Accelerating Post-earthquake Reconstruction for Faster Recovery in Nepal

This is adapted from the issue focus section of Macroeconomic Update, August 2015, Vol.3, No.2 (executive summary here, and FY2016 growth and inflation outlook here). It includes FY2015 update on real, fiscal, monetary and external sector, and growth and inflation outlook for FY2016. It provides a comprehensive macroeconomic assessment, including fiscal sustainability, after the April 25 earthquake.

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I. Introduction

A catastrophic 7.8 magnitude earthquake struck Barpak of Gorkha district on 25 April at 11:56 AM. In between numerous aftershocks of below 5 magnitude, two powerful 6.7 magnitude (26 April) and 7.3 magnitude (12 May) aftershocks shook a large part of the country, particularly central and western administrative regions. It caused further damage to the already weakened houses and physical infrastructure, and also triggered numerous landslides in the rural areas. The calamity has added a new challenge to Nepal’s short-to-medium term economic growth and development prospects.

The completion of post disaster needs assessment (PDNA), establishment of a National Reconstruction Authority (NRA) the reconstruction-focused budget and monetary policy for FY2016, and the gradual improvement in political environment have put in place the key prerequisites for the execution of reconstruction programs. Now, effectively operationalizing the NRA along with immediate planning and strategizing of reconstruction projects is critical for ensuring a fast and inclusive recovery. The NRA’s and sector ministries’ ability to swiftly prepare and implement the viable reconstruction projects will be a key determinant for speedy restoration of livelihoods and economic recovery.

The estimated 700,000-982,000 additional people pushed below the poverty line by the earthquake-induced income shock need to be pulled back above the line by providing them with jobs, skills and social protection as appropriate. The post-reconstruction programs need to be well coordinated, ensure ‘building back better’, and be an integral part of the larger goal of meaningful structural transformation of the economy.

II. Damages to lives and property

Over 8,800 were confirmed dead and 22,309 injured. Furthermore, 602,257 and 285,099 private houses were fully and partially damaged, respectively, forcing thousands of people to seek temporary shelter under tents and tarpaulin sheets. Furthermore, 2,673 and 3,757 public buildings were fully and partially damaged, respectively. To prioritize rescue and relief operations, the government declared 14 districts as severely affected (mostly in the central and western regions) although the earthquake has affected 31 of Nepal’s 75 districts.

III. Post disaster needs assessment

According to PDNA estimates, the cumulative damage and loss amount to 33.3% of GDP ($7.1 billion) and the cumulative need for recovery is estimated at $6.7 billion (31.5% of GDP). PDNA was spearheaded by the National Planning Commission with the support of various government agencies, development partners and civil society. It included 21 sectoral and thematic assessments.

 

Damages, losses and needs ($ billion)
Sector	Included sectors	Damage	Loss	Total needs
Social	Cultural Heritage, Education, Health and Population, Housing and Human Settlements	3.5	0.5	4.0
Productive	Agriculture, Financial Sector, Industry and Commerce, Irrigation, Tourism	0.6	1.2	1.2
Infrastructure	Communications, Community Infrastructure, Electricity, Transport, Water and Sanitation	0.5	0.1	0.7
Cross-Cutting	Gender, Social Protection, Nutrition, Employment & Livelihoods, Disaster Risk Reduction, Environment and Forestry, Governance	0.5	0.3	0.8
Total		5.1	2.1	6.7

Source: National Planning Commission

Of the total estimated recovery needs, about 50% is for rebuilding private housing and settlement. Productive and infrastructure clusters need 17.3% and 11.1%, respectively. These amount to about 5.5% and 3.5% of GDP, respectively. The recovery needs requirement for agriculture, education, electricity, and transport is estimated at $156 million, $397 million, $186 million, and $282 million, respectively. Furthermore, recovery of the tourism sector and restoration of cultural heritage are estimated to require $387 million and $206 million, respectively.

IV. Impact on economy

On 8 June 2015, the Central Bureau of Statistics estimated the macroeconomic impact of the earthquake. GDP growth (basic prices) is estimated to decline by over 1.5 percentage points to 3.0% in FY2015. Pre-earthquake growth estimate for FY2015 was 4.6%. Although the earthquake struck Nepal only in the tenth month of FY2015, the impact on GDP growth is sizable, especially on the services sector.

GDP growth (at basic prices), %

Source: Central Bureau of Statistics

Agricultural sector is expected to grow by 1.9%, industry by 2.7%, and services by 3.9%, down from earlier no-earthquake scenario forecasts of 3%, 3.5%, and 5.8%, respectively. The sharp drop in agricultural output is primarily due to the negative impact of delayed and weak monsoon in the first half of FY2015, and later the loss of livestock due to the earthquake.

The slowdown in the industry sector is due to the drastic drop in quarrying (stones, aggregates, sand and soil extraction slowing down in the affected districts, and the government’s policy to temporarily halt construction activities till mid-July 2015); manufacturing (physical damage, labor shortage, and weak demand); and construction (policy to temporarily halt construction activities, and low production of construction materials, among others).

The disruptions caused by the earthquake have been the most severe in the services sector. Overall, services growth is estimated to decline by about 2.1 percentage points to 3.9% in FY 2015. It grew by 6.4% in FY2014. Wholesale and retail trade; tourism activities (affects air transport, and hotel and restaurant businesses); real estate, renting and business activities; and education sub-sectors are the most affected.

Impact of earthquake on sectoral growth (%)

Source: Central Bureau of Statistics

Wholesale and retail trade grew by 9% in FY2014, but dropped to 3.4% after the earthquake (against the pre-earthquake forecast of 5.6%) in FY2015. This is primarily due to the slowdown in agricultural production and import of goods immediately after the earthquake. Hotels and restaurants suffered due to slowdown in tourist arrivals, physical damage to hotels and restaurants, and decline in domestic tourism. Furthermore, real estate activities were in line with the substantially lower land-related transactions (including buying and selling, renting, and operation of self-owned or leased real estate; and renting of machinery, equipment and personal and household goods). There was also a substantial slowdown in property renting business due to the physical damage to buildings.

Overall, agricultural, industry, and services sectors will contribute 0.6, 0.4, and 2.1 percentage points to GDP growth of 3% (at basic prices) in FY2015, respectively. Nepal’s GDP is estimated at $21.6 billion in FY2015 ($371 million less than what would have been in a no-earthquake scenario). The loss is equivalent to 1.5% of GDP, and about 62% of the total gross value added[1] (GVA) loss is accounted for by the services sector.

Value added output loss by sub-sector in FY2015 ($ million)

Source: Central Bureau of Statistics

Per capita income is estimated to decrease by $23 compared to the no-earthquake scenario (in which case per capita income would have been $785). Accordingly, real per capita income increased by just 0.6% against 3.6% in a no-earthquake scenario.

Nominal per capita GDP (US$)

Source: Central Bureau of Statistics

Inflation was moderating till mid-April 2015, but it started edging up as a result of the supply-side disruptions caused by the earthquake. Prices of both food and non-food items increased in the last three months of FY2015, resulting in an average inflation of 7.2%.

External sector stability remained robust as net transfers increased sharply than the rise in trade deficit, resulting in a current account surplus of 5.1% of GDP and a record foreign exchange reserves ($8.3 billion, which is sufficient to cover 11.2 months of import of goods and nonfactor services). However, this may not be sustained for long as import of construction items is expected to increase drastically in the next few years for the post-earthquake reconstruction programs. Consequently, growth of net transfers may stabilize as migrant workers deplete their present and anticipated savings by remitting early to help households meet immediate needs. Furthermore, remittance inflows may also slowdown if there is less demand for workers in the Gulf countries and Malaysia following the cost-free migration policy[2] implemented by the on July 2015. Hence, the current account balance may slip into the negative territory over the medium term and foreign exchange reserves may deplete to an equivalent of around 7 months of imports, which is also the recommended level of reserve adequacy to ensure external sector stability.[3]

V. Impact on poverty and MDGs

The severely earthquake-affected 14 districts account for about 13.6% of the total number of people living below the poverty line in Nepal. Among them, Dolakha, Makwanpur, Ramechap, Rasuwa, Sindhuli, and Sindhupalchowk have higher poverty rate than the national average of 25.2% in 2011. Similarly, nine have human development index (HDI) score lower than the national average.

Preliminary estimates show that the income shock as a result of the earthquake will likely push an additional 700,000-982,000 people below the poverty line. This translates into an additional 2.5%-3.5% of the estimated population in 2015 pushed into poverty compared to the no-earthquake baseline scenario of about 21%. About 50%-70% will come from rural Central hills and mountains, where the vulnerability prior to the earthquake was already high. The income shock is largely felt through the loss of livelihoods (including death and injuries to primary wage earners) and the loss of housing, productive assets (seeds, livestock, and farm equipment), and durable assets (assorted household items).

