Chandan Sapkota, Senior Fellow at Nepal Economic Forum (NEF), highlighted key macroeconomic update and the ongoing structural transformation of the economy. The opening remark focused on an overview of robust real GDP growth in the last two fiscal years (FY2017 and FY2018) and the major factors accounting for the remarkable growth rates. It essentially boiled down to base effect (post-earth reconstruction) and fiscal stimulus (high election spending), respectively. With per capita income surpassing US$1000 for the first time, the drivers of growth in the last two years indicate that the benefit in terms of employment and additional earnings were largely felt by those working in construction, and mining and quarrying sub-sectors. Mr. Sapkota underscored the need to generate and sustain the current pace of economic growth, and to ensure that the income per capita growth among the bottom 40% of the population is higher than the average.
He highlighted the challenges faced by Nepal to become a middle-income country by 2030, which is the target set by the government and entails achieving per capital gross national income of US$2500 (PPP Atlas method). Unfortunately, it is challenging to achieve that with the current pace and pattern of structural transformation, especially due to pre-mature deindustrialization, high dependence on remittance income (resulting in Dutch disease effect) and limited sources of growth. This is possible if the government focuses on increasing quantum and quality of public and private investment in seven key sectors or activities, namely high value agriculture, road and air transport, tourism, energy, light manufacturing, urban development, and education/ICT and skills. This remains the most viable strategy to generate higher levels of prosperity and to sustain it.
Mr. Sapkota also touched upon the latest update on key cross-sectoral constraints, risk and opportunities, especially after the three tiers of elections. The key cross-sectoral constrains include lack of policy clarity, inadequate productivity-enhancing infrastructure, fiscal mismanagement, business regulations, unsophisticated financial system, inadequate human capital, weak institutions/governance, and anti-competitive practices. Achieving a meaningful structural transformation that is jobs-rich as well would require being cognizant of the emerging risks and opportunities. The key risks include macroeconomic risks, financial instability, weak contract management, regulatory overreach, political instability, informal and shadow economy, overdependence on India, appreciation of real effective exchange rate or sudden devaluation of Nepali currency, and natural disasters/climate change. There are also some key opportunities including federalism (devolution of authority and better public service delivery), sound macro economy (low public debt, moderate inflation, high foreign exchange reserve), diverse natural resources and demographic dividend (more than 50% of the total population are between 15 and 49 years of age). Likewise with political stability and geographical advantage Nepal can be a major hub for the upcoming international projects. Nepal can also leverage its benefit of being enlisted in LDC with lower borrowing cost and export preferences.
Immediate-term economic outlook looks stable with better execution of capital budget and local level spending. Post-earthquake reconstruction activities, tourism and industrial activities will likely propel growth, although there will be some inflationary pressures, fiscal deficit, volatile financial sector and current account deficit. These should be managed appropriately with an appropriate mix of macroeconomic policies and institutional reforms so that the economy could be structurally transformed to enable higher and shared prosperity.
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