2010 Nepal Economic Update
May 13, 2010 - Nepal has made efforts to establish a new identity in governance and fiscal priorities since the end of a decade long conflict in 2006. Its GDP is expected to grow 3-3.5% although challenges remain in infrastructure, energy, and labor regulations.
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Nepal's GDP growth rate for Fiscal Year (FY) 2010 is expected to be 3.5%. This is less than a high growth rate of 5.3% in 2008. Political uncertainties, a cooling down of new construction and energy shortages have constrained growth rates.
Nepal ended a decade-long conflict in 2006 and has since been working to establish a “new” Nepal with inclusive and accountable governance structures. However, the transition remains complex and political uncertainty can lead to a deterioration of security the economic performance.
Fiscal management has remained prudent: there has been progress in revenue administration. Service provision, especially in education and health, is improving as community and user groups are increasingly involved in taking decisions that affect their lives.
The government expects agriculture to grow by 1.1%, against the earlier projection of 3.3%. Non-agricultural growth is expected to nearly halve to 3.6% from the 6.6% projected earlier.
Prolonged drought and unseasonal rains adversely affected Nepal’s agriculture, which contributes 33% of GDP. A grain deficit of 400,000 tons is expected in FY10, and there has been little or no new investment to mitigate the effects of weather. Investment in agriculture and irrigation remained at low average of 0.55% of GDP in FY09
Industrial production growth has been negatively impacted by power shortages, strikes, transport disruptions, and other disputes. The appreciating real exchange rate has also hurt manufacturing exporters. The government, nonetheless, projects a recovery of manufacturing growth to 2.7% for FY10, again, on the back of the construction boom.
The service sector has become an important engine of growth, it’s contribution to GDP is now up to 52% over 46% 10 years ago. This is buoyed by increased in tourism receipts, telecommunications, and increase in investments in social services including health and education.
Trade and Remittances
Strong revenue efforts and generous foreign aid have helped to finance rising spending. Foreign aid rose from 3.6% of GDP in FY07 to 4.7% of GDP in FY09
Imports have risen fast from $1.6 billion (26% of GDP) in FY01 to $3.6 billion (30% of GDP) in FY09 – largely due to thriving consumption made possible by remittances. Exports have remained under $1 billion, and as a share of GDP, have continuously declined from 13% to 7%. Exports of readymade garments, carpets and Pashmina – the erstwhile main exports have declined.
Official remittances rose from about 13.8% of GDP in FY07 to 22% of GDP in FY09. This is less than the total amount as it does not account for inflows from India and informal channels. Fueled by high remittances, monetary growth has been high in the last two years.
Nepal’s economic prospects are clouded by political uncertainty that is expected to continue until key stakeholders reach consensus on the type and shape of the new government. Business confidence is expected to remain low with continued law and order problems, extortion, occasional strikes, and uncertainty about private property.
Infrastructure bottlenecks would likely remain. Furthermore, it could be difficult to design and effectively implement key structural reforms that address matters such as labor regulations and financial sector weaknesses. Nepal, as a result, is unlikely to enjoy the full benefits of the growing Indian and Chinese markets, at least in the immediate future.
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