Beyond this monetary-based poverty estimates, a larger impact can be expected when factoring in multidimensional poverty, which includes additional factors such as water and sanitation services, disruption of schools and health services, and the possibility of an uptick in food insecurity. The poor and vulnerable are particularly dependent on local infrastructure (roads, bridges, health posts, and schools) for access to labor and commodity markets, and for accumulation of human capital (especially those of children). Reviving local economic activities and resumption of basic public services along with an accelerated implementation of reconstruction projects will be critical to make up for the setback on poverty reduction caused by the earthquake.

Furthermore, the progress towards achieving the Millennium Development Goals (MDGs), on which Nepal was mostly on track prior to the earthquake, is likely to be adversely affected, given the widespread damages to houses, classrooms, and health posts. It will also likely affect the country’s overarching goal to graduate from the Least Developed Country (LDC) category by 2022.

VI. International Conference on Nepal’s Reconstruction

On 25 June 2015, the government organized an international conference on Nepal’s reconstruction. High level representatives from over 50 countries and multilateral agencies participated in the conference.

ADB, represented by its President, Takehiko Nakao, pledged $600 million—including $200 million emergency assistance approved by its Board of Directors on 24 June—to support rebuilding of schools, roads, and public buildings. The government estimated the total pledge of assistance at $4.0 billion (equally spilt in grants and concessional loans). Of the total pledge, about 67% is new commitment ($2.7 billion). Cumulatively, India and the Peoples’ Republic of China committed $1.4 billion and $767 million, respectively. World Bank, Japan, the US and the EU pledged $500 million, $260 million, $130 million, and $117 million, respectively.

According to the PDNA, total public sector losses and damages amount to $1.7 billion, which excludes housing. The National Planning Commission estimated that about 57% of the recovery needs ($3.8 billion), including housing, will have to be shouldered by the government. In this respect, the total pledged amount was higher than the public sector recovery needs till the medium-term. However, a much higher amount of investment may be needed in the long-term to build better and earthquake-resilient public infrastructure throughout the country.

Total aid pledged for reconstruction ($ million)

Source: Ministry of Finance; ADB staff estimates

VII. FY2016 Budget and Monetary Policy

The FY2016 budget is primarily focused on rehabilitation and reconstruction of physical and social infrastructure, housing and livelihoods after the catastrophic earthquake.

Completing of reconstruction work within the next five years is the most prominent agenda. It commits to fully operationalize the NRA soon, with a special implementation authority, effective leadership, and adequate financial resources. A total of NRs91 billion ($910 million or 3.8% of GDP) has been earmarked for reconstruction work, including $740 million (3.1% of GDP) for the National Reconstruction Fund, which will initially prioritize reconstruction of housing, public buildings, archeological structures, physical infrastructure, and enhancement of productive capacity. About $170 million is earmarked for sector ministries and agencies to carry out reconstruction works till the NRA is operational, i.e. an interim arrangement.

Planned reconstruction budget for FY2016 and composition of National Reconstruction Fund (NRs billion)

Source: FY2016 Budget Speech

The budget also includes NRs200,000 (about $2000) for each household that has lost its house due to the earthquake. To address the shortage of labor for reconstruction, skill training is planned for 50,000 people in the areas of masonry, plumbing, and electrical works.

Meanwhile, to assist government, Banks and Financial Institutions (BFI), and the public in their efforts toward accelerated post-earthquake recovery, Nepal Rastra Bank (the central bank) introduced a number of measures in the monetary policy for FY2016, including:

1. Zero percent refinancing facility for BFIs willing to provide loans at 2% interest to those households affected by the earthquake, provided that such households meet the requirements set by the government. Accordingly, households within and outside Kathmandu Valley can access the subsidized loans of up to NRs2.5 million and NRs1.5 million, respectively.
2. As announced in the FY2016 budget speech, the NRB will help assist in the establishment of an Economic Rehabilitation Fund, which will provide refinancing facility and interest subsidy to the business community affected by the earthquake.

Breakdown of reconstruction budget for FY2016
NRs billion	GON	Grant	Loan	Total	Share of aid
National Reconstruction Fund	16	36	22	74	78
Recurrent expenditure	8	15	12	35	77
Program expenses	2	0	0	2	0
Capital grants to institutions & individuals	6	15	12	33	82
Capital expenditure	8	21	10	39	79
Building construction	2	10	5	17	88
Civil works	6	11	5	22	73
Natural disaster relief & reconstruction	17	0	0	17	0
Recurrent expenditure	2	0	0	2	0
Capital expenditure	15	0	0	15	0
Civil works	5	0	0	5	0
Capital contingencies	5	0	0	5	0
Capital formation	5	0	0	5	0

Source: FY2016 Red Book; Budget Speech            

VIII. Effective reconstruction and recovery

Recovery has to be faster, better and smarter given that the country lies on an active geological fault lines. Drawing from ADB’s experience in post-disaster recovery in Asia and the Pacific region, ADB President Nakao highlighted, during the reconstruction conference, five principles for effective reconstruction that Nepal could follow:

1. Public as well as private buildings should be rebuilt to earthquake-resilient standards, fully applying the principle of “Build-Back-Better”.
2. Inclusiveness should be at the core of reconstruction effort. Special attention should be paid to the needs of the poor, rural residents, and other vulnerable social groups, who have suffered more from the earthquakes.
3. A robust institutional setup for reconstruction is pivotal to successfully execute reconstruction projects within the given timeframe. A strong leadership and competent human resources are vital for the success of the NRA.
4. Continuous enhancement of the institutional capacity of executing and implementing agencies along with the adoption of sound governance and fiduciary risk management systems for the reconstruction process are also important.
5. Effective donor coordination and strong government ownership of the entire process are also equally important for the success of the reconstruction projects.

He also emphasized that reconstruction should go hand in hand with development programs already planned, without affecting the latter.

IX. Accelerated recovery and structural transformation

The reconstruction authority’s and sector ministries’ ability to swiftly prepare and implement viable projects will underpin the scope and pace of reconstruction, and hence the recovery phase. A coherent reconstruction strategy has to be ideally aligned with the long-term economic development vision, which aims to increase per capita income to the level of a middle-income country before 2030. This is especially important because the PDNA covered earthquake-resilient reconstruction only in the affected areas, whereas this has to be implemented throughout the country. Adhering to the principle of Build-Back-Better, t rebuilding damaged houses beyond the set size, retrofitting standing buildings in Kathmandu Valley and affected districts, and nationwide resilience (such as ensuring housing and school safety across the country) need to be kept in mind while planning and initiating rehabilitation and reconstruction projects.

Overall, rehabilitation and reconstruction should primarily aim at increasing productivity-enhancing public capital investment. This is a key to ensuring structural transformation whereby high value-added and high-productivity sectors are more dominant than low value-added and low-productivity sectors in the medium term. Promoting agribusiness, industrial capacity, innovation and high-productivity services need to be at the center of such a reconstruction and structural transformation strategy. In addition to higher investment, this will require reforms on institutional, legal, regulatory, and capacity enhancement fronts.

Structural transformation

Source: Authors’ estimate

Private investment has been suppressed primarily due to the liberal product market (including imports), but an unreformed factor market (land, labor, and capital) after 1992 (the time when the first set of liberalization reforms were rolled out). This has led to stunted growth of the manufacturing sector and its declining share of GDP as imported-based activities expanded. Given this background, a higher quantum and quality[4] of capital spending is vital to boost aggregate demand, expand the growth potential of the economy, and increase per capita income. Higher productivity-enhancing public capital investment would also increase returns on private investment, resulting in higher private investment due to the ‘crowding-in’ effect. Such public investment over the medium term in physical and social infrastructure enhances productivity growth, encourages technological innovation, accelerates recovery and establishes a faster, inclusive, and sustainable growth pattern. However, in the long term, structural changes, especially in factor markets (land, labor, and capital), are required to sustain the growth pattern established through stabilization measures over the medium term.

X. Concerns over effective budget execution

One of the biggest unknowns following the decision to establish the NRA is its ability to fully execute the planned reconstruction budget in well-planned productivity-enhancing projects. This concern arises from the persistent budget execution shortfalls even under normal circumstances, which has further weakened in the last decade. As such, actual capital spending averaged about 72% in the last decade and about 60% is bunched in the last quarter. Furthermore, the actual capital spending (about 3% to 4 % of GDP) is far less than the required spending (of 8-10% of GDP) to close the infrastructure gap..

Planned and actual capital spending (% of GDP)

Note: Changed reporting system to Government Finance Statistics (GFS) 2001 in FY2012. In FY2011, actual reporting was done based on GFS 2001, but budget allocation was done based on earlier GFS.

