The current account deficit is estimated to narrow to 8.1 per cent of GDP in fiscal year 2022-23

Kathmandu, September 21

Nepal's economy is projected to modestly expand by 4.7 per cent (at market prices) in fiscal year 2022-23, down from an estimated growth of 5.8 per cent in fiscal 2021-22, says an update of the Asian Development Outlook (ADO) 2022, the flagship economic publication of the Asian Development Bank (ADB).

Gross domestic product growth is forecast to moderate largely reflecting tight monetary policy for fiscal 2022-23, necessary to stem the rise in imports, a marked decline in foreign exchange reserves, and inflationary pressure.

"Downside risks to growth may arise from further stringent measures by the authorities that may be necessary to curb import, which will depress domestic production and consumption, adversely affecting growth," said ADB Country Director for Nepal Arnaud Cauchois.

"A resurgence of COVID-19 infections leading to lockdown measures, intensification of dengue fever straining the fragile health system, disasters triggered by natural hazards, and geopolitical turmoil may further dampen growth prospects."

The update highlights that agriculture growth will likely be boosted owing to a normal monsoon, but the ongoing fertiliser shortages may adversely affect paddy production. Industry is expected to grow on increased generation of hydroelectricity and capacity utilisation of industries. The report also notes that services growth will likely moderate owing to a slowdown in real estate, wholesale, and retail trade activities, induced by credit control measures and hike in interest rates. But provincial and federal level elections scheduled in November 2022 will stimulate spending supporting GDP growth.

The government's fiscal policy reflected in budget speech for 2023 is somewhat expansionary, focused on strengthening agriculture, industry, infrastructure, and social protection.

Monetary policy is contractionary, aimed at curbing high credit growth to contain domestic demand, escalating prices, and rising imports.

The country's inflation will likely decline to 6.1 per cent in fiscal 2022-23 from 6.3 per cent in 2021-22, restrained by tight monetary policy, a normal harvest, somewhat subdued oil prices, and a modest inflation decline in India.

The current account deficit is estimated to narrow to 8.1 per cent of GDP in fiscal year 2022-23 owing to a moderation in merchandise imports amidst stable remittance inflows.

Out-migration for foreign employment has picked up, exceeding the pre-pandemic level of fiscal year 2018- 19. Imports related to COV- ID-19 will have substantially decreased and falling oil prices will help lower import bill for Nepal.