Country briefing note <download pdf file>
GDP growth improves in 2012
- Low growth in Nepal in recent years has largely been due to political instability, frequent strikes in the country, persistent labour problems and severe electricity shortages.
- However, GDP growth improved to 4.5% in 2012 from 3.8% in 2011. While performance of the agricultural sector improved due to favourable weather conditions, the industrial and services sectors recorded improved growth rates also.
- Due to relatively faster growth of the services sector, the share of this sector has been rising in GDP at the expense of the agricultural and industrial sectors.
- In Nepal, the Government is targeting a growth rate of 5.5% for 2013, but it is going to be difficult to achieve. Such a rate will depend on the political situation of the country as well performance of the agricultural sector which accounts for one third of GDP and employs the majority of the population. A more realistic growth projection would be about 4%, slightly lower than that achieved in the previous year.
Some deceleration in inflation
- Inflation in Nepal closely linked to inflation in India because of the fixed exchange rates between the currencies of these countries as well as the close economic ties among them. About two thirds of the total trade of Nepal takes place with India only.
- Inflation in Nepal remained high but came down from 9.6% in 2011 to 8.3% in 2012. A weak supply of food items kept inflation high. At the same time, the cost of production of both agricultural and industrial products has been rising due to severe electricity shortages and rising labour wages due to increasing exports of labour.
Tax-to-GDP ratio on the rise
- With growing tax revenues, the tax-to-GDP ratio has been improving and it stood at more than 14% in 2011. The budget deficit in recent years has been about 3.5% of GDP.
Current account balance turns into deficit in recent years
- With a large merchandise trade deficit and slowdown in growth of overseas remittances, the current account balance has turned into a deficit in recent years.
- In order to realize its development potential, countries in South Asia including Nepal will have to overcome a number of development challenges, including large concentrations of poverty and hunger, rising inequality, poor levels of human development, wide infrastructure gaps, lack of a diversified base for high value added products and exports, widespread food and energy insecurity and high risk of disasters.
- The subregion's economic, social and environmental priorities must be balanced in favour of eradicating extreme poverty and hunger. Today, South Asia remains home to the world's largest concentrations of people living in poverty and hunger, and people without access to basic sanitation and electricity. The subregion is also characterized by having the world's highest levels of child and maternal mortality. Progress on the health, nutrition and sanitation-related Millennium Development Goals and related targets has been stalled because of the large inequalities and disparities within populations that persist in the subregion.
- This subregion faces the dual challenge of raising productivity to ensure that incomes are rising and poverty is falling, and creating enough jobs for a growing working-age population, which is expanding by about 2% per annum. With almost 60% of the population under the age of 30, Governments of countries in South Asia have to take advantage of this demographic bulge. Otherwise, the consequence can be social unrest, conflict and insecurity.
- South Asia must offer a way out of poverty and exclusion for its rapidly growing working-age population. Therefore, countries in the subregion should maximize growth through productive job creation and appropriate structural change to reduce poverty, hunger and inequalities. Countries in the subregion should also provide good-quality education, health, sanitation and other infrastructure to make the most of the youth bulge. In addition, a minimum social protection floor should be established that meets the basic needs of vulnerable populations.
- South Asia faces exponentially growing energy demand, and a number of energy challenges — energy poverty, lack of available supplies, poor energy infrastructure and transport facilities and environmental externalities. The subregion's energy deficits are particularly detrimental in terms of growth and poverty alleviation as parts of the subregion faces regular and sustained power outages. At the same time, the subregion must increase energy usage in order to maintain growth and development. Energy security, linked with energy availability, accessibility and affordability, is a paramount policy concern for countries in the subregion. The development of energy markets in South Asia, through the creation of regional energy grids and cross-country pipelines across the subregion as a part of the proposed Asian energy highway, could assist the subregion in promoting energy access and security.
- Strengthened regional cooperation can help solve a number of the challenges facing South Asia and can be an important development strategy to ensure a sustainable future for the subregion. Greater regional integration not only increases intraregional trade, but also promotes efficiency-seeking investment in the subregion's supply chain and production networks. This, in turn, creates more and better jobs in addition to building productive capacity, particularly in the subregion's least developed countries.
- Regional cooperation can play a pivotal role in crafting solutions to shared vulnerabilities and helping ensure food and energy security, as well as reducing the subregion's vulnerability to natural disasters. Finally, better connectivity, across the subregion and beyond, can help leverage the subregion's strategic location at the crossroads of Asia and the Pacific to re-emerge as the hub of East-West trade that it once was.