AT A GLANCE
2017 saw a broad-based recovery as economic activity rebounded, inflation moderated, government revenue and spending picked up and remittances grew, albeit more slowly than ever before. Growth is expected to be below potential in FY2018 in light of the worst flood in decades.
Nepal is transitioning into a federal democratic state. The country completed its first local elections in 20 years, which took place in three phases. Provincial and parliamentary elections are expected to be completed in December 2017.
The World Bank Group (WBG) is intensifying its support for institutional governance, particularly for fiscal devolution and establishing a new federal government structure, for economic sustainability and job creation and for earthquake reconstruction and disaster preparedness.
Nepal is characterized by frequent changes in government. Prime Minister Sher Bahadur Deuba took office in June 2017 as part of a power-sharing agreement among coalition partners. The country is transitioning into a federal democratic government based on the 2015 constitution, which remains contested by certain groups. Local elections were carried out in three phases, with the last elections held on September 18, 2017. Provincial and parliamentary elections are expected to be completed in early December 2017.
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.
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
Economic activity rebounded strongly in FY2017, growing 7.5 percent following two challenging years. Rice production reached a record high at 5.2 million tons following one of the best monsoons. Industry growth was high, with a record-high addition of hydropower capacity and construction as earthquake reconstruction following the devastating 2015 earthquake gathered speed. Growth in the service sector was helped by the trade and hotel subsectors normalizing after the shocks of the previous two years. Private and public investment rebounded strongly as did tourist arrivals, which reached a record high. However, consumption slowed, most likely due to slowing remittances.
Inflation, which rose in the previous two years amid disruption caused by the earthquake, fell sharply and reached a decade-low rate by the end of FY2017. Credit growth soared during the first half of the fiscal year while deposit mobilization slowed. This led to a squeeze on the availability of loanable bank funds, which eased off by the end of the fiscal year. Interest rates have not come down despite the greater availability of funds.
As imports continued to surge and exports faltered, the trade deficit further increased. Remittances continued to slow. Consequently, the current account narrowed significantly from 6.2 percent of GDP in FY2016 to a deficit of -0.4 percent of GDP in FY2017. Migrant worker outflow stagnated to a five-year low. Annual revenue growth has been robust. Public spending, particularly capital spending, picked up. It reached a record high of almost 8 percent of GDP despite significant under-spending of the planned budget. The era of positive fiscal balance ended with the fiscal deficit reaching 3.3 percent of GDP. The poverty rate at the $1.90 a day line was 15 percent in 2010 and is projected to be 10.8 percent by end 2017.
Economic activity, which was expected to progress well in FY2018, was affected by the worst floods in decades. The flooding in mid-August, the third major shock in three years, caused severe disruption and damage, especially in the southern plains. Hence growth for FY2018 is expected to be lower than earlier forecasted and moderate thereafter.
Inflation, particularly food inflation, is expected to rise temporarily in the first half of FY2018 as a result of the
Last Updated: Oct 11, 2017