Source: Ministry of Finance; NRM staff estimates

Capital spending is marred mainly by:

1. Bureaucratic hassles: project approval delays, and weak intra and inter-ministry coordination,
2. Structural weaknesses: limited appraisal, planning, and implementation capacity of line ministries (including the lack of medium-term expenditure framework), lack of strong pipeline of projects ready for implementation, cumbersome laws and regulations (procurement and procedural clearances), and allocative inefficiency,
3. Low project readiness: lack of feasibility studies and detail designs in advance, lack of well-planned procurement plans, and delays in land acquisition,
4. Weak project management: high staff turnover, lack of staff capacity, lengthy procurement process, weak contractor capacity, and weak contract management
5. High fiduciary risks in project implementation, particularly in rural areas when programs are implemented through local government having limited human resources and capacity,
6. Political instability and interference at operational level

The budget for FY2016 partially addresses this concern by giving the line ministries administering large projects the authority to spend the planned budget without getting prior approval from the NPC and the MOF. Similarly, multi-year contracts are allowed for some projects and the government has committed to restrict transfer key project staff subject to satisfactory progress in implementation. Deployment of managers, accountants, and technical staff is envisaged in village development committees starting with earthquake affected areas. However, other issues outlined above impeding regular capital spending remain unchanged and it is likely that $170 million allocated to various line ministries for reconstruction work may remain underspent at the end of FY2015.

With regard to spending by the NRA, the ordinance, which needs to be transformed into an Act without delay, governing its establishment gives it sweeping powers to do away with most of the hassles impeding accelerated capital spending. The authority is chaired by the Prime Minister and its CEO will independently handle the operations. The CEO, whose performance will be critical to accelerated reconstruction within the given timeframe, was still not appointed two months after the ordinance for its establishment was introduced. This already delayed the pace of implementation, especially concerning hiring of human resources, preparing a quick pipeline of projects, an associated action plan for investment, and its overall synchronization with the long-term development vision being envisaged by the NPC. The faster the NRA comes into operation, the faster will be the capital spending and ultimately completion of the reconstruction programs.

The NRA will have a critical role in managing the following crucial issues for accelerated reconstruction and recovery:

• Hiring competent human resources that can bring in new and smarter ideas and foster innovation (including reassigning competent civil servants from across government departments)
• Preparing a credible time-bound action plan for investment in reconstruction projects, including a sizable pipeline of potential projects
• Managing political interference in normal operations and preparation of reconstruction projects and ensuring an inclusive development process
• Ensuring line ministries’ full ownership of projects designed, approved and procured by the NRA
• Coordinating with development partners to ensure that the committed funds for reconstruction are realized within the given timeframe
• Engaging meaningfully youth, local communities, think tanks, specialized institutes, and civil society in reconstruction planning, design, implementation, monitoring, and evaluation
• Ensuring ‘crowding-in’ of private investment for reconstruction on public-private partnership (PPP) basis
• Outsourcing of managerial as well as non-managerial work (time and output-bound contractual arrangement for design, supervision, and management of reconstruction projects).

XI. Conclusion

The earthquake caused tremendous loss of lives and properties. It lowered economic growth rate, pushed about a million people below the poverty line, slowed progress on achieving some of the MDGs, and sapped investors and consumer confidence. The cumulative pledges during the international reconstruction conference exceeded the expected public sector needs for reconstruction. Now, the NRA and line ministries’ ability to swiftly prepare and implement viable projects will underpin the scope and pace of reconstruction and ultimately a better, faster and smarter recovery. The authority needs to be operationalized without delay and it has to chart out a coherent five-year reconstruction strategy by aligning it with the long-term economic development vision.

Accelerated reconstruction would require hiring of competent human resources, preparing a time-bound investment action plan, a strong pipeline of viable projects, outsourcing of design, monitoring and evaluation, political buy-in of proposed actions, and engaging youth, specialized institutions, and civil society at various stages of the project cycle. This would then ‘crowd in’ private investment as well, leading to a higher, sustainable, and inclusive economic growth. Overall, rehabilitation and reconstruction should primarily aim at increasing productivity-enhancing public capital investment, which is a key to ensuring structural transformation whereby high value-added and high-productivity sectors are more dominant than low value-added and low-productivity sectors in the medium term.

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[1] Gross output is the total value of all goods and services produced during the accountancy period (at basic prices). Intermediate consumption is the total value of goods and services consumed as inputs by production processes (at purchasers’ prices). Gross value added is the difference between gross output and intermediate consumption. Finally, GDP is equal to gross value added plus taxes minus subsidies.

[2] The Ministry of Labor and Employment directed overseas recruitment agencies to facilitate migration without financially burdening the migrant workers. This essentially means cost-free migration for workers seeking employment in Saudi Arabia, Qatar, Kuwait, the United Arab Emirates, Bahrain, Oman and Malaysia.

[3] IMF. 2015. Nepal: Request for Disbursement Under the Rapid Credit Facility. IMF Country Report No.15/224. Washington, DC. See: http://www.imf.org/external/pubs/ft/scr/2015/cr15224.pdf

[4] Low quality of capital spending escalates future recurrent costs associated with the project (such as operation and maintenance costs, staff required to monitor the project, etc)

NEPAL: FY2016 GDP growth and inflation outlook

Here is the FY2016 growth and inflation outlook from Macroeconomic Update, August 2015, Vol.3, No.2 (executive summary here). It includes FY2015 update on real, fiscal, monetary and external sector, and growth and inflation outlook for FY2016. It provides a comprehensive macroeconomic assessment, including fiscal sustainability, after the April 25 earthquake.

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FY2016 Growth Outlook

1. The outlook for FY2016 is cautiously optimistic and is largely contingent upon the scope and pace of post-earthquake reconstruction works. The weak and subnormal monsoon so far has already affected agricultural plantation, particularly paddy in the eastern and central administrative regions. The loss of agricultural land to earthquake-triggered landslides will also lower potential agricultural output. Although the overall monsoon rains are expected to be better than last year’s, it is still projected to be below the long-term average as weak El Nino continues to prevail over the Pacific.[1] Furthermore, monsoon rains were late by around two weeks. Normally monsoon rains enter on June 10 from the eastern region, and gradually cover the entire country within a week. Approximately, 80% of total rainfall occurs between June and September. Industrial and services sectors are expected to register modest to robust performance depending on the political development, reconstruction efforts, recovery of earthquake-hit factor and product markets, and remittance inflows. The promulgation of a new constitution within FY2016 by settling most of the contentious issues may boost investor confidence. Furthermore, the scope and pace of acceleration of reconstruction projects will affect performance of quarrying, manufacturing and construction activities, which in turn will then dictate industrial sector growth. Timely and judicious execution of the FY2016 budget remains at the core the recovery process. The rate of migration to overseas employment destinations and the subsequent levels of remittance inflows, and the pace of full restoration and resumption of services activities such as hotels and restaurants, transport and communications, education and real estate and renting will influence services sector growth.

Figure 1: Sectoral contributions to growth (percentage points)

Source: Central Bureau of Statistics; NRM staff estimates

2. Considering these developments, this edition of Macroeconomic Update forecasts FY2016 GDP growth (at basic prices) under two scenarios (Figure 1). Under the first scenario, assuming a marginally better monsoon rainfall, modest pickup in actual implementation of reconstruction projects through the National Reconstruction Authority, gradual normalization of political scenario, continuation of previous trend in spending capital budget, modest recovery of tourism related activities and slightly better services sector growth, GDP growth is forecast at 4.5%. Under the second scenario, a slightly better rainfall (average over the last five years) and adequate paddy plantation in the main paddy plantation belts, robust pick up in manufacturing and construction activities propelled by accelerated spending by the NRA and improved capital budget execution by line ministries, normalization of political scenario, and robust services sector performance (including robust remittance inflows and quick recovery of tourism related activities), GDP growth is forecast at 5.5%. The adverse political situation and the slow capital budget execution are the two major downside risks that could drastically lower growth forecast.

3. These estimates are lower than the government’s target of 6% as announced in FY2016 budget speech. In order to attain a 6% growth rate, assuming agricultural output growth of 2.5% considering the subnormal monsoon in the first half of FY2016, the non-agricultural output has to growth by at least 7.7%, which is 4.1 percentage points higher than in FY2015. Furthermore, assuming agricultural output equal to the average over the last five years and services output growth of 6% (which is higher than the average over the last five years), industrial output has to growth by at least 13.6% to attain GDP growth of 6%. This may be challenging given that industrial production is yet to recover fully to pre-earthquake levels due to production and supply disruptions caused by the earthquake and the political unrest in various parts of the country. Furthermore, the NRA is yet to be fully operation and it will take few months for the authority to firm up reconstruction project, and the line ministries have not proactively prepared investment plan and project strategy to execute the $170 million allocated to them for reconstruction related projects.

