Kathmandu, January 30:

Structural reforms in the financial sector, public sector and governance, as well as efforts to boost investment and productivity have lag-ged behind in Nepal, says Asian Development Bank (ADB) in its quarterly report. ADB, Nepal Resident Mission, that reviews economic situation of Nepal on a quarterly basis, has stated that if the security situation improves, economy will see better days ahead.

ADB’s quarterly economic update for October 2005 has warned that the growth outlook for fiscal year 2006 is rife with major risks. Delayed monsoon in 2005 has already affected paddy production by two per cent, ADB has said, quoting the ministry of agriculture and cooperatives’ preliminary estimates. Other major risks associated with growth is rise in international oil prices, weaknesses in the external sector and a weak economic climate.

ADB has mentioned that subsidies in petroleum products will be unsustainable and government must take actions to establish an automatic price adjustment mechanisms to make energy prices market-oriented and flexible. ADB warned that should oil prices increase further, it could impart a major external shock, including a recession.

The bank has predicted that in the fiscal year 2006, trade balance and economic growth are expected to weaken further following a decline in readymade garment exports and no alternative products emerging to compensate for the loss, said ADB. ADB said that Nepal will have difficult times to achieve a robust growth with the current level of investment (less than 20 per cent of GDP). Nepal requires an investment rate in the order of 27 per cent of GDP to achieve a GDP growth of six per cent or more, said ADB. The bank particularly has said that political instability and government’s focus on fighting the insurgency have slowed the pace of the reform agenda of the Tenth Plan/Poverty Reduction Strategy (PRS). It says that important structural reforms in the financial sector, public sector, and governance aimed at promoting investment and boosting productivity have lagged behind.

ADB said that the government has targeted revenue growth of 14 per cent in FY 2006 which is higher than the 13.3 per cent growth achieved in 2005. In such a context, achievement in GDP growth outlook could be difficult to achieve.

As per initial estimates, revenue collection grew nominally (less than one per cent) in the first quarter of FY 2006 compared with a growth of over 17 per cent in the same period in FY 2005, according to the report. In contrast, government expenditures grew by 10.7 per cent in the first quarter of FY 2006 compared to a negative growth of six per cent in the same period in FY 2005.