On 02 May 2023, the National Statistics Office (NSO) estimated
that Nepal’s economy will likely grow
by 1.9% in FY2023, down from a revised estimate of 5.6%
in FY2021. The latest estimate by NSO is lower than the estimates by
the IMF, WB and ADB – all of which projected growth to hover around 4-4.5%. In
its FY2023 budget, the government had targeted an ambitious 8% growth but
lowered it to 4% during the mid-year review of the budget. Overall, performance
in all sectors slowed down but manufacturing, construction, and retail and
wholesale trade contracted. FYI, fiscal year (FY) starts from mid-July of t-1
year and ends on mid-July of t year (for instance, FY2023 refers to the
period between mid-July 2022 and mid-July 2023).
FY2022 performance (revised estimate)
GDP grew by an estimated 5.6% in FY2022 led by industry and
services sectors performance, thanks a surge in industrial output driven by
hydroelectricity generation and services output driven by travel and tourism
activities.
Agricultural output is estimated to have grown by 2.2%,
down from 2.8% in FY2021 as unfavorable monsoon affected paddy output. Paddy
harvest was affected by unseasonal
torrential rain in October that also damaged physical
infrastructure and killed over 100 people. The Ministry of Agriculture and
Livestock Development said that an estimated 424,113 tonnes of paddy on 111,609
hectares had been destroyed. Industrial output grew by 10.6%, up from 6.9% in
FY2021, thanks to substantial increase in additional hydroelectricity
generation. Services output grew by 5.3%, up from 4.5% in FY2021 as travel and
tourism, and wholesale and retail trade activities picked up pace.
FY2023 performance (provisional estimate)
NSO projected GDP to grow by 1.9% in FY2023, down from 5.6%
revised estimate in FY2022 and 4.8% in FY2021. This was due to a slowdown in
economic activities in general and contraction in manufacturing, construction,
and retail and wholesale trade activities. Electricity, gas and related utility
grew at the fastest pace (19.4%), followed by accommodation and food services
activities (18.6%), and financial and insurance activities (7.3%).
The estimates are based on data and information up to the
first nine months of FY2023 (mid-July 2022 to mid-April 2023) and assumption of
normal economic activity during the rest of the fiscal year (mid-April 2023 to
mid-July 2023). Note that the economy contracted by 1.1% in the second quarter
of FY2023 and grew by just 1.7% in the first quarter. The government rolled
back import restrictions from December 2022 and interest rates have began to
come down in the last quarter of FY2023.
Agricultural output is projected to grow at 2.7%, up from
2.2% in FY2022, largely due to a normal monsoon that boosted paddy production.
However, winter were affected by adverse weather and there was also a drop in
production of milk, eggs, and meat, leading to less-than-expected agriculture
output.
Industrial output is projected to grow at 0.6%, down from 10.8%
in the previous year due to lower hydroelectricity addition compared to FY2022
and contraction in manufacturing and construction sectors.
Mining and quarrying activities are projected to grow at
1.1%, substantially down from 8l8% in FY2022, owing to the slowdown in
construction sector, which affected mining and quarrying of stones, sand, soil
and concrete. Construction activities contracted by 2.6%, from a growth of 7.1%
in FY2022, because capital spending decreased that affected infrastructure
projects, and residential housing and real estate got affected due to policy
restrictions on real estate plotting and tight as well as high interest rate
from banks. This subsector saw two consecutive years of about 7% growth after
FY2020, thanks to highly accommodative monetary policy as credit growth shot up
relative to deposit growth. A part of refinancing and business continuity
loans, which were rolled out as a part of relief measures to help struggling
businesses, also made their way to housing and real estate sectors.
Manufacturing contracted by 2%, from 6.7% growth in FY2022,
as industrial capacity utilization dropped due to high cost of production,
thanks to higher input prices and inflation, and lower consumer demand. This
subsector has been suffering from low private sector investment, and loss of
both domestic and external markets due to eroding cost and quality
competitiveness. A stable supply of electricity and improved industrial
relations were not sufficient to markedly boost manufacturing output as
expected. Meanwhile, the addition of hydroelectricity to national grid has not
been sufficient to bridge the electricity demand-supply gap during the dry
season. NEA cut electricity supply by almost 12
hours to industries due to a slump in power generation. This has
increased the cost of production, including those of cement, rods, and steel. Electricity
gas and utility subsector grew at 19.5%, down from 53.4% in FY2022, as new
small and medium scale hydroelectricity projects started generating
electricity. Last year’s high growth was due to the addition of 465 MW Upper
Tamakoshi hydroelectricity to the national grid.
Services output is projected to
grow by 2.3%, down from 5.3% in FY2022, largely due to a contraction in
wholesale and retail trade activities, which accounts for about 15% of GDP, by
3%. The monetary policy tightening, which not only discouraged imports but also
led to an increase in interest rates, and restrictions on imports of certain
goods squeezed wholesale and retail trade activities. This subsector contracted
in FY2020 and FY2016— both times affected by supplies disruptions. Accommodation
and food service activities are expected to keep growing at a robust pace— 18.6%,
up from 12.6% in FY2022—, thanks to a strong pick up in domestic and
international travel and tourism.
Information and communication activities are expected to
grow by 4.1%. Financial intermediation is projected to grow by 7.3%, higher
than 6.9% in FY2022, reflecting improved income of NRB, BFIs, insurance board
and companies, securities board, social security fund, EPF and CIF. Real estate
activities are expected to increase by 2.2%, up from 1.6% in FY2022, as the
government loosened real estate plotting that facilitated sale, purchase, lease
and other activities related to real estate. The spending related to
parliamentary elections in November 2022 and byelections in April 2023 on
security and public administration is expected to increase public
administration and defense activities by 5.3%, up from 4.1% in FY2022.
