AT A GLANCE
In 2018, the World Bank came up with its Country Partnership Framework (CPF) covering the five-year period of FY2019-2023. Coincidentally, this came at a time of historic transformation in Nepal, as a new government took up office in February 2018. 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.
COUNTRY CONTEXT
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.
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. Data released by the Central Bureau of Statistic (consisting of a revision of the FY2017 growth rate and an updated estimate for FY2018), show that growth has been strong, despite the external shock from floods. In mid-August 2017, the worst flood in decades destroyed 64,000 hectares of standing crop, contributing to an estimated reduction in the agriculture growth rate from 5 to 2.8 percent (in FY2017 and FY2018, respectively). This contributed to a reduction in overall GDP growth from 7.9 to 6.3 percent in FY2018. Government revenue continued to perform well but spending also picked up significantly in FY2017 compared to previous years. Nevertheless, ambitious expenditure targets envisioned in the budget have not been met and the quality of spending has not improved with 60 percent of the capital spending occurring in the last quarter. Also, spending pressures have increased in the first half of FY2018 due to fiscal transfers, as well as spending on elections, capital goods and the transition to federalism. High inflation in the past two years has moderated sharply due to moderating inflation in India and improving supply side constraints.
Inflation slowed to 4.2 percent (y-o-y) in December 2017 but increased to 6 percent (y-o-y) in March 2018 owing to a sharp uptick in vegetable prices. Meanwhile, credit growth slowed to 16.7 percent (y/y) in early 2018 compared to its peak of 31.9 percent in 2017; but deposits growth continued to decline, pushing up interest rates. On the external side, the cumulative effect of a sharp trade balance deterioration and a slow growth of remittances is putting significant pressure on the current account. Economic activity, affected by the worst floods in decades, is particularly affecting agriculture output. This contributed to the slowdown in growth from its peak of 7.9 percent in FY2017 to an estimated 6.3 percent in FY2018.
Last Updated: Apr 03, 2019