FY2016 Inflation Outlook

4. The expected low agriculture harvest due to subnormal monsoon, slightly higher price pressures in India, higher demand for reconstruction materials and workers, blockage of major trading routes with the PRC, and supply disruptions, including in distribution networks, as a result of the political strikes in various parts of the country will likely push up general prices of goods and services in FY2016 (Figure 2). Depending on the intensity of these factors, inflation is forecast considering two scenarios. Under the first scenario, although non-food prices are expected to remain low as a result of continued lower fuel prices and stable price pressures in India, food inflation is projected to remain in double digit, resulting in overall inflation of 8.5%.

Figure 2: Contributions to inflation (percentage points)

Source: Nepal Rastra Bank; NRM staff estimates

5. Under the second scenario, moderate price pressures in India, and higher intensity of supply disruptions caused by political strikes and blocking of major trading and distribution networks would push up food prices even higher than the one considered under the first scenario, especially that of cereals, legumes, vegetables and fruits. Similarly, non-food prices will likely escalate, particularly that of clothing and footwear, and furnishing and household equipment. These factors will likely push up inflation to about 9.5% in FY2016. Even after accounting for the high probability of subdued fuel prices throughout FY2016, if supply disruptions persist for long, then there is a high likelihood of even higher inflation, probably around 10%. Continued depreciation of Nepalese rupee against the US dollar will likely fuel inflationary pressures.

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[1] Indian Meteorological Department’s assessment as of 3 August 2015. The monsoon seasonal rainfall is projected to be about 84% (August to September), 90% (August) and 88% (June to September) of the long period average . Long period average refers to the 50 year average. See: http://imd.gov.in/section/nhac/dynamic/LRF_second.pdf

Nepal Macroeconomic Update, August 2015

Nepal Macroeconomic Update, Aug 2015 (in Nepali)

Here is the Nepali version of FY2016 growth and inflation outlook from Macroeconomic Update, August 2015, Vol.3, No.2. It includes FY2015 update on real, fiscal, monetary and external sector, and growth and inflation outlook for FY2016. It provides a comprehensive macroeconomic assessment, including fiscal sustainability, after the April 25 earthquake.

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sfo{sf/L ;f/f+z (Executive Summary)

!= @)!% clk|n @% sf] &=* DoflUg6\o"8 dfkg ul/Psf] ljgfzsf/L dxfe"sDk / TfTkZrft\ uPsf y'k|} k/fsDkgx? / klxnf]] 5 dlxgfdf cf};teGbf Go"g dg;'gsf] sf/0fn] cfly{s aif{ @)&!÷&@df cfly{s ultljlw ;':t /x] . kl/0ffdtM e"sDk hfg'cl3sf] $=^Ü sf] s"n ufx{:y pTkfbg j[l4b/ k|If]k0faf6 #=)Ü df em/]sf] 5 . cfly{s aif{sf] bzf} dlxgfdf e"sDk uPsf] ePtfklg cf}Bf]lus tyf ;]jfIf]qdf ;a}eGbf a9L k|efj k/\of] . s[lif pkhsf] j[l4b/ !=(Ü df emg]{ cg'dfg ul/Psf] 5 h'g e"sDkcl3 @=^Ü sf] j[l4 x'g] k|If]k0f ul/Psf] lyof] . s'Nf ufx{:y pTkfbgdf s]an !%Ü dfq} lx:;f /x]sf] cf}Bf]lus If]q cg'dflgt @=^Ü sf] j[l4b/df v'lDrof] h'g If]qsf] j[l4b/ e"sDkhfg'k"j{ $=^Ü sf] x'g] k|If]k0f ul/Psf] lyof] . o;}u/L, e"sDkn] k'/\ofPsf] gf]S;fgsf] sf/0fn] d'Vo ;]jfIf]qsf] j[l4b/ @=!Ü ljGb'n] 36g]] cg'dfg ul/Psf] 5 h'g e"sDkcl3 ^=)Ü sf] j[l4b/ /xg] k|If]k0f ul/Psf] lyof] . cfly{s aif{ @)&@÷&# sf] nflu kl/b[Zo ;ts{tfk"j{s cfzfjfbL /x]sf] tyf of] d'Votof e"sDkkZrft\sf] k'glgdf{0f sfo{sf] ult / k|efjsfl/tfdf e/ kg]{5 . sdhf]/ tyf cf};teGbf Go"g dg;'g, k'glg{df{0f kl/of]hgfx?sf] oyfy{ sfof{Gjog 7Ls7Ls} jf b|'t ultdf x'g] ;Defjgf, ljBdfg /fhgLlts cGof]n tyf d'Vo ;]jfIf]qsf lqmofsnfksf] dWod vfnsf] k'g?Tyfgsf] ;DefjgfnfO{ dWogh/ ub}{, s'n u|fx:y pTkfbg j[l4b/ $=%Ü b]lv %=%Ü sf] aLrdf /xg] k|If]k0f ul/Psf] 5 .

@= klxnf] tLgj6} q}dfl;sdf ;':t vr{ x'g' / clGtd q}dfl;sdf e"sDkn] gf]S;fg k'/\ofPsf] sf/0f cfly{s aif{ @)&!÷&@ df ;fj{hlgs vr{ k|ultdf g/fd|f];FUf k|efj k/\of] . ah]6 sfof{Gjogdf x'g] l9nfO{, nfdf] k|lqmof / emGeml6nf] v/Lb k|lqmofsf] sf/0fn] vr{ ug{ ;Sg] Ifdtfdf afwf k'u]sf]n] ubf{ k"FhLut vr{ lautsf aif{x?df eGbf dGbultdf x'g uof] . cfly{s aif{ @)&!÷@)&@df k"FhLut vr{ ug{sf nflu 5'§ofOPsf] /sdsf] ^(=(Ü dfq jf:tljs k"FhLut vr{ ePsf] 5, h'g cfly{s aif{ @)&)÷@)&!df xfl;n ePsf] &*=$Ü eGbf Go"g 5 . o;}u/L rfn" vr{cGtu{t *$=$Ü jf:tljs vr{ ePsf] 5 h'g vr{ cl3Nnf] cfly{s aif{sf] *%=(Ü eGbf yf]/}dfq sd xf] . ;du| vr{df !#=)Ü n] j[l4 ePsf] 5 h;df rfn" vr{ / k"FhLut vr{sf] j[l4 qmdzM !!=)Ü / @@=#Ü /x]sf] / b'Jf} j[l4b/ cfly{s aif{ @)&)÷@)&!sf] eGbf Go"g /x]sf] 5 .

#= s"n /fhZj !#=*Ü n] a[l4 eP klg cfj @)&)÷@)&!sf] @)=%Ü j[l4b/eGbf lgs} Go"g xf] . aflif{s /fhZj ;+sng ? $)%=* ca{ -lhl8lksf] !(=!Ü_df dfq ;Lldt ePsf] 5 . h'g /fhZj ;+sngsf] nIo ? $@@=( ca{ eGbf Go"g xf] . clk|nsf] dxfe"sDkkZrft\ cfly{s ultljlw tyf cfoftdf cfPsf] ;':ttfsf] sf/0fn] of] /fhZj ;+sng 36]sf] xf] . lhl8lkdf /fhZj ;+sngsf] lx:;f pNn]Vo ?kdf a9\g uO{ !^=*Ü k'u]sf] 5 h'g cfj @)^%÷^^ df (=*Ü dfq} /x]sf] lyof] . s/k|zf;gdf ePsf] lg/Gt/ ;'wf/, s/ cfwf/ nfO{ km/flsnf] agfOPsf] tyf cfoftdf ePsf] j[l4 -w]/}h;f] ljk|]if0fsf] cfDbfgLn] wfg]sf]_ n] uPsf] bzsdf /fhZj ;+sngdf pNn]Vo j[l4 ePsf] xf] .

