On 29 April, Central Bureau of Statistics (CBS) estimated that Nepal’s economy (at basic prices) will likely grow at 2.3% in FY2020, down from 6.7% revised estimate for FY2019. The projected growth rate is lower than the government’s 8.5% target. The growth estimates by CBS is based on the assumption that the COVID-19 affected economic activities will start to pick up pack from mid-May (last quarter) except for tourism activities (hotels & restaurants, and international travel).
In FY2020, the growth is largely driven by electricity, gas and water output. This might be based on the expectation that the government will be able to bring online Upper Tamakoshi and few other hydropower projects by mid-July as a few large infrastructure projects are not severely affected by COVID-19 pandemic related disruption to labor, supplies and capital.
Overall, agricultural, industrial and services sectors are projected to grow by 2.6%, 3.2% and 2%, respectively. Agricultural sector contributed 0.8 percentage points, industrial sector 0.5 percentage points and services sector 1.07 percentage points to the overall projected GDP growth of 2.3%. These projections are based on eight to nine months data and the assumption that economic activities will gradually pick up from mid-May (expect for international tourism).
Overall, agricultural, industrial and services sectors are projected to grow by 2.6%, 3.2% and 2%, respectively. Agricultural sector contributed 0.8 percentage points, industrial sector 0.5 percentage points and services sector 1.07 percentage points to the overall projected GDP growth of 2.3%. These projections are based on eight to nine months data and the assumption that economic activities will gradually pick up from mid-May (expect for international tourism).
Specifically, electricity, gas and water sub-sector is projected to grow at the fastest rate (28.7%, up from 9.1% in FY2019), followed by fishing (7.2%, up from 5.6% in FY2019), health and social work (7.1%, up from 6.8% in FY2019), and public administration and defense (6.9, up from 5.5% in FY2019). All other economic activities are expected to grow at a rate lower than in FY2019. Construction; mining & quarrying; manufacturing; transport, storage & communications; and hotels and restaurants activities are expected to contract in FY2020.
Industrial output would have contracted if it were not for the high growth projection for electricity and water sub-sector's output. Delayed monsoon, slow capital spending and lack of business confidence amidst the lower-than-expectation performance of the government had already created an environment where GDP growth was projected to be lower than in FY2019. The strict lockdowns and social distancing rules to contain the spread of COVID-19 exacerbated the slump in economic activities.
Industrial output would have contracted if it were not for the high growth projection for electricity and water sub-sector's output. Delayed monsoon, slow capital spending and lack of business confidence amidst the lower-than-expectation performance of the government had already created an environment where GDP growth was projected to be lower than in FY2019. The strict lockdowns and social distancing rules to contain the spread of COVID-19 exacerbated the slump in economic activities.
Agricultural output is projected to grow at 2.6%, down from 5.1% in FY2019, largely due to a delayed monsoon, shortage of fertilizers, use of substandard seeds and an armyworm invasion. The labor, harvest and supplies disruptions due to COVID-19 exacerbated the situation. The CBS expects wheat and vegetables output to grow despite the effect of COVID-19 on agricultural market and supply chains.
Industrial output is projected to grow at 3.2%, down from 7.7% in FY2019. Within industrial sector, electricity, gas and water subsector is expected to grow at the fastest rate: 28.7%, up from 9.1% in FY2019. The CBS expects a substantial addition of hydroelectricity to the national grid by mid-July. All other industrial sector activities are expected to contract. Mining and quarrying activities are projected to grow by -0.7%, down from 8.9% in FY2019, as mining and quarrying of stones, sand, soil and concrete is affected by the lockdowns and social distancing rules. Similarly, Construction activities are projected to contract by 0.3%, down from 8.1% growth in FY2019 as a combination of slow capital spending and the strict lockdowns affected output. Manufacturing activities are projected to contract by 2.3%, down from 6.8% growth in FY2019. In addition to the COVID-19 related lockdowns and containment measures, manufacturing sector has been suffering from a lack of private sector investment as well as loss of both domestic and external markets due to eroding cost and quality competitiveness. Stable supply of electricity and improved industrial relations were not sufficient to drastically boost manufacturing output as expected.
