Briefing Notes for the Launch in Kathmandu, March 2009
Growth moderates but remains robustNepal’s improved political stability, transition towards stable democracy and more conducive investment climate are expected to pave the way for a more robust economic performance over the medium term. Nepal’s GDP grew at 5.6% in 2008, compared with 2.6% in 2007. Despite a weak performance in merchandise exports and manufacturing, the growth was supported by a satisfactory expansion in agriculture, an encouraging increase in tourism and some improvements in services. Overseas workers’ remittances have been growing, and continue to play a major role in the growth of the economy by stimulating domestic consumption. The country’s GDP is expected to grow around 5% in 2009. However, global financial crisis and economic slowdown may have even a stronger adverse impact on GDP growth.
Rapid increase in inflationInflation has been driven up in all the countries of South Asia, partly by unrelenting pressures from higher international commodity prices, particularly the prices of oil, basic metals and selected food items. Because of Nepal’s fixed exchange rate with the Indian rupee, and the fact that India is a major source of imports, inflation in the country is also heavily influenced by price developments in India. In Nepal, inflation accelerated to 7.7% in 2008 from 6.4% in 2007 mainly due to the rise in energy and food prices. With fall in oil and other commodity prices in international markets, inflation is expected to come down in 2009.
Fiscal situation deterioratedThe Government of Nepal has had success in raising its revenues over the last two years. Revenue collection increased by 22.6% in 2008 on top of a 21.3% increase in 2007. As a result, the revenue-to-GDP ratio improved to 13.1% in 2008. Expenditures also witnessed a sharp increase, with development expenditure growing at a high rate. The budget deficit stood at 4% of GDP in 2008, almost the same as the previous year. The Government tried to reduce the huge subsidy on fuel oil by increasing oil prices towards the end of fiscal year 2008.
External balances under pressureThe surge in prices of fuel oil, food and other commodities created severe problems for the external balances of most countries in South Asia. In Nepal, higher imports and slower growth of exports led to further widening of the merchandise trade deficit in 2008. But workers’ remittances increased by more than 50% to roughly $2.2 billion in 2008, helping to move the current account deficit into surplus in 2008. Furthermore, a surge in foreign aid contributed to a rise in the overall balance of payment surplus, which led in turn to an increase in foreign exchange reserves in 2008. In case global economic crisis persists for a longer period, workers’ remittances can fall, causing difficulties for balance of payments.
Poverty and widespread inequalities remain major challengeAmong long-term challenges, poverty remains a major problem for most countries in South Asia. Also, economic and social inequalities remain widespread. The main challenge for countries in the subregion, therefore, is not only to improve growth rates on a sustained basis but also to make them more inclusive for a rapid reduction in poverty and inequality. The composition of sectoral growth has important implications for pro-poor growth. Agriculture, construction and small and medium-sized enterprises (SMEs) generate pro-poor growth through employment generation, and should be supported.
To benefit from employment opportunities, the development of human resources is essential. In turn, education and health services are key to the development of human resources. Public provision of these services is crucial to the poor, as they can not afford to pay the prices charged by private providers. Print and public media should be vigorously used to change people’s attitude towards girls’ education and other forms of social exclusions and to ensure that the poorest of the poor have access to information on available opportunities.
Social safety nets are also essential for the poor and vulnerable who are unable to benefit from economic growth directly or indirectly. This support should be strengthened to provide a coping mechanism for the poor, especially in the event of macroeconomic shocks such as current global economic crisis. Without such interventions to address the problem of poverty and inequality, rapid economic growth cannot be sustained over the long term, for there are clear links between inequality and social unrest and violence.
Lack of physical infrastructure is a major impediment to business growth in South Asia, most notably shortcomings in electricity service. Huge gaps between supply and demand of electricity exist in several countries in the subregion, and these gaps will widen unless new electricity capacity is added. Involvement of the private sector through private public partnerships is the only way to meet the growing needs for energy. Along with generating more electricity, it is important to efficiently utilize existing capacity. Transmission and distribution losses are massive, partly due to theft. Rehabilitation and proper maintenance of the distribution system should be a priority to minimize transmission and distribution losses.