Economy will grow at healthy but slower rate: ADB

Kathmandu, September 26

The country’s economy is projected to grow by 5.5 per cent (at basic prices) in fiscal year 2018-19, down from 5.9 per cent a year ago, says the latest Asian Development Bank (ADB)’s Nepal Macroeconomic Update.

“The growth forecast represents a continued trend reversal, but is substantially higher than the average rate of 4.3 per cent in the last 10 years (fiscal 2008-09 to fiscal 2017-18),” said Sharad Bhandari, ADB’s principal economist for Nepal. “Growth will be supported by expectations of greater political stability following the 2017 elections, normal monsoon, and efforts to accelerate implementation of mega infrastructure projects.”

The limited capacity at sub-national levels and challenges to smooth implementation of federalism may pose risks to growth. According to the update, some of the major issues affecting the smooth implementation of fiscal federalism are slow progress in requisite legislation and deployment of staff, the need for further clarification of mandates and responsibilities of the three tiers of government, and inconsistencies in revenue mobilisation regarding fees and taxes at local levels.

The agriculture sector will likely grow from 2.8 per cent in fiscal 2017-18 to 3.5 per cent in fiscal 2018-19, on the back of an anticipated bumper harvest supported by a good monsoon. Industry sector is expected to expand by 7.2 per cent in fiscal 2018-19, buoyed by improved electricity supply. And the services sector will likely grow by 6.1 per cent in fiscal 2018-19 with the expansion of wholesale and retail trade, financial intermediation and travel and tourism subsectors.

The update says inflation is projected to rise to six per cent in fiscal 2019 from 4.2 per cent in fiscal 2018, partly reflecting higher inflation expected in India, a modest rise in oil prices, and higher government expenditures under the new federal structure.

Though revenue collection of Rs 731.4 billion (24.3 per cent of the gross domestic product) slightly exceeded the budget target in fiscal 2017-18,the fiscal deficit widened to 6.7 per cent of GDP with the rise in government expenditures compared to the previous year. While capital expenditure increased by 28 per cent in fiscal 2017-18 with the execution rate at 79.7 per cent, the hasty nature of spending has continued, undermining the quality of capital projects, says the update.

Nepal increasingly faces the risk of external sector instability due to rising trade and current account deficits. The current account deficit of $2.4 billion (8.2 per cent of GDP) in fiscal 2017-18 is significantly higher than the deficit of $95.7 million, or 0.4 per cent of GDP, a year earlier. The merchandise trade deficit increased on higher import of construction materials and capital goods in fiscal 2017-18. While remittance has shown a healthy growth, a substantial rise in the near future is unlikely to offset the rise in the trade deficit, leading to further widening of the current account gap.