World Bank and ADB Forecast Modest Growth for Nepal

The World Bank has projected Nepal to grow at rate of 5.1 percent while ADB forecast 4.7 percent

the HRM
After two tumultuous years of pandemic, the Nepali economy is set to grow at a modest pace raising hopes for a ‘V’ shaped economic recovery of the Himalayan nation. According to the latest Nepal Development Update of the World Bank, Nepal’s economy is expected to grow at a rate of 5.1 percent in FY2022/23 and 4.9 percent in FY2023/24. The growth outlook forecasted by the Washington DC-based agency is bolstered by the assumption that ongoing import restrictions will end by October 2022 and that international tourist arrivals will reach pre-pandemic levels by 2024. “A rebound in tourism is projected to support Nepal’s service sector and industrial growth is expected to be strong mainly due to increased hydroelectricity production,” reads the report.

The World Bank has expected Nepali tourism to continue to recover, supported both by rising international demand and improvements to domestic infrastructures such as the newly constructed Gautam Buddha International Airport and Pokhara Regional International Airport. The service sector has been expected to grow at 5.6 percent in FY23 and 5.1 percent in FY24.

The World Bank has expressed its satisfaction with the pace of hydropower development in Nepal and said that a continued expansion of hydroelectricity production capacity is expected to drive industrial sector growth. “Industry sector growth is projected to remain high and drive aggregate growth,” reads the report, adding, “The associated increase in the supply of electricity to other industrial sub-sector and increased public capital spending are also envisioned to support industrial growth, leading to projected growth rates of 8.9 and 9.2 percent for the sector in FY23 and FY24, respectively.”

Inflation to Remain Above 5 percent
The World Bank has predicted that inflation, which has surged in the last one year, to moderate slightly in the medium term. Inflation in FY2023 is expected to fall to 5.5 percent and decelerate further to 5.2 percent in FY2024. However, increases in aggregate demand due to national and provincial elections in November 2022, continued financial sector restrictions on the issuance of letters of credit for the import of selected items, the export ban on select food commodities (wheat, sugar, and broken rice) and a higher customs duty on the export of rice by India are likely to increase domestic prices in Nepal meaning that inflation is expected to remain above 5 percent and above the pre-pandemic levels. The inflation forecast of the World Bank is significantly lower than the target set by the Nepal Rastra Bank (NRB); NRB in the Monetary Policy for FY2022/23 has said that it will tame the inflation rate at 7 percent which is currently hovering over 8 percent.

Trade Deficit to Narrow Gradually
After the easing of pandemic-related restrictions and the resumption of international trade in early 2021, Nepal’s trade deficit with other countries ballooned massively prompting the government and NRB to announce measures to curb imports. The World Bank in its report has said that Nepal’s large trade deficit is expected to narrow gradually as import-driving stimuli are unwound. Nepal’s trade deficit is projected to narrow to 33 percent of GDP in FY2023 and further to 30.4 percent of GDP in FY2024. Merchandise imports are projected to decrease as global commodity prices normalize, import financing costs increase due to tighter domestic monetary policy, and electricity imports decline as the country becomes a net exporter of electricity from FY23 onwards. “In addition, the addition of an approximate 4,000 MW of hydropower capacity over the medium term is expected to lower the volume of crude oil imports as households, firms, and government offices can substitute for electricity,” said the bank.

According to the report, merchandise exports are expected to grow commensurate with industrial sector growth, benefiting from lower input costs as firms move to the use of hydropower electricity and are buoyed by hydropower export potential to India and Bangladesh. “Service trade is also projected to grow robustly as exports are buoyed by the projected recovery of the tourism sector,” reads the report.

Current Account Deficit to Narrow
The World Bank has projected Nepal’s current account deficit to narrow but said that external financing needs will remain elevated. The current account deficit is expected to narrow to 8.8 percent of GDP in FY2023 and 5.7 percent in FY2024 as the projected growth of remittances adds to a narrowing trade deficit. Remittances are expected to increase by 0.7 percentage points per year in FY2023 and FY2024 and are expected to reach 21.5 percent of GDP by FY2024, reflecting increased outmigration during FY22.

“The current account deficit is projected to remain financed by concessional borrowing, trade credits, and, where necessary, drawdowns of foreign exchange reserves,” said the World Bank.

Public Debt to Reach 41.6 percent in 2023
According to the World Bank, Nepal’s total public debt is projected to reach 41.6 percent of GDP in FY2023 and then decrease to 40.9 percent of GDP by FY2024. “Debt is expected to remain sustainable in line with the most recent Joint BankFund Debt Sustainability Analysis (DSA, December 2021), which finds that the risk of debt distress is low for both external and public debt,” states the report.

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