KATHMANDU, October 5, 2016—Growth in Fiscal Year 2017 is expected to recover to five percent after two years of sub-par growth, according to the twice yearly Nepal Development Update, released in Kathmandu today.

According to a press release issued by growth is expected to improve on the back of a normal monsoon that is likely to boost agricultural output and will be supported further by increased investments as the earthquake recovery gains momentum. Nepal suffered devastating earthquakes in April and May last year, followed by a border crisis along vital transit routes that brought trade and manufacturing to a near standstill between September 2015 and February 2016 which led the slowest growth in 14 years.

Imports of goods managed to rebound quickly after the trade disruptions but exports have not, owing to sluggish growth of exports to India, says the report. The external sector has so far remained resilient due to high level of remittances. While remittances picked up in the last three months of fiscal year 2015/16, the effect is largely seasonal. Analyzing seasonally adjusted data, the report observes a contraction in remittances starting in August 2015 and a growth rate that has since remained negative. In addition, from an average of 45,000 per month prior to April 2015, migrant worker departures have slowed and now average 33,000 per month. Even a modest contraction in remittances would have adverse effects on growth and fiscal and external accounts, given the outsized role they play in the economy.

The report also highlights continued high inflation in Nepal. “Despite normalization in supplies and a favorable external environment (i.e., lower food and oil prices and moderating inflation in India), a sharp uptick in housing rental prices in Nepal following the earthquake has been the largest contributor to headline inflation,” it says.

The report voices concerns over the declining quality of government spending and lack of budget realism. 71 percent of the total capital expenditure was spent in the last quarter and a massive 50 percent just in the last month of the fiscal year, a significant deterioration compared to the last four years, it says.  While post-earthquake reconstruction needs drove substantial increases in budget outlay during the past two years, actual expenditure fell far short.  For example, the planned outlay for the FY2016 budget was 33.5 percent of Gross Domestic Product (GDP) while actual expenditure remained 23 percent of GDP, i.e., a deviation of more than 11 percent of GDP. The FY2017 budget is even more ambitious, with a target of 36.5 percent of GDP—i.e. an increase of 14 percent of GDP compared to FY2016 actual spending—which is also unlikely to be met.

While growth is expected to improve, the report highlights downside risks to this forecast with domestic risks predominating. The boundaries of the provinces that were the subject of protests are yet to be resolved, while controversies surround the demarcation and restructuring of local-level governmental bodies. Frequent changes in government and a series of upcoming elections (local, provincial, federal) by the beginning of 2018 are also likely to add to policy uncertainty, it says.

The special focus of this edition of the Update is titled “Powering Recovery” and it highlights the need of clean, reliable and affordable electricity—the single most important source for recovery and longer term growth of Nepal. “Electricity sector could not only meet domestic demand reliably, affordably, and cleanly, but would earn revenue from export of surplus hydropower through enhanced regional electricity markets to neighboring countries by integrating the wider South Asia power market.” The report outlines wholesale structural reforms of the electricity sector that are needed to achieve this vision.