India’s demonetisation could impact Nepal

Kathmandu, January 11

The impact of the shock move by the Indian government to cease the legal tender of high value banknotes on November 8 could weigh on Nepal’s economy as well, a latest World Bank report says.

Stating that the ‘demonetisation’ could  continue  to  disrupt business  and  household  economic  activities in India, weighing on growth, the World Bank Group’s flagship report titled ‘Global Economic Prospects - Weak Investment in Uncertain Times’ says, “Spillovers from India to Nepal and Bhutan, through trade and remittances channels, could  also  negatively  impact  growth in these neighbouring smaller economies.”

Despite the delays in post-earthquake reconstruction and disruptions in cross-border trade with India adversely affecting growth in Nepal, the country’s economy is set to rebound to an estimated five per cent  growth  in  fiscal year 2016-17  (ending  on  July 15, 2017), up from 0.6 per cent posted in fiscal 2015-16, according to the World Bank.

This puts the country in the fifth position among the South Asian economies — a significant improvement from fiscal year 2015-16, when it had ranked at the bottom rung.

This is on the back of acceleration in post-earthquake reconstruction, together with favourable monsoon rains, which is expected to support economic activity. Lifting of the southern border blockade with India around the first week of February has normalised trade and eased supply-side bottlenecks.

However, a slowdown in growth of remittance inflows — which account for a third of the country’s gross domestic product — from the oil-rich   Gulf Cooperation Council economies has weighed on consumption and investment.

The increased imports for post-earthquake reconstruction amid receding remittances in Nepal has, nonetheless, worsened the country’s current account balance.

Hence, Nepal’s growth is expected to ease to 4.8 per cent in fiscal 2017-18 ‘in line with the country’s potential’, the report says. While inflation is projected to subside to an average pace of eight per cent in the medium-term, continuing reconstruction-related imports, and slowdown  in remittances, are expected to turn current account surpluses into deficits in the forecast period.

While over-dependence on remittance has been flagged as a major risk for the country, the World Bank report has also cited political unrest as a possible threat in retarding economic growth. Moreover, since Nepal’s currency is pegged  to  the  Indian rupee,  the country’s exports  could  suffer  from  a  loss  of   competitiveness   should India’s currency appreciate  against  major  currencies, as per the report.

Also, preliminary data suggests continued investment weakness in 2016, according to the World Bank. Across the region, investment growth slowed sharply from 11  per cent  in  2011  to  three per cent  in  2014,  with  only  a modest  rebound  to  six  per cent  in  2015. “The downward trend reflects  a  slackening  in India,  (which  accounts  for  more than  three-quarters  of  the  region’s  total  investment), offsetting  a  pickup  in Bhutan, Nepal,  and Pakistan.”

In terms of the region, economic activity in South Asia expanded by an estimated 6.8 per cent in 2016, buoyed by robust domestic demand. India continued to post strong growth, reflecting ongoing tailwinds from low oil prices and support from structural reforms. Excluding India, regional growth is estimated at 5.3 per cent in 2016, according to the World Bank. “However, there were  notable differences  within  the  region  depending  on security  issues,  domestic  policies,  and  reliance  on remittance flows.”

Looking ahead, growth in the region is projected to edge up to an average of 7.3 per cent in 2017 to 2019, supported by dividends from ongoing policy reforms and strong domestic demand. Sluggish recovery in key export markets, weak private investment, and security challenges pose headwinds to the outlook. Risks are tilted  to  the  downside,  including  reform  setbacks,  heightened  domestic  insecurity  and  political  tensions,  and unexpected tightening of financing conditions.

Structural reforms, aided by supportive macroeconomic policies, could help mitigate some of the risks, and bolster the region’s long-term growth prospects, according to the World Bank.

Meanwhile, it pared back its global growth estimate for this year a tenth from the June forecast to 2.7 per cent compared to 2.3 per cent growth seen last year.

But, uncertainty about economic policies of US President-elect Donald Trump is clouding the outlook. “We need to pay attention. All eyes are on US policymakers and how they will formulate their policies,” Ayhan Kose, main author of World Bank’s global forecast, was quoted by AFP as saying. “What happens in the United States does not stay in the United States.”