According to the macroeconomic update (April 2018) published by the Asian Development Bank (ADB), Nepal’s economy is anticipated to grow at 4.9% in FY2018 compared to 6.9% in FY2017. Floods of August 2017 and erosion of the base effect attribute to decline in the growth rate. The projection is 0.2% upward revision from the September edition of macroeconomic update 2017 reflected by better harvest of agro produce, substantive government expenditures and expansion in construction subsector. In addition, acceleration of post-earthquake construction and planned disbursement of relief grants to earthquake victims shall induce growth.
Nepal’s economy grew by an estimated 6.9% in FY2017 from a low growth of 0.01% in FY2016. The agriculture sector grew by 5.3% in FY2017, up from 0.03% in FY2016. The above average monsoon and timely availability of farm inputs such as seeds and fertilizers along with the expansion of irrigation facilities helped increase agriculture output.
The industry sector grew by 10.9% in FY2017 after from 6.3% in FY2016 due to the expansion of construction activities and increased availability of electricity. Similarly, BFIs active role in increasing the access to finance across the country, increase in arrival of tourists, and notably, normalization of trade and subsequent increase in wholesale and retail trade further led to services’ sector growth by 6.9% in FY2017 up from 2.1% in FY2016.
For 2018, the agriculture sector is forecasted to grow by 3% and a modest growth is expected in the industrial sector given the expansion of construction sub-sector. Service sector growth on the other hand, is expected to decline to 5.5% in FY2018 from 6.9% in FY2017.
|Indicators||FY 2016 (%)||FY 2017 (%)2||Projected rate for FY 2018 (%)3||Percent Change (3-2)|
|Gross Domestic Product (GDP growth||0.01||6.9||4.9||-2.0 Ñ|
|Sectoral Contribution to GDP|
The fiscal sector saw an upsurge in expenditure performance in the first seven months of FY2017/18. Capital expenditures surged by 26.9%, but execution remains at 19.7%. Lack of project readiness and coordination among implementing agencies, frequent transfer of key project staff, weak contract management and procedural hurdles related to land acquisition and forest clearance are some of the key reasons for poor execution of capital expenditures. On the other hand, recurrent expenditure was high with its year-on-year growth of 46.3% and execution at 45.4% in the first seven months of FY2018. The recurrent expenditures will increase in FY2018 with continued implementation of the federal system of governance.
|First seven months of FY2018||Year-on-Year Growth (%)||Execution (%)|
The revenue side of the fiscal sector saw an increase of 21% y-o-y in the first seven months of FY2018 primarily attributed to increase in higher import growth.
Thus, the budget as of mid-February 2018 is in deficit by NPR 26.4 billion, down from a surplus of NPR 17.9 billion in the corresponding period of FY2017/18 An increased recurrent expenditure compounded by election expenses and fiscal transfers widened the budget deficit.
The government’s total internal borrowing has significantly increased to 13.5% of GDP as a resultant of upsurge in domestic borrowing. The total external public debt as of mid-FY2018 is 15.0% of GDP, which too is likely to increase in FY2019 to meet fiscal transfers to both provincial and local governments. However, the sources of revenue generation will be limited given the small sized economy, further constrained by inadequate capacity of resource mobilization particularly at provincial and local levels. This will likely lead to more borrowing from both internal and external sources to meet the widening fiscal gap.
|Fiscal Year (FY)||Total external public debt (NPR in billion)||Total internal borrowing (NPR in billion)|
|FY2017||402||232.2 (8.9% of GDP)|
|FY2018 ( Mid February )||436.5 (15% of GDP)||394.5 (13.5% of GDP)|
Inflation in the monetary sector remained moderate at 3.7% until mid- February 2018 as a resultant of modest oil prices, ease in the supply of goods, better-than-expected harvest and subdued inflation in India. Increase in government expenditures, fiscal transfers and disbursements of earthquake relief grants will likely increase inflation for the remaining months of FY2018. For FY2019, the average annual inflation is expected to be around 6%.
The Broad money (M2) supply in the monetary sector grew by 13.5% year-on-year as of mid-February 2018. Net Foreign Assets on the other hand fell by about 2.0% through mid-February 2018, after rising by 3.9% in the year earlier period, owing to sluggish rise in remittance and huge trade deficit.
The credit disbursement saw a moderate increase until mid- February 2018 while the deposit collection of BFIs increased at a slow pace due to a sluggish growth of remittances and the inability of governments to utilize budget in the first seven months of FY2018.
|Growth (%) for FY 2017||Growth (%) until mid-February 2018||Percent Change|
|Deposit Collection||8.9||6.8||-2.1 Ñ|
|Credit Disbursement||12.9||14.7||1.8 D|
The monetary sector also saw the Nepal Rastra Bank intervene for liquidity management through monetary policy operations. In addition, the implementation of interest rate corridor contained the short-term interest rate volatility from December 2017 onwards.
The country’s external sector weakened as import growth outdid export growth alongside a slow growth in remittance inflow, contributing to a current account deficit of USD 1374.1 million by the first seven months of FY2018. In addition, weak capital inflow accompanied by the current account deficit led to an overall balance of payment deficit of USD 178 million. Merchandise imports went up by 23.9%, consequently leading to a widening trade deficit of USD 5.8 billion. On the contrary, there was a notable increase in export of agro-based products, which can be attributed to normalization of Nepal’s trade activities and better management of electricity during the review period. Although a substantial rise in foreign investment was observed in cement, hydro and hotels since FY2017, its share of GDP remains below 1%. As of mid-February 2018, Nepal’s gross foreign exchange reserves stood at USD 10.2 billion which is sufficient to cover about 10 months of goods and services.
With the implementation of fiscal decentralization in the new federal set-up, the GDP growth of 5.5% is predicted for FY2019. This higher forecast is dependent on the assumption of normal monsoon and accelerated infrastructure projects. However, limited experience and capacity especially in provincial and local governments remain a major challenge in the smooth implementation of federalism.
Data Source: ADB Macroeconomic Update (April, 2018)