Healthcare related demand continues to remain strong, keeping its growth rate
above 5% since FY2017.
Agriculture, industry and services sectors are projected to
account for 29.4%, 16.4% and 54.2% of GDP in FY2023.
On the expenditure side, consumption is expected to slow
down to 3.7% from 7.1% in the previous two years. Gross investment is expected
to contract by 13%. Within it, public and private fixed capital investments are
expected to contract by 20.2% and 55.9% respectively, reflecting not only lower
public capital spending, but also dismal private sector investment. The former
is affected by lower domestic resource mobilization and foreign aid and
receding budget execution capacity of the government. The latter is affected by
a range of factors such as government instability, high interest rate, high
inputs costs including imported goods and energy, and low external demand. Even
change in stocks contracted by 20.2%. While exports growth slowed down to 5.5%
from 34.1% growth in FY2022, imports contracted by 17.2%.
Here are quick takeaways from the latest GDP projection.
First, the projection by NSO is slower than the estimates
related days earlier by the IMF
(4.4%), WB
(4.1%), and ADB
(4.1%). Quarterly provisional GDP data show that the economy contracted by 1.1%
in the second quarter of FY2023 and it grew by just 1.7% in the first quarter.
If economic activities do not pick up pace as expected, then annual growth may
be even lower than currently projected by NSO. The industries are complaining
about interrupted electricity supply (with some forced to use costly diesel generators
during blackouts), low cash flow, rapid draw down of inventory and lack of
stocking, high cost of imported inputs, high interest rates and low aggregate
demand.
Second, the tight monetary policy to maintain external
sector balance, especially to narrow current account deficit and increase
foreign exchange reserves, and lower public spending dampened aggregate demand,
leading to lower than expected real GDP growth, which at 1.9% is the lowest
since FY2016 (except for the contraction in FY2020). While public and private
investments contracted by 20.2% and 7.6% respectively, consumption expenditure
slowed down to 3.7%. Moreover, while export growth moderated, the restrictive import regime as well as monetary policy tightening contracted total imports.
Consequently, the external sector and to some extent the financial sector indicators
have improved but this has come at the cost of a slowdown in imports and overall
economic activities. Lower than expected capital spending and recurrent spending
rationalization, partly due to lower revenue mobilization, also affected
economic activities and banking sector liquidity.
Third, manufacturing, construction, and retail and
wholesale trade— which together account for about 28% of GDP— contracted. It
indicates not only lower industrial capacity utilization due to higher cost of
higher cost of production including issues with electricity supply, inflation,
and input costs, but also direct and indirect policy restrictions on real
estate transactions, and deliberate measures to discourage imports. In April
2022, due to fast depleting foreign exchange reserve, the government imposed outright
import
restrictions on certain goods, including vehicles, and the
central bank asked importers to maintain a 100% margin amount to open a letter
of credit. These were relaxed in the third quarter of FY2023.
Fourth, nominal GDP increased by just 10.3%, lower than
13.1% increases in FY2022. This affected the level of public debt as a share of
GDP. In FY2022, outstanding public debt stood at 42.6% of GDP, up a percentage
point of GDP from FY2021.
Fifth, the size of Nepali economy is estimated at US$41.2
billion. Per capita GDP and per capita GNI are estimated at $1399 and $1410,
respectively. GNDI (GNI + net current transfers incl remittances) is estimated
to reach 125.2% of GDP. Gross domestic savings (GDP – consumption) is around 6.4%
of GDP, reflecting a high level of consumption. The country’s population in
FY2022 is estimated to be 29.5 million.
Sixth, with more hydroelectricity projects
connected to the national grid, the share of the industry sector in GDP will
also increase over time. Some sort of structural shift is happening. One of the
major policy focuses should be to not only increase hydroelectricity
generation, but also diversify energy sources to wind and solar to lower vulnerabilities
associated with reliance in one sector and to strategically use excess electricity
generation to boost production and productivity in manufacturing and services
sectors. This should be prioritized before exporting electricity to neighboring
countries. Hydroelectricity should be thought of both as a final product as
well as an input to enhance economy-wide output and productivity. Moreover, since most of the hydroelectricity projects are run-of-the-river type, dry or winter season will see shortage of hydroelectricity output, forcing NEA to cut electricity supply to industries. Year-round adequate supply of electricity needs to be managed well so that the industries do not face shortage during certain months, and that consumers have incentive to shift to electric goods and appliances. Nepal's installed capacity was 2,650 MW as of April 2023, but during dry season it drops to around 800-1300 MW.
Seventh, with the lifting of policy restrictions on imports,
gradual lowering of interest rates, decreasing inputs costs including fuel, loosening
of real estate plotting and housing restrictions, and positive outlook for tourism
as well as remittance inflows, the economic activities will pick up pace next
year. Inflation may stay above 7% due to high food and energy prices. As
imports increase and FDI and foreign aid (loans and grants) decrease, the
current account balance may quickly deteriorate from current levels despite the
expected rise in remittances. Banking sector liquidity will continue to be an
issue due to less lending headroom, lower credit demand, and lower spending by
the government. Long running structural issues such as stagnating revenue but
rising expenditure thanks to fiscal profligacy, low capital budget absorption
capacity, asset liability mismatch, evergreening of troubled assets and high non-performing
loans, low exports but rising imports, sectoral bubbles, low private sector
confidence, etc remain unchanged. Improving domestic resource mobilization and
budget execution rate and taking decisive policy reforms to boost private
sector confidence will be key.
