A sharp slowdown in economic activities, slackened domestic demand, tighter monetary policy, and persistent global headwinds adversely affected Nepal’s economy in FY 2023.
the HRM
A fter a meager 1.9 percent growth in the last fiscal year, Nepal’s economy is set to rebound in the current fiscal year. The World Bank and the Asian Development Bank (ADB) in their recent reports have projected notable improvement in the country’s economy in FY 2024.
A sharp slowdown in economic activities, slackened domestic demand, tighter monetary policy, and persistent global headwinds adversely affected Nepal’s economy in FY 2023.
In its latest ‘Nepal Development Update’, the World Bank said that Nepal’s economy will grow by 3.9 percent in FY 2024. Meanwhile, the Manila-based ADB in its latest Asian Development Outlook has projected Nepal’s economic growth in FY 2024 to be 4.3 percent.
Both agencies have said that the lifting of import restrictions, recovery in the tourism sector, and the gradual loosening of monetary policy will drive economic growth higher than the previous year.
In its report, the World Bank has said that the lagged impact of lifting the final import restriction measures in January 2023 and the gradual loosening of monetary policy is expected to support growth in the industrial and services sectors. “Sub-sectors that suffered the brunt of the import restrictions and monetary policy tightening in FY 2023, including wholesale and retail trade, construction, and manufacturing, are expected to gradually recover over the forecast period,” reads the report.
The continued expansion of hydroelectric production through the commissioning of new projects is expected to carry stronger growth in the industrial sector. Wholesale and retail trade are expected to benefit from the lifting of import restrictions and boost service sector growth. “Only agricultural sector growth is expected to slow in FY 2024, due to the impact of the lumpy skin disease on livestock and a decline in rice paddy production,” the World Bank said.
According to the report, the growth of the industrial sector is projected to be 3.2 and 6.3 percent in FY 2024 and FY 2025, respectively. The electricity sub-sector will continue to grow robustly with significant new hydroelectric capacity scheduled for commissioning during the projection timeframe.
The services sector is projected to accelerate growth to 5.1 percent in FY 2024 and to 5.9 percent in FY 2025. The real estate services sub-sector should benefit from the recent amendment of the 2022 Land Use Regulations for land zoning, and the raised ceiling for lending to first-time homebuyers to Rs 20 million.
According to the bank, the near-record migration of Nepali workers should be reflected in strong medium-term remittance inflows which, however, are not expected to balance the goods and services trade deficit. “Consequently, the current account deficit is expected to widen to 3.7 percent of GDP in FY 2024, and 4.6 percent of GDP in FY 2025,” reads the report.
ADB in its assessment of Nepal said economic activities in 2024 will still be curtailed by low domestic and external demand, continued weakness in investor confidence, high interest rates, and deficient rainfall in June that will likely suppress agricultural output. However, ADB has acknowledged that the Nepal Rastra Bank’s decision to decrease the policy rate is expected to result in reduced commercial interest rates and a boost in economic activities.
The central bank’s decision to lower the policy rate by 50 basis points to 6.5 percent and relax provisions on working capital loans to revive investor confidence will help stimulate economic activities, according to the ADB.
“Along with moderation in inflation and comfortable foreign exchange reserves, the Nepal Rastra Bank has adjusted its monetary policy stance by lowering the policy rate by 50 basis points to 6.5 percent, which is expected to help lower commercial interest rates and stimulate economic activities,” reads the Asian Development Outlook-September 2023 report.
Challenges Persist
While the economy is on a gradual path of recovery, there are still multiple risks. According to the World Bank, there are multiple risks to the outlook including an erratic monsoon, which could dampen agricultural growth; a renewed spike in commodity prices or continued food export bans by India which would raise prices; and higher inflation which could keep policy rates elevated, increase domestic debt servicing costs, and drag on growth.
The ADB says the downside risks to the economic outlook in 2024 may arise from more contractionary economic policy by the authorities to stem price rises given the uncertainties centered around geopolitical tensions. “This may dampen consumption and domestic production and adversely affect growth,” ADB said.
The ADB has acknowledged a notable progress in restoring external balance has been made but warned that fiscal challenges still persist. “Despite some progress in restoring price and external sector stability, fiscal challenges persist. While the estimated fiscal deficit for 2024 is moderate at 2.4 percent of GDP, much lower than the deficit of 6.1 percent in 2023, the actual deficit could be substantially higher if the government does not meet its ambitious revenue target for FY 2024,” said Jan Hansen, ADB Principal Economist for Nepal.
Inflation to Remain Higher
According to the World Bank, inflation is expected to remain elevated in FY24 reflecting the removal of VAT exemptions on select basic food items and necessities, India’s food export restrictions, and the recent international increase in fuel prices. High inflation in 2024 will weigh on real disposable income and in turn private consumption growth. Inflationary pressures are expected to recede and remain within the central bank’s ceiling in 2025 alongside a projected decline in commodity prices.
The ADB report projects annual average inflation to fall to 6.2 percent in 2024 from 7.7 percent in 2023 on subdued oil price increases and a decline in inflation in India, Nepal’s main source of import.
