World Bank, ADB Warn of Challenging Days Ahead for Nepal

Both the World Bank and the Asian Development Bank (ADB) have estimated that Nepal’s economy will grow by 4.1 percent in 2023

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Nepal’s economic growth in 2023 is projected to slow basically due to tighter monetary policy, slackened domestic demand, the unwinding of the Covid-19 stimulus, and persistent global headwinds.

The two multilateral development partners – World Bank (WB) and Asian Development Bank (ADB) – in their latest updates have made downward revisions in Nepal’s GDP growth. Both WB and ADB have said that the country’s economy will grow by 4.1 percent in 2023.

The World Bank has pointed out that downside risks continue to prevail because of concerns over political stability in the country.

In its latest Nepal Development Update, the Washington DC-based agency has lowered Nepal’s growth estimate to 4.1 percent from the earlier projection of 5.1 percent.

According to the World Bank, slower than the previous forecast was made due to the impacts of import restrictions, monetary policy tightening, higher inflation, and shrinking government expenditure reflecting lower government revenue.

Similarly, the Manila-based ADB said that the country’s growth is expected to decelerate to 4.1 percent in 2023, a downward revision from the 4.7 percent that the bank had projected in September 2022.

The World Bank has expressed concerns over political stability in the country. “Political stability remains important to manage the economy and ensure the continued pursuit of development priorities. Political stability may not be achieved in the forecast period,” the World Bank said.

Higher-than-expected inflation which will dampen consumption and growth, the possible impacts of likely rotations in government officials, and rising inequality from reduced investments in human capital, especially amongst those yet to recover from unemployment following the pandemic are other factors that could drag the growth down, according to the World Bank.

According to ADB, agriculture growth will likely moderate to 2.0 percent in 2023. “There has been an increase in paddy output, but winter rainfall has been scanty and will likely affect winter crop yield and overall agriculture output,” states the Asian Development Outlook (ADO) April 2023 report.

The manufacturing sector growth will likely decelerate further due to higher interest rates, import restriction measures, and the slowdown in domestic consumption. A dampened external demand has affected manufacturing and construction subsectors. ADB has projected that the industrial sector’s growth will likely decelerate by half, from 10.2 percent to 5.1 percent in 2023. “The key areas of the economy have contracted, notably construction and manufacturing,” reads the report.

Services growth will also moderate to 4.4 percent in 2023 from 5.9 percent in FY2022. Credit control measures and a hike in interest rates have slowed down real estate, wholesale, and retail trade activities. While tourism growth has been strong, international tourist arrivals are still at half of the pre-pandemic level.
ADB has said that accelerating capital budget spending through focused investment planning, financial management, and project readiness will help spur Nepal’s economic growth over the years.

According to Faris Hadad-Zervos, World Bank Country Director for Maldives, Nepal, and Sri Lanka, the government’s move to adopt fiscal prudence such as import restrictions to address the challenges in the external sector of the economy came at a cost. “It has come at the cost of investment to advance the development agenda,” he said.

To face the impacts of the Covid-19 pandemic, Nepal had adopted an expansive fiscal and monetary policy that has resulted in a massive trade deficit and a sharp depletion of foreign exchange reserves. In order to stabilize the external sector, the government introduced import control measures and the central bank also hiked policy rates that resulted in higher interest rates for the borrowers. As a result, Nepal’s fiscal revenue and expenditure both decreased. “Amid measures taken to address pressures on the external sector, the Nepali economy has faced the unintended consequences of a slowdown in economic growth and lower fiscal revenue,” said Zervos.

According to the World Bank, the import control policy resulted in a steep drop in fiscal revenues and slower growth in the first half of FY 2022/23 as goods imports fell. Nepal relies heavily on imports as a tax base, which contributes about half of total tax revenues through VAT, excise, and import duties.
“For the first time in five years, Nepal’s fiscal balance was negative in the first half of FY23 at -0.3 percent of GDP as revenues fell across the board while expenditures remained flat,” stated the World Bank report. “The downturn in revenue growth reflects not only lower imports but more sluggish economic activity as well.”

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