The latest Asian Development Outlook 2011 has a 4-pager update (authored by Yubraj Acharya, ADB Nepal Resident Mission) on the Nepali economy. It states that political uncertainties, unfavorable weather, and weakening remittances from abroad impacted economic growth in last fiscal year. It projects growth rate to fall below 4 percent in FY2010/11, reflecting the “protracted post-conflict transition process”.
The ADB estimates Nepal’s GDP growth rate to be 3.8% in FY2010/11 and 4.0% in FY2011/12 (assuming favorable monsoon and weather). Inflation is estimated to be 10% and 8% in FY2010/2011 and FY2011/12, respectively. Current account balance (share of GDP) is expected to be negative 0.5%. The GDP growth projections of the World Bank and the ADB are pretty much similar. Earlier, the WB projected that Nepal’s real GDP growth to be 3.7% and 4% in 2011 and 2012, respectively.
The ADB is hopeful that tourism and more vibrant construction activity will modestly boost growth in FY 2011/12. Meanwhile, agricultural sector is expected to grow by 4% in FY2010/11, up from 1.3% in FY2009/10. This is expected to have some push on GDP growth rate as the performance of the agricultural sector has a heavy weight on growth in Nepal. But, delay in completion of the transition, high food and oil prices, and the impact of the unrest in the Middle East (primarily hitting remittances inflows) are the major risks to the economy.
The higher growth rate in FY 2009/10 (4%) than that in FY 2008/09 (3.8%) is attributed to increased economic activity in small industrial sector (thanks to fewer political strikes) and the expansion of services sector. Deceleration in the growth rate of remittances and excessive lending to real estate led to liquidity crunch in the banking sector.
The ADB notes that high food-inflation in India and low domestic crop production was the main source of high inflation in the economy. These are two of the causes. The report misses to mention the role of high global food and fuel prices starting 2008 as the main source of inflation that has remained sticky ever since. The other factors that are having a drag on domestic prices are supply bottlenecks due to extended periods of bandas and strikes, leading to shortage of essential items. Additionally, hoarding, black marketeering, deliberate withholding of supplies and inventory, and agricultural trade hurdles imposed by our neighbors contributed to keeping prices higher even after the normalization of market forces in the domestic economy. Here is an article that details why there is such a high level of sticky prices in Nepal.
Anyway, the report notes that exports are decreasing due to low productivity and infrastructure bottlenecks, leading to eroding competitiveness. It should also be noted that protracted energy crunch, labor militancy, and supply side constraints are also weighing heavily on the loss of exports. Imports surged more last fiscal year because of high gold imports, which has become a hot investment commodity after the squeeze in real estate market. The widening trade deficit and decelerating growth rate of remittances pushed current account deficit to 2.7% of GDP last fiscal year from a surplus of 4.2% of GDP the year before. The official reserves declined by US$113 million and Nepal drew US$42 million from IMF’s Rapid Credit Facility to offset external shock.
The ADB expects that further monetary tightening will not happen as real estate activity is already slowing down and the expected moderation of price levels in India will put less pressure on prices in Nepal.
Nothing major new or enlightening stuff to guide policymaking is in the brief report. But, it is a good rundown of the state of major macroeconomic variables and how the events of last year impacted them.