$= ck]Iff ul/PeGbf Go"g /fhZj ;+sng;Fu} lg/fzfhgs vr{ k|ultn] cfa @)&!÷&@ df lhl8lksf] nueu )=@Ü k|ltzt a/fa/Lsf] ljlQo 3f6f -lkm:sn 8]lkml;6_ /x]sf] 5 . oBlk of] cfa @)^(÷@)&)sf] lhl8lksf] )=&Ü / cfa @)&)÷&! sf] )=^Ü a/fa/sf] ;l~rt ljQ x'g' eGbf /fd|f] cj:yf xf] . of] cem}klg lhl8lksf] @=@ k|ltztdf /x]sf] dWosfnLg cf};t ljlQo 3f6f eGbf Go"g 5 . g]kfn h:tf] Go"g cfo ePsf] d"ns tyf hnljB't\ / ;8s h:tf k"jf{wf/ lgdf{0f ug{ 7"nf] k"hLsf] cfjZostf k'/f ug{ dWodvfnsf] ljQ 3f6f df rNg' jf~5gLo 5 t/ To;f] ubf{ ljQ lbuf]kgf -lkm:sn ;:6]glaln6L cyf{t\ ;/sf/n] ug{'kg]{ vr{, /fhZj tyf cGo gLltut s'/fdf gf]S;fg x'g lbg' x'b}g_ . cfa @)^*÷^)( b]lv k|fOd/L ;/\KN;df rln/x]sf] 5 o;sf] cy{ ;fj{hlgs C0fsf] Jofh ltg'{k"j{ ljQ ;Gt'ng ;sf/fTds /x]sf] eGg] xf] . g]kfnsf] ;du| ;fj{hlgs C0f -afx\o tyf ufx{:y_ lg/Gt/ 3l6/x]sf] / pQm C0f cfj @)&!÷@)&@df lhl8lksf] @%=^Ü df em/]sf] 5 . ljQLo lbuf]kgf -lkm:sn ;:6]gflaln6L_ laZn]if0fn] kof{Kt ljQLo cfwf/ /x]sf] / To;n] pTkfbg j[l4 ug]{u/L ;fj{hlgs k"FhL nufgL lj:tf/ ug{ ;lsg] b]vfpFb5 / o:tf] nufgL k'glgdf{0fsf cfof]hgfdf ;d]t ug{ ;lsG5 t/ To;f] ubf{ ;/sf/sf] lkm:sn ;fp08g]z -ljQLo dha'tLdf_ df hf]lvd x'g'x'b}g .

%= d"b|f:kmLlt -aif{sf] cf};t pkef]Qmf d"No_ cfa @)&!÷@)&@df pNn]Vo ?kdf tn em/L &=@Ü df cfOk'u]sf] 5 To;df vfB / u}/vfB j:t'sf] d"No tn emg{ uO{ d'b|fl:kmlt cfa @)^^÷^& otfs} ;a}eGbf tn cfPsf] xf] . cfa @)&!÷@)&@df vfB / u}/vfB j:t'sf] d"Noj[l4b/ qmdzM (=^Ü / %=@Ü df /x\of] h'g cfa @)&)÷@)&!df qmdzM !!=^Ü / ^=*Ü n] j[l4 ePsf] lyof] . cfa @)&!÷@)&@df ;du| d"Noj[l4df vfBj:t'sf] d"Non] %=# Ü ljGb' / u}/vfB j:t'sf] @=& Ü ljGb'sf] of]ubfg /x]sf] 5 . cfpFbf] ;donfO{ x]bf{, cf};teGbf Go"g dg;'gsf] sf/0fn] s[lif pTkfbgdf sdL x'g] / ef/tdf x'g] clnslt pRr d"Nosf] rfk, lgdf{0f ;fdu|L / sfdbf/sf] pRr dfu, rLg;Fusf] d'Vo Jofkl/s gfsf aGb /xg' / ljt/0f g]6js{;lxt cfk"lt{df x'g hfg] cj/f]w, tyf d'n'ssf] ljleGg efudf /fhgLlts aGb x8\tfnn] ubf{ j:t' / ;]jfsf] ;fwf/0f d"No cfa @)&@÷&# df *=% Ü b]lv (=%Ü sf aLrdf /xg] k|If]k0f ul/Psf] 5 . cfa @)&@÷&# df OGwgsf] d"No lgolGqt x'g] pRr ;Defjgf /x]tf klg nfdf] ;do;Dd cfk"lt{df cj/f]w hf/L /x]df d"Noj[l4 s/La !)Ü ;Dd k'Ug ;Sg] ;Defjgf 5 .

^= dlg ;KnfO{ cyf{t\ d'b|f k|bfo -Pd@_ !(=(Ü n] a9]/ g]? #!!=* ca{df k'u]sf] 5 o;f] x'g'sf] sf/0fdf v'b a}blzs ;DklQ tyf v'b ufx{:y ;DklQdf pNn]Vo j[l4 x'g' xf] . a}+s tyf ljQLo ;+:yfn] kl/rfng u/]sf] lgIf]k @)=!Ü n] a9]sf] 5 h'g ut cfadf pQm lgIf]k !*=$Ü j9]sf] lyof] . cfa @)&!÷@)&@df ;+lrt lgIf]k kl/rfng lhl8lksf] &(=%Ü df k'u]sf] 5 h'g ut cfadf &@=%Ü dfq lyof] . a}+s tyf ljQLo ;+:yfsf] s"n C0f -C0f / k]ZsL_ !&=%Ü -g]? @@(=# ca{_ n] j[l4 ePsf] 5 h'g cfa @)&)÷@)&!df !$=$Ü j[l4 eO -g]? !^%=% ca{_ df k'u]sf] lyof] . ;du|df, s'Nf C0f k|jfxsf] ;a}eGbf a9L @!=*Ü yf]s tyf v'b|f ljqm]tfdf uPsf] 5 To;kl5 !*=*Ü pBf]udf, !!=@Ü lgdf{0fdf, &=(Ü ;]jfd"Nfs If]qdf C0fk|jfx ePsf] 5 . cfa @)&!÷@)&@df a}+s tyf ljQLo ;+:yfsf] s'Nf C0f lhl8lksf] &@=^Ü df k'u]sf] 5 h'g ut cfadf ^&=^Ü df /x]sf] lyof] . s]Gb|Lo a}+sn] aif}{el/ ljleGg OG:6«'d]G6 h:t} l/e;{ l/kf] tyf laqmL af]nsaf]ndfkm{t\ clws t/ntf k|zf]rg u/]sf] 5 . aif}{el/ Jofhb/df ptf/r9fa cfO/xFbf cNksfnLg t/ntf Joj:yfkgsf pkfox?sf] k6s k6s k|of]u x'g'n] ljBdfg t/ntf Joj:yfkg /0fgLlt c:yfoL pkfo ePsf] / bL3{sfnLg ;dfwfg ug{ nufgL jftfj/0fdf g} ;'wf/ cfpg'kg]{ s'/f Olu+t ub{5 . aif}}{el/ clws t/ntf sfod /x]sf]n] cNksfnLg Jofhb/ !=)Ü eGbf klg Go"g x'g uPsf] 5, oBlk @)!%sf] km]a'|c/Lkl5 pQm Aofhb/ cl3Nnf] cfasf] ToxL ;doeGbf pRr lyof] . afl0fHo a}+sx?n] cfjZos l;Pcf/ -Soflk6n Pl8Sj];L /]l;of]_ / v'b t/ntf ;lhn};Fu k'/f u/]sf 5g\ . afl0fHo a}+ssf] l;Pcf/ !!=^(Ü df /x\of] h'g Go"gtd !)Ü l;Pcf/ / !Ü akm/ cfjZostfeGbf w]/} xf] .

&= cfa @)&)÷@)&!df zf]wgfGt/ art cd]l/sL 8n/ !=% ca{ -lhl8lksf] ^=*Ü_ k'u]sf]n] d'n's'sf] afx\o If]q ;an ePsf] lyof] . lhl8lksf] #!=@Ü df k'u]sf] d'n'ssf] 7"nf] Jofkf/ 3f6f a}b]lzs /f]huf/df uPsf sfdbf/af6 cfPsf] ljk|]if0fn]* ]cf+lzs ?kdf k|lt;Gt'ng u/]sf] 5 h'g ljk]|if0f lhl8lksf] @(=!Ü df k'u]sf] 5 / lhl8lksf] $=^Ü /x]sf] lgof{tn] ubf{ rfn" vftfdf cd]l/sL 8n/ !=! ca{ -lhl8lksf] %=!Ü_ art /x]sf] 5 . of] art cl3Nnf] cfa @)&)÷@)&! df lhl8lksf] $=^Ü /x]sf] lyof] . s'n ljb]zL ljlgdo ;l~rlt cfa @)&)÷@)&! sf] cd]l/sL 8n/ ^=* ca{af6 a9]/ cfa @)&!÷@)&@df cd]l/sL 8n/ *=# ca{df k'u]sf] 5 h'g !!=@ dlxgfsf] nflu j:t' / ;]jf cfoft ug{ k'Ug] /x]sf] 5 . ;du|df g]kfNfL ?k}ofF @)!! h'nfO{ !% b]lv @)!@ h'nfO{ !% aLrdf !(=(Ü n] cjd"Nog eof] / @)!@ h'nfO{ !% b]lv @)!# sf] h'nfO{ !% aLrdf ^=&Ü n] cjd"Nog ePsf] lyof] . o;}u/L @)!# sf] h'nfO{ !% b]lv @)!$ sf] h'nfO{ !%sf] cjlwdf )=(Ü n] x|f; ePsf] g]kfnL ?k}ofFdf @)!$ sf] h'nfO{ !% b]lv @)!% sf] h'nfO{df km]l/ %=$Ü n] cjd"Nog ePsf] 5 .

