Nepal | June 03, 2020

Govt likely to fall short of growth target

Pushpa Raj Acharya
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Kathmandu, December 23

With output growth — a significant contributor to economic growth — remaining low, the likelihood that the government will miss the economic growth target of 7.2 per cent set for this fiscal is strong.

The government had set the target based on the assumption that agricultural and industrial output would rise, wholesale and retail trade would expand and other areas under the service sector would register growth. It had also expected election expenses to have a positive effect on the economy.

However, as things stand, agriculture output growth is expected to remain sluggish as production of paddy has dropped by around 100,000 tonnes this year compared to 5.23 million tonnes the previous fiscal, according to preliminary data of the Ministry of Agricultural Development.

Paddy, which contributes 22 per cent to agriculture gross domestic product, is expected to drop to 5.1 million tonnes this year.

The MoAD had set a target of producing a record high 5.4 million tonnes of paddy this year as the ministry had conducted special programmes to harvest paddy bi-annually in some pocket areas of the Tarai, known as the rice bowl of the country.

However, drought during rice planting and subsequent floods adversely affected paddy, said Maniratna Aryal, senior agriculture economist at the ministry.

Likewise, industrial sector output was expected to expand considerably with regular power supply. However, this sector will not surpass last fiscal’s growth due to base effect. Along with substantive progress in electricity generation and reliable supply of power in the last fiscal, the industrial sector’s growth stood at an impressive 10.9 per cent. The high base of last year and delay in completion of the highest capacity project in the country — the 456MW Upper Tamakoshi — will hit industrial growth.

Moreover, the government had expected expenses during elections to stimulate growth as it would contribute in expansion of the service sector, including retail, wholesale trade and tourism sub-sectors. But on the flip side, development projects, including reconstruction, were stalled due to elections. It will be difficult for the government to spend the budget allocated for development this year, according to Keshav Acharya, a senior economist.

At the same time, lending to private sector has plummeted significantly this fiscal due to deposit crunch. Compared to 30 per cent growth in lending to the private sector till mid-December last fiscal, the growth has been limited to only 17.5 per cent this fiscal.

“Banks are on the brink of credit crunch again as 40 per cent of income tax needs to be filed by mid-January and around Rs 30 to Rs 35 billion will be withdrawn from the banking system for the purpose,” said Sudesh Khaling, CEO of Laxmi Bank. “Deposit crunch is likely to get more severe as remittance growth is low and government’s expense has remained sluggish.”

He further said the funds mobilised during elections were unlikely to ease the situation as a large chunk of the fund might have already been utilised to import goods.

Why picture’s not so rosy

  • Paddy production lower than expected
  • Private sector lending hit with banks facing credit crunch
  • Slow government expenditure on development projects, reconstruction
  • Base effect of last fiscal’s industrial output
  • Delay in completion of Upper Tamakoshihydel project

A version of this article appears in print on December 24, 2017 of The Himalayan Times.

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