KATHMANDU, OCTOBER 3

Due to the delayed effects of lifted import restrictions, a robust recovery in tourism, and the gradual easing of monetary policies, the World Bank projects Nepal's economy to rebound, reaching 3.9 percent growth in fiscal year 2024. Releasing its the Nepal Development Update, Restoring Export Competitiveness, the world Bank has also projected that Nepal's economy to grow by 5% in Fiscal Year 2025.

'However, there are multiple risks to the outlook including an erratic monsoon, which could dampen agricultural growth; a renewed spike in commodity prices or continued food export bans by India which would raise prices; and higher inflation which could keep policy rates elevated, increase domestic debt servicing costs, and drag on growth,' as per the report.

The report also explores the drivers of external competitiveness for Nepal. The country's total exports amounted to 6.9% of GDP in FY23, representing only a third of the exports of other South Asian middle-income countries on average. The analysis finds that the real appreciation of the exchange rate and continued low labor productivity are associated with Nepal's lower exports. As per the report, Nepal suffers from labor productivity deficit across all three sectors – agriculture, industry, and services – compared to peer countries and its main trading partner, India.

'Amid challenges, Nepal is leading the way towards operationalizing its green, resilient, and inclusive development vision to shape the country's long-term economic recovery,' said Faris Hadad-Zervos, World Bank Country Director for Maldives, Nepal, and Sri Lanka. 'Improved external competitiveness is key to driving this recovery and enabling Nepal to compete in export markets, in terms of both prices and quality. This requires emphasis on reforms to help increase domestic productivity and reduce the inflation differential with Nepal's trading partners.'

The report also projected that South Asia to grow by 5.8% this year-higher than any other developing country region in the world, but slower than its pre-pandemic pace and not fast enough to meet its development goals.

Regional growth prospects are subject to downside risks, including due to fragile fiscal positions. Government debt in South Asian countries averaged 86% of GDP in 2022, increasing the risks of defaults, raising borrowing costs, and diverting credit away from the private sector. The region could also be affected by a further slowdown in China's economic growth and natural disasters made more frequent and intense by climate change, the report states.

'South Asia's energy intensity of output is about twice the global average and the region lags in the adoption of more advanced energy-efficient technologies,' said Franziska Ohnsorge, World Bank Chief Economist for South Asia.

'Improvements in energy efficiency, in the context of a rapid global energy transition, are an opportunity for South Asia to make progress toward both environmental and economic goals.'

In South Asia, the World Bank predicts that India will have the highest economic growth at 6.3 percent, followed by Bangladesh at 5.6 percent, Maldives at 5.2 percent, and Bhutan at 4 percent. Sri Lanka and Pakistan are expected to have the lowest economic growth at just 1.7 percent, according to the World Bank's projection.