IMF estimated that Nepal’s economy will grow at 6.3% in FY 2017/18, a fall by 1.6% compared to the last fiscal year. A lower growth in agriculture output, as a result of catastrophic flooding in the southern plains at the beginning of the current fiscal year, has resulted in a slight fall in real GDP figures. Following the 2015 earthquake and trade disruption, real GDP growth was recorded at 7.9% (highest since 1994) in 2016/17.
Consumer price inflation trend in Nepal largely mimics that of India due to high volume import of both consumer and non-consumer goods from India. Despite the inflationary pressure exerted by increasing global oil prices, consumer price inflation (CPI) fell to 4.1% (as of May 2018) from 5.3% in the previous month due to fall in price of some essential items. In addition, decline in prices of clothes, footwear, housing and utilities, furnishing and household equipment was responsible for moderation of non- food inflation which went down to 4.8% from 6% in the previous fiscal year.
Despite a fall in the number of workers going abroad for employment, remittance flow was recorder at USD 623 million in May 2018. Remittance in the last three months went up drastically by 19% compared to the same period in the last fiscal year.
The real effective exchange rate of Nepali rupee vis-à-vis the US dollar depreciated as of mid-May and picked up slightly by the end of the month. However, on an average real effective exchange rate of Nepali rupee is approximately 14% above the 2010-2014 average.
The first 10 months of FY 2017/18 endured elevated levels of imports leading to a widening current account deficit of USD 1.85 billion. However, this was accompanied by a strong increase in remittance income. Central Bank Reserves which include gold and SDR holdings were at USD 3.9 billion in mid-May, sufficient to cover import of goods and services for more than 8 prospective months.
Recent Fiscal Developments
After prolonged years of surpluses in the overall fiscal balance, rise in both current and capital expenditure in FY 2016/17 has led to a deficit of 2.8% of GDP.
In the last three months, government revenue increased by an average of 14% however, constant net public debt (22% of GDP) alongside a rise in central government spending by 56% and net domestic debt of NPR 400 billion, contributed to the overall negative fiscal balance. Fiscal decentralization has largely contributed to the rise in overall central government spending which transferred NPR 75 billion to local governments.
Recent External and Monetary Sector Developments
Imports from Nepal’s largest trading partners- India and China surged, leading to an increase in overall import by 28% compared to last fiscal year. Petroleum products, machinery parts and vehicles constituted a major chuck of the import value. Similarly, increase in export of cardamom, jute sackings, polyester yarn and ginger, among others, resulted in an increase in export of 5%. Private credit growth as of May stood at 20%, lower than the record high growth of 32% in February 2017.
Nepal and its Peers: Growth, Exports, FDI, Remittances and Human Development
A comparison of Nepal with other south Asian nations reveal the following results:
- Although per capita GDP growth of Nepal was similar to that of Cambodia and Bangladesh in the year 2000, its growth today remains poor and lags behind all other South Asian countries.
- Nepal fairs poorly in comparison to its peers in terms of exports. In 2016, export value of GDP was lower than that of 2014.
- Due to lack of investment friendly environment, FDI inflow in Nepal is the lowest in the region.
- Remittance as a percentage of GDP is the highest in the region for Nepal, after Tajikistan.
- Growth in remittance has played a crucial role in eliminating poverty across Nepal within a short period of time. Although poverty is relatively higher in rural and mountainous areas of Nepal, the decline in overall poverty is reflected by an improvement in Nepal’s Human Development Index.
Though the macroeconomic indicators are bleak but with the right economic strategy, Nepal can achieve the desired double digit growth for sustainable period of time. Following economic reforms should be targeted to transform the economy from the current state of destitution.
- Industrialization of the economy: The focus should be to transform the agriculture economy to an industrialized one. Considering the composition of labor force, knowledge economy is still in a rudimentary phase so the priority should be to modernize the agriculture sector and develop small and medium scale industries.
- Utilization of foreign investment: Besides proper utilization of domestic savings, Nepal must adopt a policy to encourage foreign direct investments.
- Configuration of contemporary neighborhood policy: Astute neighborhood policy must be adopted to utilize the neighboring markets. As it is difficult for Nepal to compete with India and China, the focus should be in endorsing favorable bilateral or trilateral agreements. Such agreements should encourage the investors (from China and India) to invest in Nepal.
- Reformation of Banking and Financial Institution (BFIs): Despite the implementation of various stringent rules, presence of BFIs is still relatively scarce in the remote areas of Nepal. Additionally, BFIs have not been able to provide loans to small and micro entrepreneurs.
- Development of infrastructure: Nepal should extensively develop modern infrastructures by mobilizing different economic actors. Development of infrastructure is also essential to link the economy with the local and global market.
Apart from above mentioned issues focus also should be on promoting good governance, curbing corruption, and radically transforming bureaucracy.