With a relatively favorable monsoon and good flow of remittance, Nepal’s economy is likely to make progress, pushing the GDP growth to 4.8 percent for the coming year.

The Asian Development Bank (ADB), in its August 2016 issue of Nepal Macroeconomic Update, has considered various factors to propel the GDP growth in FY2017.

Prepared by Sharad Bhandari and Narendra Chand of ADB Nepal Resident Mission, the outlook discusses Nepal’s economic performance and forecasts the economic progress the country is likely to achieve.

The outlook for FY2017 is moderately optimistic and hinges on the scale of recovery of agricultural output given the normal monsoon, the scope and pace of post-earthquake reconstruction and rehabilitation, budget execution, and remittance inflow.

A bumper agricultural harvest expected due to the normal monsoon, subdued inflation scenario in India, low fuel and commodity prices and normalization of trade and supplies will be likely to lower the general prices of goods and services in FY2017 despite the demand-side pressures emanating from the earthquake related fiscal stimulus, especially the committed $2000 grant to over half a million affected households.

Economist Bhandari presented the macro-economic part and Chand presented the overall scenario of procurement in Nepal. In a press meet, country director of ADB Nepal Resident Mission Kenichi Yokoyama said that Nepal’s expenditure in current fiscal year is likely to grow better than that of the last year given the present trend.

Kenichi also said that ADB’s current disbursement is quite high, close to achieving the target of spending over 200 million dollars. He said that Lumbini International Airport and Melamchi Drinking Water Project have made satisfactory progress. The target of Tribhuwan International Airport will also be met given the progress the contractor is making in the runaway and terminal construction.

The monsoon rains were above normal and on time unlike in the past few years. Approximately, 80 per cent of total rainfall occurs between June and September.

This year, the report also projects a decline in the overall inflation from 9.9 percentage points to 8.5 in 2017 as the food and non-food inflations are projected to contribute 4.3 and 4.2 percentage points.

Agriculture Products

The Ministry of Agricultural Development has estimated that paddy transplantation has been higher than in previous years. Paddy transplantation averaged about 95% of 1.4 million hectares of rice field by the first week of August, much higher than 75% in FY2015. However, widespread flooding in the Terai region and mid-Hills, and landslides caused some damage to crops during the last week of July and the first week of August. The outlook for industrial and services output is contingent upon the evolving political situation, reconstruction work, pace of budget execution, recovery of tourism sector and remittance inflows.

According to the ADB report, the scope and pace of reconstruction projects will affect demand for quarrying, manufacturing and construction activities, which largely dictates the trajectory of industrial output. Timely, effective and judicious budget execution, which includes both accelerated spending and reform measures, will be at the core of industrial and services sector recovery.

The report said that the slow post-earthquake reconstruction and crippling trade and supply disruption resulted in gross domestic product (GDP) growth of just 0.8% in FY2016.

According to the report, this was exacerbated by the trade and supply disruption between September 2015 and February 2016. The combined effect was quite disruptive for the economy as GDP growth dipped to its lowest level since FY2002. Agricultural output grew by an estimated 1.3%, marginally higher than 0.8% in FY2015. Meanwhile, industrial output registered a negative growth of 6.3% in FY2016, sharply down from 1.5% growth in FY2015.

Capital Spending

The capital spending stalled for almost five months as the severe shortage of fuel and construction materials paralyzed project implementation as well as post- earthquake reconstruction. Budget under-execution has been a major fiscal issue in Nepal. The estimated actual capital spending was just 56.3% of planned capital spending in FY2016, sharply down from about 76% in the last five years.

The report said actual recurrent spending was 75.6% of planned recurrent spending in FY2016, a significant drop compared to an average 90% in the last five years. Overall, expenditure grew by 13%, with recurrent and capital spending growth at 7.9% and 32.6%, respectively— lower than the growth rates in FY2015.

For a country with one of the lowest per capita incomes in Asia, running a fiscal surplus indicates chronic problems associated with budget execution. A fiscal policy anchored on a modest deficit to finance productivity-enhancing infrastructure would not jeopardize fiscal sustainability.

Nepal faces an estimated infrastructure financing gap of between 8% and 12% of GDP annually until 2020. Ramping up public spending on physical and social infrastructures, including those related to post-earthquake reconstruction, is essential for accelerated, employment-centric and inclusive economic growth. Primary surplus— fiscal balance before interest payment on public debt— increased to 3.8% of GDP.

Nepal has been running a primary surplus since FY2012. Combined with the low and declining outstanding public debt (about 27.6% of GDP), it indicates that the government has ample fiscal space to ramp up productivity enhancing public capital investment without jeopardizing fiscal sustainability. However, a major constraint for doing that is the eroding expenditure absorption capacity.

BFIs Mobilization

The BFIs mobilized NRs328 billion (reaching a total NRs2016.8 billion) in deposits in FY2016, higher than NRs282 billion mobilized in FY2015, as higher remittance inflows (despite the decrease in the number of migrant workers) and slower government expenditure boosted deposits.

The report said that the total credit (loans and advances) of BFIs increased by 23.3% (NRs360 billion) in FY2016, up from 17.5% growth in FY2015 (NRs229.3 billion). Credits by commercial banks grew by 25.9% (NRs327.9 billion), up from a rate of 18.8% in FY2015.

Responding to the persistent excess liquidity in the banking sector in FY2016, the Nepal Rastra Bank (NRB) mopped up liquidity equivalent to NRs235.9 billion through reverse repo auctions— one of the short-term tools used by the central bank to manage liquidity— at weighted interest rates between 0.0001% and 1.3%; NRs 9 billion through outright sale auctions at weighted interest rate between 1.06% and 2.88%; NRs297.5 billion through deposit auction at a weighted interest rate of 0.85%; and NRs49.1 billion by selling NRB bonds.

The Balance of Payments

The balance of payments surplus reached $1.8 billion (8.5% of GDP) in FY2016, up from $1.4 billion in the previous year. The large merchandise trade deficit, which declined to 30.3% of GDP from 31.3% of GDP in FY2015, was partially offset by workers’ remittances, which hit a record 29.6% of GDP, resulting in a current account surplus of $1.3 billion (6.2% of GDP), up from 5.1% of GDP in FY2015.

FDI inflows increased to $55.8 million from $44.2 million in FY2015. Gross foreign exchange reserves increased from $8.1 billion in FY2015 to $9.7 billion in FY2016, sufficient to cover 14.1 months of import of goods and non-factor services. The Nepalese rupee continued to remain weak against the US dollar, closely following movement of the Indian rupee, to which the currency is pegged since 1993. Overall, the Nepalese rupee depreciated by 5.2% between mid-July 2015 and mid-July 2016.

According to the repot, many medium to large-scale development projects in Nepal are plagued by implementation delays and cost overruns. At the core of such recurrent hurdles is inefficient public procurement, contributed by a slew of factors such as legal and policy complications, poor performance of contractor, lack of required human resources to manage contract and high staff turnover, political meddling at management and operational levels, weak leadership by project directors, and prolonged delays by oversight and judicial agencies to clear contentious procurement. Consequently, project implementation is slow with cost and time overruns, quality and scale of infrastructure construction is not up to the taxpayers’ expectation, and disbursement is slow and below target. All these result in sluggish economic growth and insufficient jobs creation.

Despite the bad performance of Nepalese economy in 2016, progress in the overall economic sector is promised by the present indicators. However, Nepal’s economic is unlikely to be predictable without reducing the dependency on the remittances and reducing the agriculture's reliance on erratic monsoon.