*= o; Dofqmf]Osf]gf]lds cKf8]6n] zL3| k'g:yf{kgfsf nflu e"sDkf]Q/ k'glgdf{0f sfo{sf] dxTj / o;nfO{ s;/L cufl8 a9fpg ;lsG5 eGg]jf/] s]lGb|t eO a0f{g u/]sf] 5 . e"sDkn] wghgsf] 7"nf] Iflt u/]sf] 5 . o;n] cfly{s j[l4b/df x|f; NofPsf] 5, s/La bz nfv dflg;x? ul/aLsf] /]vfd'lGt/ ws]lnPsf 5g\ . ;x;|fAbL ljsf; nIosf s]xL xfl;n ug'{kg]{ k|ultx?df ;':ttf cfPsf] 5 / ;fy} nufgLstf{ / pkef]Qmfsf] dgf]an sdhf]/ ePsf] 5 . cGt/fli6{«o k'glgdf{0f ;Dd]ngdf ;fj{hlgs If]qsf] k'glgdf{0fsf nflu ck]Iff ul/Psf] eGbf a9L g} k|ltj4tf Kf|fKt ePsf] 5 . xfn, zL3| kl/of]hgf tof/ ug]{ / nfu" ug{] sfdsf nflu /fli6«o k'glgdf{0f k|flws/0f -Pgcf/P_ tyf ;DalGwt dGqfnosf] Ifdtfn] g} k'glgdf{0fsf] ;Defjgf / ultdf cfwf/ to ub{5 / To;n] klxn]eGbf /fd|f], b|'t k'g:yf{kgf ug{ d2t ub{5 . k|flws/0fnfO{ s'g} l9nf gu/Lsg ;+rfngdf NofOg'kb{5 / o;n] bL3{sfnLg cfly{s ljsf;sf] b[li6sf]0f;Fu d]n vfg] u/L kfFraif]{ k'glgdf{0f /0fgLlt tof/ ug'{kb{5 .

(= k'glgdf{0fnfO{ ultdfg\ agfpgsf nflu of]Uo hgzlQmsf] lgo'lQm cfjZos 5 . o;}u/L ul/g'kg]{ sfo{df ;doa4 nufgL tflnsf;lxtsf] of]hgf agfpg], k|f]h]S6x? tof/ u/L tof/L cj:yfdf /fVg], l8hfOg, cg'udg tyf d"Nof+sg sfdsf] cfp6;f]l;{ª\ ug]{, k|:tfljt sfo{df /fhgLlts ;dembf/L, k|f]h]S6 ;fOsndf o'jf, ljz]if ;+:yf tyf gful/s ;dfhsf] kl/rfng cflb sfdx? kb{5g\ . oL sfo{x?n] gLlhIf]qsf] yk nufgL NofpF5 clgdfq pRr, lbuf] tyf ;dfj]zL cfly{s j[l4tkm{ cufl8 a9\g] jftfj/0f aGb5 . ;du|df, k'g:yf{kgf tyf k'glgdf{0fn] d"Votof pTkfbg a9fpg] Pjd\ ;fj{hlgs k"FhL nufgL j[l4 ug]{ nIo /fVg'kb{5 . pQm ;fj{hlgs k"FhLut nufgL ;+/rfgfut kl/jt{g Nofpgsf nflu dxTjk"0f{ 5 / To;f] ePdf dfq pRr d"No -xfO Eofn" P8]8_ / pRr pTkfbg x'g] If]qx? dWosfnLg Go"g Df"No -nf] Eofn' P8]8_ ePsf tyf Go"g pTKffbg ePsf If]qx?eGbf a9L ;zQm x'g]5g\ .

v= cfa @)!^ a[l4b/ cfp6n's (FY2016 Growth Outlook)

!= cfly{s aif{ @)!^sf] nflu cfp6n's ;ts{tfk"j{s cfzfjfbL /x]sf] tyf of] d'Votof e"sDkkZrft\sf] k'glgdf{0f sfo{sf] ult / k|efjsfl/tfdf lge{/ /xg]5 . sdhf]/ tyf cf};teGbf Go"g dg;'gn] s[lifdf afnL nufpg] ;dodf k|efj kfl/;s]]sf] 5, vf;u/L k"jf{~rn / DfWodf~rn ljsf; If]qdf wfg /f]kfO{df To:tf] k|efj kl/;s]sf] xf] . e"sDkkl5sf klx/f]n] ubf{ u'd]sf] v]tLof]Uo hldgsf] sf/0fn] klg s[lif pkhsf] pTkfbg 36\g ;S5 . ;du|df uPsf] aif{sf] eGbf dg;'g /fd|f] /xg] ck]Iff ul/Psf] ePtf klg aiff{ bL3{sfnLg cf};teGbf Go"g /xg] / To;sf] sf/0fdf k|zfGt dxf;fu/df[*]* sdhf]/ Pnlggf] hf/L /xg' xf] . z'?d} dg;'g b'OxKtf l9nfu/L lqmofzLn ePsf] lyof] . ;fdfGotof dg;'g h'gsf] !) ut] k"jf{~rnaf6 k|j]z ub{5 clg Ps;ftfdf k'/} b]zel/ km}lnG5 . nueu s'n aiff{sf] *) k|ltzt h'gb]lv ;]K6]Da/;Ddd} x'g] ub{5 . cf}Bf]lus tyf ;]jfIf]qn] dWod b]lv dha"t pknlAw xfl;n ug]{5g\ t/ To:tf] pknlAw /fhgLlts ljsf;qmd, k'glgdf{0fsf] k|of;, e"sDksf] k|efj / j:t' ahf/sf] k'g:yf{kgf / ljk|]if0f cfk|jfxdf e/ kb{5 . cfa @)!^ df ;a}h;f] ljjfbf:kb laifox? ;N6fP/ hf/L ul/g] gofF ;+ljwfgn] nufgLstf{sf] dgf]an a9fpg ;S5 . ;fy}, k'g:yf{kgfsf] ;Defjgf / sfdsf] ultn] vfgL, pTkfbg / lgdf{0f ultljlwdf k|efj kfg]{ / cf}Bf]lus If]qsf] j[l4df /fd|f] glthf b]vfpg]5 .

lrq !M j[l4b/df If]qut of]ubfg -k|ltzt ljGb'_

;|f]tM s]Gb|Lo tYof+s ljefuÙ NRM Staff estimates 

@= cfa @)!^ sf] ah]6 ;dod} / ljj]sk"0f{ sfof{Gjog ug]{ s'/f k'g:yf{kgfsf] s]Gb|ljGb'df /x]sf]] 5 . a}b]lzs /f]huf/Ldf hfg] b/, To;cg'?k /]ld6]G; cfk|jfx, xf]6]n, /]i6'/]G6, oftfoft, ;~rf/, lzIff tyf l/on :6]6 / ef8f;]jf cflb e"sDkk"j{s} cj:yfdf Nofpg] / ;]jf ;'Rff? ug]{ s'/fn] ;]jfIf]qsf] j[l4df k|efj kfb{5 .

#= oL ;Defjgfx?nfO{ dgg ub}{ of] dfOqmf]Osf]gf]lds cK8]6n] cfa @)!^sf] lhl8lk j[l4b/ -cfwf/e"t dNodf_ b'O{ cj:yfdf k|If]k0f ul/Psf] 5 -lrq !_ . klxnf] cj:yfdf yf]/} ePklg /fd|f] dg;'g x'g], /fli6«o k'glgdf{0f k|flws/0fdfkm{t\ ul/g] k'glgdf{0f kl/of]hgfx?sf] oyfy{ sfof{Gjog 7Ls} 9+un] ult lng], /fhgLlt kl/b[io lj:tf/} ;fdfGoLs/0f x'b} hfg], ljutsf k"FhLut vr{sf sfo{qmd lg/Gt/ rNg], ko{6g ultljlwdf klg dWod txsf] k'jf{j:yfdf cfpg] / ;]jfIf]qsf] j[l4df clnslt ;'wf/ x'g] cj:yfdf lhl8lk $=%Ü n] j[l4 x'g] k|If]k0f ul/Psf] 5 . clnslt /fd|f] aiff{ -uPsf kfFr aif{sf] cf};t_ / wfg v]tL x'g] If]qdf kof{Kt wfg /f]kfO{ x'g], /fli6«o k'glgdf{0f k|flws/0faf6 x'g] vr{df j[l4 Pjd\ ;DalGwt dGqfnosf] k"FhLut vr{df pNn]Vo ;'wf/n] ubf{ pTkfbg / lgdf{0f ultljlwdf pNn]Vo k|ult, /fhgLlts kl/b[iodf ;dfGoLs/0f / ;]jfIf]q -dha't /]ld6]G;sf] cfk|jfx / zL3| ko{6g ;]jfsf] k'g:yf{kgf cflb lqmofsnfk_ dha't x'g] bf]>f] cj:yfdf eg] lhl8lk %=%Ü n] j[l4 x'g] cg'dfg ul/Psf] 5 . k|lts"n /fhgLlts cj:yf tyf ;':t k"FhLut ah]6 sfof{Gjogh:tf b'O gsf/fTds sf/0fn] j[l4b/ k|If]k0feGbf klg tn hfg;Sg] ;Defjgf klg 5 .

