AT A GLANCE
In 2018, the World Bank came up with its Country Partnership Framework (CPF) covering the five-year period of FY2019-2023 comes at a time of historic transformation in Nepal. The signing of the Comprehensive Peace Agreement in 2006 ended a 10-year conflict that came at a significant cost of lives and foregone economic development. Since then, Nepal has gone through lengthy and complex transitions towards a new Constitution in 2015 that set in place a federal structure. By the end of 2017, elections were successfully held at the federal, state, and local tiers. There is a newfound optimism for greater political stability, inclusion, good governance and sustainable growth. The new federal structure presents unprecedented opportunities for Nepal to reset its development storyline, as outlined in the Systematic Country Diagnostic (SCD). At the same time, the shift to federalism poses new challenges and source of fragility, given the heightened popular aspirations and expectations. Key challenges include the need to clarify the functions and accountabilities of the federal, state, and local governments; deliver basic services and maintain infrastructure development; create a conducive environment for the private sector; and address governance weaknesses that may worsen in the early years of the new federal system.
A new government, backed by a historic majority in Parliament, took up office on February 15, 2018. This follows elections for all three tiers (local, state and federal) of the state architecture defined by the new constitution, marking a protracted but successful conclusion of a political transition that began with the signing of the Comprehensive Peace Agreement in November 2006. State governments largely mirror the coalition at the center. At the sub-national level, funds, functions and functionaries hitherto managed by the central, district and village authorities are moving to the seven new states and 753 local governments for which new legislation, institutions and administrative procedures are being formalized as constitutionally prescribed. Meanwhile, the central level authority is being streamlined with a focus on oversight. These exercises at state restructuring are expected to result in improved outreach and service delivery but will likely take time before they become fully operational.
Significant adjustments need to be made to the government structure. They include amending over 400 existing acts, restructuring the civil service at all levels, devolving fiscal management, and determining the division of funds, functions, and functionaries between various levels of government.
In contrast to the frequent changes in government that characterized Nepal’s decade-long transition to federalism, the new government enjoys a historic super-majority in Parliament. Along with new constitutional checks and a far fewer number of political parties, there is a much greater degree of optimism for stability in the coming days. However, state restructuring on this scale is uncharted territory for Nepal and smoothening the transition from the previous unitary system to the new federal one will remain a daunting task. The new system, in principle, provides opportunities to decentralize development benefits and make service delivery more effective and accountable. However, the risks of jurisdictional overlap between the three tiers of government, lack of clarity and coherence between policies and devolved powers, and duplication of efforts will remain high during the coming few years. Key aspects of the new system require further definition and may continue to be contested by different population groups.
Nepal experienced devastating earthquakes in 2015 followed by trade disruptions leading to a fuel crisis, which impacted the entire economy. The heavy monsoon rains sweeping across South Asia in 2017 affected 1.1 million Nepalis.
RECENT ECONOMIC DEVELOPMENTS
Nepal grew by 6.3 percent in FY2018 despite less favorable monsoons and the easing of rapid growth that ensued following the trade blockade in FY2016. On the demand side, investments are driving overall GDP growth with gross fixed capital formation contributing 4.4 percentage points. Of the 4.4 percentage point contribution, 84 percent came from the private sector. In part this has been supported by post-earthquake housing reconstruction which is in full swing. Of the 707,443 beneficiaries eligible for housing grants, over 88 percent have been enrolled in the program and received the first tranche as of August-end 2018. More than 71 percent of houses are now under construction, with a disbursement rate of 67 and 40 percent respectively for the second and third tranches. Private domestic investment grew by close to 16 percent. Foreign Direct Investment (FDI) also grew by a healthy 32 percent (y/y) in FY2018 to reach a record US$ 168 million. The growth in FDI suggests a growing appetite to invest in Nepal by international investors such as Hongshi-Shivam Cement and Huaxin Cement Narayani, although FDI still only accounts for 0.6 percent of GDP.
On the supply side, the main growth drivers were the service and industry sectors. Both tourist seasons – Autumn 2017 and Spring 2018 – during the fiscal year saw record levels of tourist arrivals. Furthermore, with continued strong remittance growth (see further analysis below) consumption continues to boost the service sector as well. Combined these have supported growth in the retail (9.1 percent y/y), and hotels and restaurants (9.8 percent y/y) sub-sectors of the service sector. Industry grew by 8.8 percent (y/y) in FY2018, well above its twenty-five-year average of 4 percent. The elimination of load shedding has supported the growth of industry through the expansion of capacity utilization. This has been possible through better electricity management by the Nepal Electricity Authority (NEA), with an additional 102 megawatts added to the national grid through the commissioning of new hydro powerplants and electricity trade with India.
Last Updated: Oct 15, 2018