Rising revenue potential of sub-national governments will be critical though

Kathmandu, October 7 

The country's economy is projected to achieve an average six per cent growth in the next three years, however the performance could be less impressive if the challenging transition to a federal system affects infrastructure provision and service delivery, according to South Asia Focus 2018, a report published by the World Bank.

Despite limited resources available for infrastructure financing and public service delivery, the Nepali economy has been growing at a stable rate. To sustain investment and maintain high levels of growth, additional private sector resources and engagement - including foreign direct investment (FDI) - are needed, as per the report.

“This necessitates timely implementation of reforms to support an enabling environment for the private sector and to increase foreign investment.”

The service sector has been witnessed as a key sector to boost growth. Services were the main driver contributing 3.6 percentage points, over 60 per cent of which came from trade and hotels, the report states. “For industry, over 90 per cent of growth came from construction and manufacturing. On the demand side, investment and private consumption were the main drivers of growth,” as per the report.

The report further said that the federal structure will be particularly important to enhance implementation capacity and revenue potential at sub-national levels of government. Raising revenue potential of sub-national governments will be critical as will be their capacity to implement their projects and programmes.

Overall, taxes on rising imports, luxury items and incomes of wealthier households, including a broadening of the tax base, will help increase revenue to 29 per cent of gross domestic product (GDP) over the medium term, as per the report. The government has set a revenue collection target of Rs 945.56 billion in this fiscal 2018-19 compared to Rs 730.05 billion of the previous fiscal 2017-18.

The World Bank report has mentioned that the fiscal budget of ongoing fiscal includes investments to promote improved inputs and storage facilities for farmers, including for irrigation. “These investments focus on modernisation, commercialisation, mechanisation and the expansion of value chains. As these programmes ramp up, agriculture sector growth is expected to increase from 2.8 per cent to 4.5 per cent in the next fiscal,” as per the report. Similarly, number of foreign tourists is expected to increase as the country has launched the ‘Visit Nepal 2020' campaign.

Growth will be supported by key infrastructure projects and includes linking completed hydro projects to the transmission grid. A new large private cement factory - Hongshi Shivam Cement - is expected to boost construction activities, while the agreement to build a second cement factory with Chinese investment will likely enhance FDI in the next fiscal year, according to the report. “Growth in industry and services is projected to average eight per cent and six per cent respectively, as infrastructure constraints are eased, and capacity utilisation expanded.”

The World Bank report has projected inflation can be controlled at five per cent over medium term, assuming oil prices rise, and the exchange rate depreciates.

Despite strong import demand and currency depreciation, export performance remains disappointing while imports are still growing rapidly and the country's current account deficit is widening, however, the report expects the current account deficit to gradually improve as import growth moderates.

“The government is shifting from consumption to investment-based growth, with emphasis on engaging the private sector and raising the very low levels of FDI. In addition to infrastructure investments, key reforms will include establishing public private partnerships, one-stop investor services, and e-government services for citizens,” says the report.