Briefing Notes for the Launch in Kathmandu, 10 May 2010
Economic growth moderatesGlobal economic crisis affected countries of South Asia adversely but generally to a lesser extent as compared to countries in other subregions of Asia and the Pacific. The crisis penetrated domestic economies of the subregion through substantial decline in exports and slowdown in capital inflows. However, GDP growth has remained positive even though decelerated somewhat in 2009 from strong growth achieved in 2008 in most cases. Generally domestic demand plays a bigger role than external demand in these economies. Therefore, the impact of the crisis was less pronounced on these economies. Many of the countries of the subregion have been facing security problems ranging from internal conflicts to terrorist attacks linked to global geopolitical issues, thus adversely impacting on their macroeconomic performance.
Despite the recent political fragility in Nepal and the global economic crisis, the macroeconomic situation remains broadly stable. GDP growth was 5.3% in 2008 and fell only slightly in 2009 to 4.7%. Some of the fall reflects adverse weather, since agricultural output, which accounts for around one third of GDP and which had grown by 4.7% in 2008, grew by only 2.2% in 2009. The non-agricultural sector was constrained by severe electricity shortages and difficult industrial relations and strikes that delayed the movement of goods and prevented people from getting to work. In recent years the services sector has, however, grown steadily and accounts for around half of GDP. For 2010, the government’s ambitious target of 5.5% GDP growth is being supported by strong private consumption and an expansionary fiscal budget, but not expected to be achieved due to delayed monsoon and poor weather conditions and continuing global economic crisis. GDP growth in 2010 is expected to be around 3.5%.
Inflation remains a key policy concernA sharp increase in food and fuel prices in 2008 created hardships for large populations in countries of South Asia. As inflation adversely affects the poor disproportionately, it is a serious problem for many countries in the subregion with high incidence of poverty. Therefore, controlling inflation is and will remain a major challenge for the subregion. Inflation in Nepal was about 13% in 2009, up from 7.7% in 2008. Inflation was driven mostly by food price increases. A 16.5% spike in the cost of food and beverages, which have a 53.2% weighting in the consumer price index, was the main reason for higher prices in 2009.
Trade declines sharply but workers’ remittances stay strongThe global economic crisis impacted adversely on expansion of both exports and imports. At the same time, workers’ remittances held up strongly and provided support to the current account balance. In Nepal, due to the continued growth of remittances, the current account and balance of payments remain in surplus despite large merchandise trade deficit. Workers’ remittances increased by 24.2% to $2.7 billion in 2009. Foreign exchange reserves also went up by 15.8% to $3.6 billion in mid-July 2009 as compared with reserves one year earlier.
Expansionary fiscal policy being pursuedAs for all other subregions of Asia and the Pacific, Governments in South Asia used expansionary fiscal and monetary policies to counter the negative fallout of the global slowdown and moderate the decline in growth. Of some concern is the continuation of high budget deficit in some countries, while in others fiscal deficits improved somewhat in 2009 as compared to 2008. Furthermore, inflationary pressures are growing. Consequently, some tightening of monetary policy is expected also.
In Nepal, the budget deficit fell to 3.8% of GDP in 2009 from 4.1% in 2008 owing to strong revenue growth and below target spending. The ratio of revenue mobilization to GDP grew to 14.8% in 2009 as compared to the ratio of 13.2% in 2008 because of encouraging growth in revenue collection. As a result of more expansionary fiscal policy to sustain economic growth, budget deficit is expected to increase in 2010 as compared to 2009.
Sustained high and inclusive economic growth needed for poverty reductionHigh poverty levels continue to be a serious problem for all countries in South Asia. Therefore, accelerating economic growth is crucial to bring down poverty levels. The challenge will be how to make growth more inclusive by spreading its benefits to larger segments of the population. More resources should be devoted to provision of basic services such as education, health, sanitation and housing particularly for those belonging to lower income groups. Targeted programmes for the benefit of the poor in the broader framework of social protection should also be a priority. The Indian National Rural Employment Guarantee Scheme being successfully implemented in India can be replicated in many developing countries. The scheme provides guaranteed employment at minimum wage for 100 days each year to every rural household whose adult members volunteer to do unskilled manual work.
The inadequacies of physical infrastructure remain a key constraint holding back the potential of economic growth. Of particular concern is electricity shortage, where disruptions in the supply of electricity are compromising growth as a result of closures of factories and economic activities. Quality of life and human capital are adversely affected in case of frequent electricity outages of long durations. Huge investments are needed to enhance capacity of electricity generation. At the same time, renovation of transmission and distribution lines is necessary to minimize electricity losses. Potential of trade in electricity among countries of the subregion should be explored and subregional cooperation in electricity generation and distribution should be promoted to overcome electricity shortages.