$= of] k|If]k0f ;/sf/n] cfa @)&@÷&# sf nflu ah]6df 3f]if0ff u/]sf] ^Ü sf] lhl8lk j[l4 eGbf Go"g xf] . ^Ü sf] j[l4b/ xfl;n ug{, cfly{s aif{sf] klxnf] ^ dlxgfdf cf};teGbf sd dfq dg;'gsf] aiff{ ePsf] cj:yfdf klg s[lif pTkfbg @=%Ü n] a[l4 x'g'kb{5 / u}/s[lif pTkfbg sDtLdf &=&Ü n] j[l4 x'g' cfjZos x'G5 of] If]qsf] j[l4b/ ut cfjdf $=!Ü dfq /x]sf] lyof] . o;}u/L, s[lifsf] pTkfbg uPsf] kfFr aif{sf] cf};t j[l4b/ a/fa/ x'g] eg]/ dfGg] tyf ;]jfIf]qsf] j[l4b/ ^Ü -h'g uPsf kfFr aif{sf] cf};teGbf a9L xf]_ df k'Ug] xf] eg] klg lhl8lkdf ^ k|ltzt j[l4b/ xfl;n ug{ cf}Bf]lus If]qsf] j[l4b/ sDtLdf !#=^Ü cfjZos x'G5 . pTkfbg tyf cfk"lt{df hf/L Jojwfgsf] sf/0f tyf b]zsf] ljleGg :yfgdf hf/L /fhgLlts czflGtn] cem}klg cf}Bf]lus pTkfbg e"sDk k"j{sf] cj:yfdf k"0f{tof gcfO;s]sf]n] of] nIo r'gf}tLk"0f{ 5 . ;fy} Pgcf/P cem} klg k"0f{ sfof{Gjogdf cfO;s]sf] 5}g / o;nfO{ k'glgdf{0fsf kl/of]hgf Joj:yfkg ug{ cem} s]xL dlxgf nfUg ;S5 / k'glgdf{0f ;DaGwL kl/of]hgffnfO{ egL ;DalGwt dGqfnonfO{ 5'§\ofOPsf] !&) ldlnog cd]l/sL8n/ nufgL ug]{ of]hgf tyf kl/of]hgfsf] /0fgLlt cfkm} hfu?s eP/ tof/ kf/]sf] klg 5}g .

u= cfa @)&@÷&# d'b|fl:kmlt cfp6n's (FY2016 Inflation Outlook)

!= cf};teGbf Go"g dg;'gsf] sf/0fn] x'g] s[lif pTkfbgdf sdL / ef/tdf x'g] clnslt d"Noj[l4sf] rfk, lgdf{0f ;fdu|L / sfdbf/sf] pRr dfu, lkcf/;L;Fusf] d'Vo Jofkfl/s gfsf aGb /xg' / ljt/0f g]6js{;lxt cfk"lt{df x'g hfg] cj/f]w, tyf d'n'ssf] ljleGg efudf /fhgLlts aGb x8\tfnn] ubf{ j:t' / ;]jfsf] ;fwf/0f d"No cfa @)&@÷&# df a9\g] b]lvG5 -lrq @_ . oLg} ljifox?sf] ufDeLo{tfsf] cfwf/df b'O{ cj:yfdf d'b|fl:kmltsf] k|If]k0f ul/Psf] 5 . klxnf] cj:yfdf lg/Gt/ OGwgsf] d"No 3l6/x]sf] a]nfdf u}/vfBsf] d"No tn} /xg] / ef/tsf] d"No rfk l:y/ /xg] tyf vfBj:t'sf] d"Noj[l4 b'O{ c+sdf /xg] cg'dfg ul/Psf] / To;f] ePdf ;du| d"Noj[l4 b/ *=%Ü df /xg] k|If]k0f ul/Psf] 5 .

lrq @M d'b|fl:kmlt -k|ltzt ljGb'_ df of]ubfg

;|f]tM g]kfn /fi6« a}+sÙ NRM Staff estimates

@= bf]>f] cj:yfdf, ef/tdf x'g] d"Nodf dWod vfnsf] rfk tyf Jofkf/ / ljt/0f g]6js{df d'Vo Jofkf/ x'g] gfsfdf cj/f]w x'g' tyf /fhgLlts cfGbf]ngn] ubf{ x'g] aGb x8\tfnn] cfk"lt{df pRr cj/f]wn] wfg ds} ux'F clg t/sf/L / kmnkm"n h:tf vfB kbfy{sf] Df"No klxnf] cj:yfdf eGbf klg dfly hfg] b]lvG5 . o;}u/L u}/vfB j:t' vf; u/L sk8f / km'6j]o/, ;hfj6 tyf 3/df k|of]u x'g] ljleGg pks/0fsf] klg d"No a9\g]5 . h;n] ubf{ cfa @)&@÷&# df d"Noj[l4 s/La (=%Ü ;Dd x'g]5 . cfa @)&@÷&# df OGwgsf] d"No lgolGqt g} /xg] ePtfklg cfk"lt{df x'g] cj/f]w nfdf] ;do;Dd hf/L /x]df d"Noj[l4 To;eGbf klg dfly s/La !)Ü ;Dd klg k'Ug] ;Defjgf /xG5 . cd]l/sL 8n/sf] t'ngfdf g]kfnL ?k}ofFsf] lg/Gt/ cjd"Nogn] d"Noj[l4df yk rfk kg{ ;Sg] ;Defjgf klg 5 .

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[*] v'b j:t', ;]jf tyf cfDbfgLsf] ;G'tng lhl8lksf] @*=#Ü n] gsf/fTds /x]sf] / h;n] ubf{ lhl8lksf] ##=$Ü a/fa/ v'b 6«fG:km/ ;Gt'ng x'g cfpF5 / kl/0ffdtM rfn" vftfdf lhl8lksf] %=!Ü a/fa/ art /xG5 .

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Nepal Macroeconomic Update, August 2015

Here is the executive summary of Macroeconomic Update, August 2015, Vol.3, No.2. It includes FY2015 update on real, fiscal, monetary and external sector, and growth and inflation outlook for FY2016. It provides a comprehensive macroeconomic assessment, including fiscal sustainability, after the April 25 earthquake.

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1. The catastrophic 7.8 magnitude earthquake on 25 April 2015 and subsequent multiple aftershocks, and the subnormal monsoon in the first half of the year slowed down economic activities in FY2015, resulting in GDP growth of 3.0%, down from the pre-earthquake growth estimate of 4.6%. The earthquake affected industrial and services sectors the most even though it hit in the tenth month of FY2015. Agricultural output growth dropped to an estimated 1.9% from the pre-earthquake estimate of 2.3%. The industry sector, which comprises a mere 15% of GDP, grew by an estimated 2.6% compared to the estimated pre-earthquake growth of 4.6%. Meanwhile, the earthquake-induced disruptions to main services activities lowered its growth rate by 2.1 percentage points from the estimated pre-earthquake growth of 6.0%. Looking forward, the outlook for FY2016 is cautiously optimistic and is largely contingent upon the scope and pace of post-earthquake reconstruction works. Considering the weak and subnormal monsoon so far, modest to fast pick up in actual implementation of reconstruction projects, political uncertainties, and modest recovery of key services activities, GDP growth is projected to be between 4.5% and 5.5%.

2. The sluggish expenditure in the first three quarters and damages caused by the earthquake in the last quarter of FY2015 significantly affected public expenditure performance. The budget execution delays, and long-running procedural as well as procurement hassles constrained absorptive capacities, resulting in slower capital spending than in the previous years. The estimated actual capital spending was 69.9% of planned capital expenditure in FY2015, lower than the 78.4% achieved in FY2014. Meanwhile, actual recurrent spending was 84.4% of planned recurrent expenditure, marginally lower than the 85.9% in FY2014. Overall expenditure grew by 13.0%, with recurrent and capital spending growth at 11.0% and 22.3%, respectively— lower than the growth rates in FY2014.

