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Overview

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  • 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

  • THE WORLD BANK GROUP AND NEPAL

    The World Bank Group (WBG) fielded its first economic mission to Nepal in 1963 to assess the country’s development prospects and challenges. It approved its first credit in 1969 for a telecommunications project. Since then, the World Bank has provided Nepal $4.75 billion in assistance ($3.48 billion in credits and $1.27 billion in grants).

    After three consecutive Interim Strategies in FY 2007, 2009 and 2011, the WBG is providing longer-term support through the Country Partnership Strategy (CPS) covering FY2014-2018. The CPS aims to support Nepal’s aspirations for higher and more inclusive economic growth to help equalize opportunities across population groups. The partnership focuses on expanding hydropower generation, enhancing transport connectivity, improving the business environment, enhancing agriculture productivity, and equalizing access to health care, skills development, and social protection.

    A mid-term review was completed in February 2017. Given the country developments, the WBG is intensifying its support for institutional governance particularly for fiscal devolution and establishment of a new federal government structure, for economic sustainability and job creation, and for earthquake reconstruction and disaster preparedness. A new Country Partnership Framework (CPF) will be prepared in the second half of FY2018. The WBG is carrying out the Systematic Country Diagnostic (SCD) to inform the new CPF.

    Nepal is eligible for concessional financing support from the International Development Association (IDA). During the IDA17 period (17th replenishment of IDA covering FY2015-2017), the World Bank committed $1.2 billion. This amount included additional financing of $300 million from the IDA Crisis Response Window to respond to the emergency needs after the 2015 earthquake. During IDA18 period (FY2018-2020), Nepal may access approximately $1.3 billion in IDA financing. This includes additional financing from the IDA Exceptional Risk Mitigation Regime financing window.

    WORLD BANK PROGRAM

    The current portfolio comprises 22 active projects with a net commitment of $2.32 billion. In terms of the number of proj­ects, the energy sector makes up the largest share (5 projects) followed by agriculture and education (4 projects in each sector). In terms of volume, the education sector accounts for the largest at $530.8 million, followed by agri­culture ($464.9 million), and energy ($341.9 million). The World Bank is also financing projects in climate resilience, education, financial management, health, irrigation and water management, social protection, and urban development. Across its projects, the World Bank considers gender, citizen engagement and climate change as cross-cutting issues.

    After the 2015 earthquake, the WBG responded quickly and flexibly to finance emergency reconstruction, coordinating closely with other development partners. The World Bank restructured, reallocated or extended 12 existing IDA projects for recovery efforts. In parallel with the Japan International Cooperation Agency, it funded the Earthquake Housing Reconstruction Project ($200 million).  The World Bank also administered a multi-donor trust fund ($10 million) that pooled resources from Canada, the UK’s Department for International Development (DFID), Switzerland, and USAID.

    In addition to financing investment projects, the World Bank is supporting the government’s policy reforms in fiscal management and the financial sector. For example, through development policy financing it has supported the restructuring of the banking sector, strengthening the sector’s legal and regulatory framework and improving transparency in the financial sector. The World Bank is also financing the government’s programs for healthcare reforms and education development.

    The World Bank has provided a range of analytical and advisory support for policy reforms and economic and sector advice. One recent flagship report was “Climbing Higher: Toward a Middle-Income Nepal” that offered policy recommendations for escaping the low-growth trap. Together with DFID it also published “Moving Up the Ladder – Poverty Reduction in Social Mobility in Nepal.” Other World Bank analysis included reports on health insurance, education, nutrition and urban engagement.  Twice a year, the World Bank issues the Nepal Development Update that reviews the state of Nepal’s economy.

    WORLD BANK – IFC COLLABORATION

    The World Bank is working closely with the International Finance Corporation (IFC) to strengthen the environment for private sector investment and promote private sector growth. Nepal is one of the pilot countries for the WBG’s renewed efforts to maximize financing for development by crowding in private sector finance and to minimize public debt and contingent liabilities. The two institutions coordinate closely in the energy and financial sectors. In addition to the SCD, multiple joint analytical work is underway, including the Country Private Sector Diagnostic (CPSD) and the Infrastructure Sector Assessment Program (InfraSAP).

    IFC has invested over $150 million in Nepal since 1956. As of June 30, 2017, IFC’s committed portfolio was about $43 million and its advisory services portfolio was $17 million across 10 projects.

    IFC’s strategy focuses on addressing development gaps in financial inclusion, sustainable infrastructure, and competitiveness. IFC is supporting financial institutions and venture funds to expand access to finance for SMEs and individuals. With the WB, it has helped unlock barriers for new infrastructure projects, including the ground-breaking 216 MW Upper Trishuli-1 hydropower project that is expected to attract the largest single project foreign direct investment into Nepal.

    Through its advisory services, IFC is working with the Government and the private sector on improving Nepal’s investment climate, enhancing regional connectivity and promoting investment in tourism.

    MIGA

    The Multilateral Investment Guarantee Agency (MIGA) has no exposure in Nepal at this time. MIGA is currently coordinating with the World Bank and IFC to consider a guarantee support for the Upper Trishuli-1 Hydro Project. The Agency is ready to consider further projects across sectors as appropriate opportunities emerge.

     

    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. 

    Economic activity in Nepal, which rebounded strongly in FY2017, reaching 7.5 percent (y/y) following two challenging years, has again been impacted by severe flood affecting more than one-third of the country, as indicated in the latest Nepal Development Update (October 2017).

    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 October 12, 2017, 654,366 beneficiaries have been identified in 14 most affected districts. Out of this, around 90 percent of beneficiaries (572,633) have signed the Grant Participation Agreement, almost all of whom have received the first tranche of payment. 93,039 beneficiaries have received the second tranche payment, while 16,655 have received the third tranche.

    Out of the beneficiaries, 138,288 are currently reconstructing their homes, receiving technical and monitoring support from the NRA. World Bank is facilitating this process of reconstruction by sending out bulk SMSes to the beneficiaries, advising them of the various processes and requirements of reconstruction. Similarly, the NRA has set up a toll-free 24-hour hotline to cater to the queries of beneficiaries regarding reconstruction. NRA is also collaborating with a few agencies to disseminate Public Service Announcements to ensure that beneficiaries acquire correct and timely information on the reconstruction and monitoring procedure.  

    Last Updated: Oct 24, 2017

RELATED

LENDING

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

*Amounts include IBRD and IDA commitments

Additional Resources

Resources

Country Office Contacts

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