Overview

  • 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. Slow recovery of exports, increase in lending rates, continued decline in departures of migrant workers going abroad and a fluid political environment continue to pose challenges.

    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.

    COUNTRY CONTEXT

    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 OUTLOOK

    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 floods, but is expected to remain within the Central Bank’s target. With increased government spending due to a new federal structure and in response to the earthquake and flooding, the fiscal deficit is expected to widen in FY2018. The current account turned into a marginal deficit in FY2017 and this is expected to widen as import growth remains high and remittances and exports grow only slowly.

    Last Updated: Oct 11, 2017

    •  In the 1950s, Nepal’s literacy rate was 2 percent. Only one in one thousand children went to school. Today almost all children go to school and live within 30 minutes of their school.
     
    • Nepal has reached gender parity in primary education.
     
    • In the early 1970s, Nepal’s road network spanned 2,700 kilometers.  Today it stretches over 80,000 kilometers.
     
    • A child born today can expect to live 25 years longer than one born in 1970.

     

    • Fewer than 1 in 1,000 Nepalis owned a telephone until 1970. Today, two in three Nepalis own a cell phone.
     
    • Until 1970, only five percent of Nepalis had piped water supply. Today, 85 percent of the rural population has access to clean water 81 percent has access to sanitation.
     
    •  By halving extreme poverty in just seven years, Nepal has achieved the first Millennium Development Goal ahead of time and well before some neighbors.
  • On April 25, 2015, a major earthquake occurred at shallow depth with a magnitude of 7.8 in central Nepal causing widespread destruction. There were several aftershocks as well as a subsequent earthquake event of magnitude 7.3 on May 12. 

    A combined 9,000 lives were lost and close to ten million people in at least 31 of 75 districts were affected, making this the worst disaster in Nepal’s history in terms of human casualties. An assessment of the impact shows that Nepal’s recovery needs amount to the equivalent of a third of its economy. 

    The Post Disaster Needs Assessment (PDNA) priced the damage at US$ 7 billion, with total reconstruction needs at US$ 6.7 billion. The largest single need identified by the PDNA was housing and human settlements, estimated at about $3.27 billion.

    Economic impact of the earthquake

    Early estimates suggested that an additional 3 percent of the population had been pushed into poverty as a direct result of the earthquakes. This translates into as many as a million more poor people. The earthquake, coupled with trade disruptions that occurred from September 2015-January 2016, pushed down the overall growth of FY 2016 to 0.6 percent (at market prices) – the lowest in 14 years.

    Reflecting both the earthquake and trade related disruptions, inflation spiked to over 12 percent (y/y) by mid-January rising 5 percentage points in just four months from mid-September 2015. This was the highest inflation level since FY 2009. As the trade disruptions ended, inflation eased to back to single digits. 

    Following two years of disappointing growth, the Nepal Development Update (October 2016) predicted a rebound. Growth in FY 2017 is forecasted to accelerate to five percent and is expected to moderate in line with the country’s potential during FY 2018.

    Support from international donors

    After the earthquakes, the international community rallied to provide immediate rescue and relief and support for the country’s longer-term recovery. An International Conference on Nepal’s Reconstruction was held in Kathmandu on June 25, 2015. Numerous countries, international financial institutions, foundations, and NGOs stepped forward, pledging about $4.4 billion to support Nepal’s recovery and reconstruction and help the country become more resilient to future events.

    The government swung into action, launching the Post-Disaster Recovery Framework on May 12, 2016. It outlines all sector plans and financial projects through 2020. In December of 2015, it also established the Nepal Reconstruction Authority (NRA) and appointed a Chief Executive Officer to expedite the reconstruction process.

    The government also established the Nepal Earthquake Housing Reconstruction Multi-Donor Trust Fund (MDTF) to support housing reconstruction. The fund is administered by the World Bank. Current committed financing includes: (i) $200m from IDA’s Crisis Response Window; (ii) $100m credit from JICA for parallel financing; (iii) $30.56m in a WB-administered Multi-Donor Trust Fund (USAID – $9.6m, Switzerland - Swiss Francs 7m, Canada – CAN$ 10m and United Kingdom, DfID – GBP 4.8m). Out of $30.56m committed under MDTF, $26.59m has been received; (iv) about $200m earmarked by I/NGOs for the sector; and (v) $50m from the World Bank’s budget support. 

    As of April 11, 2017, 626,695 beneficiaries have been identified in 14 most affected districts. Out of this, 90 percent of beneficiaries (561845 beneficiaries) have signed the Grant Participation Agreement, 542,963 beneficiaries have already received the first tranche payment and 4,206 beneficiaries have received the second tranche payment.

LENDING

Nepal: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments

In Depth

image
Agriculture and Food Apr 27, 2017

Promoting Agribusiness Innovation in Nepal

World Bank Group Launches New Center to Promote Agribusiness in Nepal.

image
Economics

Nepal Development Update Series

The Nepal Development Update is produced twice yearly and aims to report on key economic developments over the preceding months and ...

image
Poverty

Moving Up the Ladder

The Moving Up the Ladder blog series aims to discuss the trends and drivers of living standards changes in Nepal in the last two decades ...

image
Education

World Bank's Special Technical Education and Vocational Training Program

The World Bank has approved a $60 million credit to support a second phase of the Enhanced Vocational Education and Training Project in ...

Additional Resources

Country Office Contacts

Kathmandu
Yak and Yeti
Hotel Complex
Durbar Marg
Kathmandu, Nepal
+977 1 4236000
+977 1 4226792
infonepal@worldbank.org