Economy in Recession: Govt Faces Hard Choices

The economic growth estimate of 2.16 percent by NSO is the lowest after the Covid-induced growth of -2.37 percent in FY 2019/20

the HRM

When the government announced the federal budget for the current fiscal year, it had set an ambitious target of eight percent of economic growth. Despite challenges in the external sector, the then Finance Minister Janardan Sharma presented a bloated budget increasing social security allowances and civil servants’ salaries.

As import restrictions hit the revenue collection, creating a mismatch in the resource management, the government, during the midterm review, cut down the budget size, as well as slashed the growth target to 4 percent.

Now, even that four percent growth target is unachievable. The National Statistics Office (NSO) in the first week of May made published the National Account Statistics saying the economic growth will be limited to 2.16 percent.

The slowdown in economic activities also hit the income of Nepalis. The per capita income growth of Nepalis has stagnated this year as the NSO estimated that per capita GDP will remain unchanged from last year’s USD 1,399. Per capita income means an average income of a person in a year. The average per capita income of Nepalis increased by USD 122 in the last fiscal year.

The NSO’s growth estimate for the current fiscal year has clearly shown that a sharp slowdown in economic activities, slackened domestic demand, tighter monetary policy, and persistent global headwinds have adversely affected Nepal’s economy in the current fiscal year.

With an acute liquidity crunch, higher interest rates, rising inflation, and sluggish market demand, the country’s economy has been under pressure from the start of FY 2022/23. While the economy grew by a meager 1.7 percent in the first quarter of the current fiscal year, the gross domestic product (GDP) growth was negative by 1.1 percent in the second quarter.

The slump in the construction, mining, transport, manufacturing, and wholesale and retail trade sectors dragged the overall economic growth. The manufacturing, construction, and trading sectors have all experienced negative growth, contributing to the country’s economic woes. Additionally, the growth of the agriculture sector, the major contributor, has remained low, further exacerbating the problem.

The construction sector contributes 5.52 percent to the national economy, while the retail and wholesale sector accounts for 15 percent, and the agriculture sector contributes a whopping 25 percent.

The NSO report says the construction sector which grew by 7.08 percent in the last fiscal year, is expected to remain negative by 2.62 percent in this fiscal year.

Similarly, the wholesale and retail trade’s growth has been projected to be negative by 2.96 percent in this fiscal compared to growth of 7.46 percent in the last fiscal. According to NSO, the growth of the manufacturing sector is likely to decelerate by 2.04 percent in FY 2022/23 due to higher interest rates, import restriction measures, and the slowdown in domestic consumption.

Ram Prasad Thapaliya, Chief Statistician at NSO, says the economic data does not look promising. “The government of all three tiers needs to work to improve the economy. The contraction in economic activities has badly affected the country’s economic growth,” he said, “We have presented the real picture of the economy in our report based on which the government can bring the necessary policy interventions in the next fiscal year’s budget,” he said while unveiling the report.

According to economists, several factors have contributed to the low growth. Chandra Mani Adhikari observes sluggish capital expenditure as one of the main factors in this regard. “Due to this, industries such as cement and steel have not been able to produce at their full potential, which has led to a decrease in overall economic activity. Another important factor is the country’s dependence on rainfall for agriculture. Nepal is heavily reliant on the monsoon rains to support its agricultural sector, which accounts for a significant portion of the country’s economy. However, Nepal has experienced less rainfall, which has severely affected agricultural productivity and led to a decline in overall economic growth,” he said.

According to Adhikari, the country needs to invest in its infrastructure and industries to boost economic activity and reduce its dependence on rainfall for agriculture. “This could involve increasing public investment in key sectors such as transportation, energy, and telecommunications, as well as providing support for small and medium-sized enterprises,” he said.

Economist Keshav Acharya says the slowdown in demands across the sector has exacerbated the economic woes. “Nepal is struggling with a credit crunch, real estate slowdown, tumbling stock market, and rising unemployment,” he said, adding, “Political instability has caused the government to overlook the economy, making it difficult to implement effective policies. Urgent measures and policies are needed to address these challenges and support the economy.”

NSO’s projection is even lower than the forecasts made by the World Bank and the Asian Development Bank a month ago. Both agencies estimated Nepal’s economic growth at 4.1 percent for the current fiscal year.  Although major sectors have indicated depressed activities, there are positive signs in Nepal’s tourism and electricity sectors. NSO projected that the electricity and hospitality industries will experience the highest growth in the current fiscal year. The electricity sector is expected to grow by 19.36 percent, while accommodation will increase by 18.56 percent.

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