In its latest Asian Development Outlook Update 2012, the ADB has revised down Nepal’s economic growth rate for 2012/13 to 3.8 percent from an earlier estimated of 4 percent. The main reasons are delay in monsoon (and its impact on agriculture output), shortage of fertilizers and partial budget. The forecast is in line with what analysts have been predicting. Last week, the IMF also raised concern that growth will come down due to late monsoon, continued slowdown in industrial output and slow growth in India. Inflation in 2013 is forecasted to be 8.5 percent.
Meanwhile, ADB projects Asia’s growth to drop to 6.1 percent in 2012, and 6.7 percent in 2013, down significantly from 7.2 percent in 2011. Specifically, India’s gross domestic product is expected to grow by 5.6 percent in FY2012 (which ends March 2013) and 6.7 percent in FY2013, a significant drop from ADB’s earlier projections of 7.0 percent and 7.5 percent, respectively, for the two years.
The ADB argues that the shock emanating from Europe’s sovereign debt crisis and sharp fiscal consolidation in the US pose the biggest downside risk for Asian economies. Fortunately, it says, most of the Asian countries have enough space to launch countercyclical policy interventions.
The ADO 2012 update recommends economies to enhance productivity and efficiency to increase prosperity. Specifically, it sees a particularly vital role of a high value modern services sector, whose constrains to expansion are lack of human capital, inadequate infrastructure and restrictive regulations.
Below is a revised outlook of Nepali economy (adapted from the ADO Update 2012, p.101):
GDP grew by 4.6% in FY2012 (ended in July 2012), up from 3.8% a year earlier. Good weather allowed a bountiful harvest, and robust increases in tourist arrivals and migrant worker remittances underpinned the recovery. Inflation moderated to 8.3% from near double digits in the previous year as food price hikes abated, but non-food inflation remained high, reflecting increases in the administered prices of fuels. Although banks’ liquidity constraint eased, growth in credit was slow because there were few attractive investment opportunities. Political uncertainties continued, marked by the dissolution of the Constituent Assembly on 27 May without agreement on a new constitution. Revenue collection grew robustly, but there was under-spending on capital projects, reflecting limited implementation capability. The external position strengthened as remittances and tourism receipts offset a widening trade deficit.
In FY2013, GDP growth is expected to dip to 3.8%—falling below the ADO 2012 forecast of 4.0%—as the late monsoon and fertilizer shortages undermine agriculture and as the inability to approve a budget for all of FY2013 creates fiscal drag. Remittance inflows and tourist arrivals will sustain expansion in services, but growth in industry will remain constrained by persistent power outages, sporadic fuel shortages, and long-standing structural bottlenecks and policy distortions.
Prices in FY2013 will be under pressure from needed upward adjustments to domestic fuel prices to limit losses at the Nepal Oil Corporation, and from continued high inflation in India mirrored in Nepal by the currency peg. The Update inflation forecast is raised to 8.5%. The current account balance is expected to improve moderately, as forecast in April.