Services output is projected to grow at 2%, sharply down from 7.3% in FY2019, making it the most affected sector due to the lockdowns and supplies disruptions. Within service sector, wholesale and retail trade activities are expected to grow by 2.1%, down from 11.1% in FY2019. This reflects a drastic drop in import demand (as remittance-financed imported goods are traded in the domestic market) and sale of agricultural and industrial goods. Since travel and tourism activities were severely affected by COVID-19 pandemic, hotels and restaurants sub-sector is expected to contract by 16.3% and transport, storage and communications by 2.4%. The growth rates in FY2019 were 7.3% and 5.9%, respectively. Financial intermediation is projected to grow by 5.1%, lower than 6.2% in FY2019, reflecting reduced income of NRB, BFIs, insurance board and companies, securities board, EPF and CIF. Real estate activities are expected to slowdown to 3.3% from 6.1% in FY2019. Education sector is expected to slowdown to 3.0% from 5.1% in FY2019. Public administration and defense is expected to grow at 6.9%, up from 5.5% in FY2019. Similarly, health and social work is expected to growth at 7.1% from 5.7% in FY2019.
On the expenditure side, GDP (at market prices) is expected to grow at 2.3%, drastically down from 7% in FY2019. Consumption is expected grow at 3.2%, down from 5% in FY2019. However, public and private gross fixed investment and inventory (change in stock) are expected to contract. Net exports is expected to growth at 5.5% (compared to a negative growth rate last fiscal) thanks to a higher rate of decrease in imports compared to exports.
Here are quick takeaways from the latest GDP projection.
First, the strict lockdowns, supplies and travel disruptions, and social distancing norms have severely affected almost all sectors. Particularly hit are industrial and services sector activities. Overall, consumption slowed down but investment (both public and private) contracted.
Second, GDP growth was projected to be lower than in FY2019 even before COVID-19 pandemic affected Nepal. Delayed monsoon and shortage of inputs had dented prospects for higher agricultural output. Slower than expected capital spending during the first half of FY2020 had affected construction, and mining and quarrying. Industrial sector was in stress due to low capital utilization. Slowdown in remittance inflows had affected services sector activities (particularly, import dependent wholesale and retail trading). The COVID-19 onslaught exacerbated the economic outlook.
Third, the CBS’s projection might be a bit more optimistic. A majority of the economic activities happen in the second half of fiscal year. This is also the period when COVID-19 hit Nepal and the government resorted to necessary containment measures like strict lockdowns and social distancing. The CBS expects lockdowns to loosen by mid-May and economic activities to gradually normalize. However, this may be challenging because of the disruption to labor and supplies markets and subdued consumer demand. For instance, the dispersal of labor (internal and external migrant workers) is hard to reverse quickly. Contagion conscious businesses may find it hard to fully open shops and activities. Same with casual workers and informal sector workers. It will be challenging to ramp up construction activities for the rest of the year because contract award and work commencement usually happened in the second half. Additionally, if hydroelectricity generation (addition to the national grid) is less than expected by mid-July, then it will affect the growth projections too.
Fourth, fiscal stress will be heightened as revenue dwindle but expenditure needs shoot up. Employment demand under prime minister employment fund will increase as jobless people resort to making use of social protection schemes (think of it as automatic stabilizer in employment market). Similarly, there will be increased pressure for direct cash transfer to the newly jobless workers and vulnerable groups.
Fifth, with adverse external environment (weak export demand, slowdown in Indian economy, likely fall in remittances and FDI, etc), and weakened internal production, GDP growth in FY2021 might still be muted. Private sector investment may remain subdued given the large uncertainties and additional cost to businesses due to the lockdowns. Worse, some might simply go out of business and default on loan payments. In times like this the public sector really has to ramp up consumption (direct cash and in-kind transfers, support to MSMEs) and investment (high capital spending exploiting the low hanging fruits) to stabilize falling aggregate demand.
