On 30 April 2021, Central Bureau of Statistics (CBS) estimated that Nepal’s economy will likely grow by 4% in FY2021, up from 2.1% contraction in FY2020 (this is revised estimate). The projected growth rate is far less than the government’s target of 7% owing to the severe impact of COVID-19 pandemic on economic activities and mobility of labor and capital. If we factor in the base effect, there is hardly any steam left in the economy in FY2021. The data is based on latest rebased national accounts, which are now reported in FY2011 prices instead of FY2001 prices. FYI, fiscal year (FY) starts from mid-July of t-1 year and ends on mid-July of t year (for instance, FY2021 refers to the period between mid-July 2020 and mid-July 2021).
According to FY2020 revised data, while industrial and services output contracted by 3.7% and 4.0%, respectively, agricultural output increased by 2.2%, which is lower than 5.2% in FY2019, owing to delayed monsoon, shortage of chemical fertilizers, use of substandard seeds, and an armyworm invasion. A country-wide lockdown in Nepal started on 24 March 2020 (which was towards the end of second month of third quarter) and lasted well into the fourth quarter. Lockdown was relaxed in September 2020. The country did not fully open at least until the end of 2020 (international travel remains restricted though).
Overall, in FY2021, agricultural, industrial and services sectors are projected to grow at 2.6%, 5.0% and 4.4%, respectively. Agricultural sector will likely contribute 0.8 percentage points, industrial sector 2.4 percentage points, and services sector 2.4 percentage points to the overall projected GDP growth of 4.0%. These projections are based on eight to nine months data and the assumption that economic activities will gradually pick up from mid-May 2021.
Several local administrations imposed lockdown in April 2021 in response to the increasing number of Covid-19 cases as the second wave sweeps the nation. The CBS made the latest projections based on the (unrealistic) assumption that lockdowns and economic activities will ease after two weeks and that there will be substantial improvement in accommodation and food service activities (basically, domestic tourism). Given the unrealistic nature of this assumption and that most of the economic activities typically happens in the last two quarters of fiscal year, the actual growth estimate will likely be revised downward in subsequent revisions. In fact, it may actually either show contraction or near zero growth.
Agricultural output is projected to grow at 2.6%, up from 2.2% in FY2020, largely due favorable monsoon and a surge in agricultural labor (lockdowns forced reverse migration and contributed to more migrant workers’ engagement in agricultural work) having a positive effect on paddy output.
Industrial output is projected to grow at 5.0%, up from a contraction of 3.7% in FY2020. Within industrial sector, electricity, gas and air conditioning subsector is expected to grow by 7.7%, down from 25.6% growth in FY2020 (this was due to substantial addition of new hydroelectricity to the national grid). All other industrial activities are expected to grow at a modest pace, mainly thanks to the base effect.
Mining and quarrying activities are estimated to grow by 7.5%, up from a contraction of 2.2% in FY2020 as mining and quarrying of stones, sand, soil and concrete affected by the lockdowns were allowed to operate as restrictions eased. A boost in construction activities is expected to positively affect mining and quarrying as well. Construction activities are projected to grow by 5.6%, up from 5.0% contraction in FY2020 as supplies of construction materials normalize, and households, commercial and infrastructure projects pickup pace after a slack last year.
Manufacturing activities are projected to increase by 3.9%, up from 8.6% contraction in FY2020. In addition to the COVID-19 related lockdowns and containment measures, manufacturing sector has been suffering from low private sector investment, and 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. Manufacturing activities may not actually recover to the pre-pandemic level in the short-term.
Electricity, gas, steam and air conditioning supply is expected to increase by 7.7%, down from 25.6% growth in FY2020, on expectation that a part of Upper Tamakoshi hydroelectricity projects will come online by mid-July 2021. Water supply, sewerage, waste management and remediation activities are expected to increase by 1.6%, down from 2.1% growth in FY2020, thanks to the expected supply of drinking water to households from the Melamchi water supply project. Both Upper Tamakoshi and Melamchi proejcts have faced multiple time and cost overruns.
