Kathmandu, September 6 :

Asian Development Bank (ADB) has forecasted Nepal’s GDP growth in 2006 at two per cent, due to adverse impact of poor summer and winter weather on agricultural production.

Besides poor performance by the agriculture sector, the economic outlook is rendered uncertain by recent worsening of insurgency, political instability and the growing polarisation between the government, says the bank’s flagship publication Asian Development Outlook 2006 Update, released today.

Beyond 2006, the pace of growth will hinge on political stability and credible progress in finding a political solution to the conflict. However, the bank is hopeful that Nepal’s economy would recover in 2007, as it predicts the GDP growth at 3.4 per cent. Despite intensification of the conflict in 2002, Nepal has managed to maintain a relatively solid annual expansion of two to three per cent since then, for two main reasons — the manufacturing sector and a steady inflow of workers’ remittances.

Besides keeping the national economy afloat, the increased inflow of remittances has underpinned consumption and helped alleviate the worst effects of the conflict. These two factors should, it is hoped, continue to operate, says the bank. ADB forecasts that agricultural growth is expected to be pulled down to 1.5 per cent in 2006 by the weather-related decline in both winter and summer crops. It is projected to pick up to 3.5 per cent in 2007.

According to the bank, the industry sector in 2006 will also slowdown and the growth is estimated at 1.3 per cent, reflecting continued conflict-related disruptions and a sharp decline in readymade garment exports since the abolition of quotas under World Trade Organisation agreements. Expansion in services is projected to improve by 2.8 per cent in 2006, reflecting a slight rebound in tourism, and is forecasted to rise further by 3.9 per cent in 2007, assuming that the number of tourist arrivals from Europe and North America will pick up.

The report says that inflationary pressures are likely to increase further as the full effect of high oil prices are pas-sed through to consumers, and as low paddy production plays out in higher market prices. ADB predicts that inflation will rise sharply to eig-ht per cent in 2006, well abo-ve the average of past 3 years.