Nepal | April 24, 2019

Double digit growth: Expectations and reality

Vikash Raj Satyal

To achieve rapid growth, we need agricultural revolution, openness for foreign investment, investment-friendly industrial environment, facilities for business, corruption control and strict compliance with fiscal discipline

Illustration: Ratna Sagar Shrestha/THT

The government in its plans and policies, presented on May 21, has announced to achieve a double digit growth in the next five years. The National Planning Commission (NPC) too has projected a growth of nearly 10 per cent in coming three years.

But under the current circumstances, how realistic are these expectations?

Nepal in 2017 crossedits growth ceiling to 7.9 per cent, highest in the decade, which followed one ofthe lowest growths of 0.6 per cent the previous year. The impact of the 2015 earthquake and five-month-long border blockade were the main reasons for the slow growth. As a result, a normal revive of the economy in 2017 caused high growth. This was largely due to a very low base value in 2016.

It is a must to understand that there were no miraculous achievements in 2017 to produce that high growth; rather it was simply the calculation formula which was based on
low base value of 2016. Looking at the decade’s trend, the country has experienced an average growth of 4.3 per cent.

When it comes to economic growth forecasts, no predictions are perfect, as they are based on assumptions which change with time. However, the International Monetary Fund has predicted a 5 per cent growth for 2018 (Economic Survey 2017).  The Asian Development Bank has estimated a growth of 4.9 per cent for 2018 and 5.5 per cent for 2019 (Asian Development Outlook 2018). Amid this, the NPC recently presented to the federal government a scenario of growth of 9.1 per cent and 9.5 per cent for the next two fiscal years—once again very high expectations.

Currently, the country is in economic crisis as displayed by major indicators. Our trade deficit is widening annually. In the first eight months of this fiscal year, the trade deficit has reached around 37 per cent of the Gross Domestic Product (Economic Survey 2018). This trend is very alarming for the GDP growth as it indicates a strong decline in our production capacity.

By the composition of GDP, the primary sector that consists of agriculture, forestry, fishery and mining holds about 28 per cent of GDP, which is the largest share among others. Unfortunately, this sector is declining year by year. But the incumbent government has no special programmes for agriculture uplifting. The only major agriculture support programme, as seen in the current fiscal budget, is “The Prime Minister Agriculture Modernisation Project” for which Rs 4.77 billion has been allocated.

This programme is a continuation from last year, but last year’s evaluation shows that it was a largely a failure. As a result, the agriculture sector in the current fiscal year has shrunk to 27.6 per cent. These facts indicate the primary sector of GDP is likely to decline in coming years as well.

The other two prominent sectors of GDP are wholesale-retail trade and realestate. Real estate is likely to dwindle due to various policy restrictions imposed by the current government. Trade that has flourished due to import will also be declining due to strengthening US dollar and decreasing earning from remittance that had boosted consumer economy in the country. However, all these downward trends can be changed if country can make some radical policy changes.

Growth rate while gives a handy indicator of economic development, it is not the whole story. Size of the economy matters a lot. The USA, the world’s largest economy, has GDP of $19.39 trillion, but a very low growth rate of about 1.5 per cent. This means, by next year it will add about $290 billion to its GDP. Now if we compare it with our economy, even if we get a 10 per cent growth next year, the total size of our GDP will be around $32 billion.

Further, per capita GDP is another important yardstick where we lag behind even when we compare it to our South Asian neighbours. Nonetheless, we do need a high economic growth to balance it with the rest of the developing nations.

As the incumbent government has been making a pitch for prosperity, it must focus on “prosperity which includes economic development”. We need economic growth to
sustain our increased regular expenses. In the current fiscal year, the total government expenditure has increased by 45.1 per cent. While the federal system, which is one of the most expensive systems, has increased the cost, lack of budgetary disciplines has also contributed to increase in government expenses.

In conclusion, under the current setup, as predicted by many international agencies, it is very likely that we will achieve only a nominal growth of around 5 per cent in the coming years. If so, it will be higher than the decade’s average, but lower than the expected double digit.

To achieve rapid growth, we need agricultural revolution, openness for foreign investment, investment-friendly industrial environment, facilities for business, corruption control and strict compliance with fiscal discipline. There is also an opportunity for Nepal to reap spill-over benefits from our two neighbours India and China—two giant economies.

We need rapid development in our technology, energy and infrastructure. This is possible only from investment in these sectors.

Satyal is professor at Department of Statistics, Tribhuvan University


A version of this article appears in print on October 11, 2018 of The Himalayan Times.

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