Services output is projected to grow at 4.4%, up from 4% contraction in FY2020. Last year, wholesale and retail trade; transport and storage; and accommodation and food service activities within services sector contracted as these high-contact activities were severely affected by lockdowns and social distancing rules. There was also a drastic drop in import and sale of agricultural and industrial goods. In FY2021, however, the CBS is projecting these subsectors, which together account for 22% of GDP, to bounce back (although much of it will be base effect, which refers to the tendency of achieving an arithmetically high rate of growth when starting from a very low base). Wholesale and retail activities are expected to increase by 5.6%, up from a contraction of 5% in FY2020, as supplies disruptions ease and consumer demand pickup. The CBS is also projecting transportation and storage activities to pickup pace, growing by 6.1% from a contraction of 13.4% in FY2020. This as well hinges on the assumption that travel and tourism activities will gradually recover. Accommodation and food service activities are expected to increase by 11.2%, making it the fastest growing subsector in FY2021, as domestic tourism picked up pace after the FY2020 lockdowns were eased.
Information and communication is expected to grow by 1.5%, down from 2.3% growth in FY2020. Financial intermediation is projected to grow by 5.8%, higher than 4.8% in FY2020, reflecting improved income of NRB, BFIs, insurance board and companies, securities board, EPF and CIF. Real estate activities are expected to increase by 2.6%, marginally up from 2.4% in FY2020. Human health and social work activities are expected to increase by 6.5%, up from 5.3% in FY2020. The other services sector activities are also expected to grow at a rate higher than in FY2020.
On the expenditure side, consumption is expected to increase by 5.2%, up from 3.6% in FY2020. Public and private fixed investment are expected to increase by 1.6% and 8.3%, respectively, up from contraction of 4.2% and 15.1%, respectively, in FY2020. Net exports are expected to grow at 5.1%, thanks to muted imports growth but a further contraction in exports.
Here are quick takeaways from the latest GDP projection.
First, lockdowns, supplies and travel disruptions, and social distancing rules affected almost all sectors, especially industrial and services activities. Consumption increased marginally but investment bounced back from a contraction by 29.5%. In FY2021, lockdowns in many parts of the country started in the last quarter of fiscal year. Note that most of the economic activities happen in the second half of the fiscal year, more so in the last quarter (except for in FY2019 and FY2020).
Second, given the lack of preparedness for a surge in cases; overwhelmed healthcare system; lack of adequate fiscal and monetary lifelines during the second wave that is ravaging lives and livelihoods; slow vaccination drive; disruptions to labor, capital and product mobility; supplies disruptions; and political instability, economic activities may not actually recover beyond the base effect in FY2021. Capacity utilization of firms will be hit due to lockdowns, supplies disruption and market uncertainties. It will affect private investment. A lack of employment opportunities both in formal and informal sectors will curtain household income and consumption. Similarly, the inability of the government to boost capital spending will also affect mining and quarrying, and construction activities -- affecting the growth of industry sector. Manufacturing and exports are not expected to recovery anytime soon. Against this backdrop, the economy might hardly grow (or it may even contract for second year in a row). So, the CBS’s assumption that economic activities may not be affected much after two weeks of lockdown, i.e., mid-May 2021 (it has already been extended for two weeks more in Kathmandu valley and other parts of the country) is unrealistic. It floated the same assumption when it released provisional national accounts estimate last year.
Third, agricultural output would have grown higher than 2.6% if it were not for the shortage agricultural inputs, mainly chemical fertilizers. Procurement of chemical fertilizers has been mired in decision-making delays and lack of advanced planning.
Fourth, the government does not have much fiscal firepower to launch temporary social protection schemes targeted at households and businesses affected by the deadly second wave of COVID-19 that started from mid-April 2021. There is hardly any fiscal space left with fiscal deficit projected to hit around 6-7% of GDP in FY2021. If the government allocates funds for new elections, then it might lead to scaling back of public spending as revenue mobilization slows down in tandem with the expected decline or muted growth in economic activities. It might also affect the banking sector, which might see demand for new credit decrease after a slight increase in the first half of FY2021. Firm bankruptcies due to cashflow problems, and a subsequent rise in non-performing assets of BFIs are real possibilities, especially after the regulatory forbearance on loan moratorium is lifted and refinancing opportunities dry up. MSMEs, which do not have much cash reserves to cushion against negative shocks, will bear the brunt of the crisis.
Fifth, the size of Nepali economy is estimated at USD 36.1 billion. Per capita GNI of USD 1196 and per capital GDP of USD 1191. GNDI (GNI + net current transfers incl remittances) is estimated to reach 124.8% of GDP. Gross domestic savings (GDP – consumption) is around 6.6% of GDP, reflecting high level of consumption. The country’s population in FY2021 is estimated to be 30.3 million.