3. Total revenue grew by 13.8%, much lower than 20.5% growth in FY2014, reaching NRs405.8 billion (19.1% of GDP). It is lower than the budget target of NRs422.9 billion as the slowdown in economic activities and imports following the earthquake in April hit revenue mobilization. As a share of GDP, tax revenue mobilization has improved significantly, reaching 16.8% in FY2015, up from 9.8% of GDP in FY2007. The continuous reforms in revenue administration, broadening of the tax base, and the higher import bill (mostly financed by remittance income) resulted in robust revenue performance over the last decade.

4. The lower than expected revenue mobilization along with the disappointing expenditure performance resulted in a fiscal deficit equivalent to about 0.2% of GDP in FY2015. Though this is better than the fiscal surplus equivalent to 0.7% of GDP in FY2013 and 0.6% of GDP FY2014, it is still lower than the medium-term average fiscal deficit of about 2.2% of GDP. For a low-income country with a large financing need to bridge the infrastructure deficit, particularly in hydropower and transport, running a modest fiscal deficit without jeopardizing fiscal sustainability is desirable. Nepal has been running a primary surplus since FY2012, meaning that fiscal balance before interest payment on public debt is positive. Nepal’s overall outstanding public debt (external and domestic) has been steadily declining, reaching an estimated 25.6% of GDP in FY2015. The fiscal sustainability analysis shows the government has ample fiscal space for now to expand productivity-enhancing public capital investment, including for reconstruction projects, without jeopardizing fiscal soundness.

5. Inflation (year-on-year [y-o-y] average CPI) sharply declined to 7.2% in FY2015, the lowest since FY2008 as both food and non-food prices cooled down. Food and non-food prices increased by 9.6% and 5.2%, respectively, in FY2015. They increased by 11.6% and 6.8%, respectively, in FY2014. Overall, while food prices contributed 5.3 percentage points to overall inflation, non-food prices contributed 2.7 percentage points in FY2015. Looking forward, the expected low agriculture harvest due to subnormal monsoon, slightly higher price pressures in India, higher demand for reconstruction materials and workers, blockage of major trading routes with the PRC, and supply disruptions, including in distribution networks, as a result of the political strikes in various parts of the country will likely push up general prices of goods and services to between 8.5% and 9.5% in FY2016. Even after accounting for the high probability of subdued fuel prices throughout FY2016, if supply disruptions persist for long, then there is a high likelihood of even higher inflation, probably around 10%.

6. Money supply (M2) grew by 19.9%, reaching NRs311.8 billion, on the back of a robust growth of net foreign assets and net domestic assets. Deposit mobilization of BFIs increased by 20.1%, higher than 18.4% growth in FY2014. The cumulative deposit mobilization reached 79.5% of GDP in FY2015, up from 72.5% of GDP in FY2014. Total credit (loans and advances) of BFIs increased by 17.5% (NRs229.3 billion) in FY2015, up from 14.4% growth in FY2014 (NRs165.5 billion). Cumulatively, 21.8% of the total lending went to wholesale and retail traders, followed 18.8% to industry, 11.2% to construction and 7.9% to services activities. The total credit of BFIs reached 72.6% of GDP in FY2015, up from 67.6% of GDP in FY2014. The central bank mopped up excess liquidity throughout the year deploying a variety of instruments such as reverse repo and deposit auction. However, the frequent use of recurring short-term liquidity management tools amidst fluctuating interest rates throughout the year indicates that the existing liquidity management strategy is a temporary measure and for long term solution the investment climate has to be improved. The persistence of excess liquidity throughout the year pushed short-term interest rates mostly below 1.0%, although the rates were higher after starting February 2015 compared to the corresponding period in FY2014. The commercial banks’ have comfortably satisfied the capital adequacy ratio (CAR) and net liquidity requirements. CAR of commercial banks stood at 11.69%, which is 0.69 percentage points higher than the minimum 10% CAR and 1% buffer requirement.

7. The country’s external situation strengthened in FY2014 with the balance of payment surplus reaching $1.5 billion (6.8% of GDP). The large merchandise trade deficit, which reached 31.2% of GDP, was partially[1] offset by workers’ remittances, which reached a record 29.1% of GDP, and export (4.6% of GDP), resulting in a current account surplus of $1.1 billion (5.1% of GDP), up from 4.6% of GDP in FY2014. . Gross foreign exchange reserves increased from $6.8 billion in FY2014 to $8.3 billion FY2014, sufficient to cover 11.2 months of imports of goods and non-factor services. Overall, the Nepalese rupee depreciated by 19.9% between 15 July 2011 and 15 July 2012 and a further 6.7% between 15 July 2012 and 15 July 2013. It depreciated by 0.9% between 15 July 2013 and 15 July 2014, and a further 5.4% depreciation between 15 July 2014 and 15 July 2015.

8. This edition of Macroeconomic Update’s issue focus discusses the importance and ways to accelerate post-earthquake reconstruction for faster recovery. The earthquake caused tremendous loss of lives and properties. It lowered economic growth rate, pushed about a million people below the poverty line, slowed progress on achieving some of the MDGs, and sapped investors and consumer confidence. The cumulative pledges during the international reconstruction conference exceeded the expected public sector needs for reconstruction. Now, the National Reconstruction Authority and line ministries’ ability to swiftly prepare and implement viable projects will underpin the scope and pace of reconstruction and ultimately a better, faster and smarter recovery. The authority needs to be operationalized without delay and it has to chart out a coherent five-year reconstruction strategy by aligning it with the long-term economic development vision.

9. Accelerated reconstruction would require hiring of competent human resources, preparing a time-bound investment action plan, a strong pipeline of viable projects, outsourcing of design, monitoring and evaluation, political buy-in of proposed actions, and engaging youth, specialized institutions, and civil society at various stages of the project cycle. This would then ‘crowd in’ private investment as well, leading to a higher, sustainable, and inclusive economic growth. Overall, rehabilitation and reconstruction should primarily aim at increasing productivity-enhancing public capital investment, which is a key to ensuring structural transformation whereby high value-added and high-productivity sectors are more dominant than low value-added and low-productivity sectors in the medium term.

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[1] Overall, the net goods, services and income balance was a negative 28.3% of GDP, which was offset by net transfers equivalent to 33.4% of GDP, resulting in current account surplus equivalent to 5.1% of GDP.

Major Indian highways connecting Nepal to be upgraded

The Indian government is upgrading its major highways connecting Nepal to facilitate trade and mutual cooperation. Some of these trade routes/highways are a lifeline to Nepal’s economy as a majority of Nepal’s exports and Nepal’s import passes through them. About 60% of Nepal’s exports and imports are to and from India.

Fully upgrading of such trade corridors are a precursor to developing an economic corridor, growth stimulants and employment generators. The Times of India reports that the Indian Prime Minister Narendra Modi has “asked the ministry to see whether multimodal hubs can be developed on the major stretches, such as Raxaul along NH-28A.”

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Ministry sources said, the 70km stretch from Raxaul, on Indo-Nepal border, to Piprakothi on the East-West corridor in Bihar is being widened to two-lanes with paved shoulder by NHAI at a cost of Rs 375 crore. This will be a toll road and the project is likely to be completed by next March.

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Nepal should also give equal priority to upgrading of major trade corridors along the border. It will help boost exports and lower the cost of imported goods.

Nepal and India share a 1,751km long border linked to Uttarakhand, Uttar Pradesh, Bihar, West Bengal and Sikkim.

India’s (and Nepal’s) problem with manufacturing sector

The problem with India’s (can relate to Nepal’s as well) manufacturing sector explained by The Economist:

1. India opened up product market to competition (including imports), but left its factor market (land, labor and capital) unreformed.
2. Companies needed to ensure economies of scale in production to effectively compete in the global market. But, high cost of capital, inflation and inefficient court clearance (of recovery of bad loans) led to high production costs.
3. Complex laws make it difficult to acquire farmland for industry or infrastructure.
4. Dated labor laws burden businesses with cumbersome (disincentivizing) regulations and processes. Hiring is easy, but firing is very difficult (even when the company’s revenue/profit dips south). Unruly trade unionism is a major concern.
5. Hence, most firms and economic activities are capital-light (IT services, services sector, etc).

With the ‘Make in India’ initiative, one of the signature campaigns of PM Modi, some positive signs are emerging: Mahindra Aerospace, Foxconn, Micromax, Ford, BMW, Mercedes, etc are opening new factories.

For Nepal, it has been disappointing ride all along as investment and share of manufacturing in GDP are both shrinking (the above reasons apply, plus lack of adequate supply of electricity, lack of skilled workforce, and political instability).