs, and reducing trade deficit, by exporting power to India and other parts of the region.

Nepal has the potential to enlarge the market especially as it is in the proximity of vast north Indian market, which is a home to about 500 million people. The country has not been able to participate in regional and global value chains, which is vital in this globalised and interdependent world. In addition, Nepal is losing comparative advantages (revealed comparative advantages) in many products, but has developed its capability in producing goods in higher complexity sectors (which is not less than some of the Northern Stares of India) and is generating product opportunities in a number of manufacturing products.

Nepali exporters have not been able to utilise the trade preferences provided by different countries and regions. India provides market access to almost all manufacturing products produced in Nepal. Generalised System of Preferences provided by the European Union, and preferential market provided by the US in 66 products and preferences provided by Australia, Canada, China and other countries have been grossly underutilised. So Nepal, among others, should take advantage these favourable provisions to improve the economy of the country.

In addition, tourism and ICT are some of the service sector which has a great potential to support growth and reduce trade deficit. Nepal has a strong comparative advantage in tourism and ICT has the highest potential of value addition and is growing at an exponential rate.

Higher level of public investment including in the tourism areas, simplified procedures for investment including FDI, improvement of transportation and transit system in maximising the benefits from neighbouring economic powerhouses, could help in achieving higher and sustained growth in Nepal.

Shankar Sharma
Shankar Sharma is the Team Leader at the Economic Policy Incubator, supported by Ministry of Finance and DFID. He is also a member of the Advisory Board at Nepal Economic Forum.
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