Briefing Notes for the Launch in Kathmandu, March 2008
Hopes for higher growth have not materialized – growth remains low
- A much hoped for upswing in the economy after the cessation of hostilities among rival political groups has failed to materialize with overall economic growth at 2.5% in 2007.
- Reasons for the relatively low performance include low investment due to on-going political unrest in some areas as well as adverse weather conditions leading to poor agricultural performance.
- On the positive side, remittances continued to sustain the economy as in the years before. Remittances continue to cushion economic shocks.
- Although high oil prices adversely affect the Nepalese economy, they also lead to increased demand of workers in the oil-exporting countries of Western Asia, where many Nepalese migrate to.
- The agricultural sector grew only marginally at 0.7 %, while non-agricultural production grew stronger at 3.6 %. This is mainly due to an increase in mining and quarrying (at 6%), services, too, remained fairly buoyant, growing by 4.1% with rapid expansion of transport, telecommunications and mobile telephone service. Growth of industry was below average with 2.2%.
Inflation reduced, but higher food prices affect the poor
- Inflation decreased from 8% in 2006 to 6.4% in 2007
- Among the reasons for the relatively low inflation is that the government did not raise fuel prices in spite of increasing oil prices on world market.
- Appreciation of the Nepalese rupee (due to the peg to the Indian rupee) against the dollar contributed to cushioning effect of increased world market prices
- Food prices increased stronger than other items in the Consumer Price Index (CPI).
- Rising food prices can become a concern for the poor since the poor have a high share of food in their consumption basket.
Budget deficit increasing, but debt is manageable
- The Government of Nepal’s budget deficit increased marginally from 3.8% to 4% in 2007 – in spite of improved performance on the income side, however, government expenditure increased at the same time.
- The Government’s tax revenue as a percentage of GDP increased by broadening the tax base, strengthening tax administration and raising customs duties on selected commodities – but the collection of newly-introduced VAT has been below expectations, due in part to a lack of an appropriate billing system.
- Government expenditure increased by 18.9% compared to the previous year, mainly due to increased security expenditure and pay of government employees
- Total public debt as a percentage of GDP was reduced to 49.2% in 2007 external debt was at 34.8% of GDP in 2007.
- Most of the external loans are long-term loans with low interest rates. Currently the burden of debt servicing is higher for internal than for external debt.
- Because of the nature of external debt, debt servicing is not a pressing issue for Nepal at the moment but needs to be carefully watched to avoid it becoming a burden on the economy. Government spending has to become more productive in order to achieve adequate returns of internal debt.
Nepali Exports are losing competitiveness
- Export development was relatively sluggish at 3.6%. The trade deficit widened as imports outpaced exports.
- Political uncertainties, frequent strikes and shortages on power and fuel supply contributed to sluggish export development.
- Erosion of export competitiveness in traditional Nepali export goods (readymade garments) affected exports to countries other than India.
- Although the Nepalese economy has been widely liberalized, foreign direct investment (FDI) inflows remained low. Investors currently consider the institutional environment as not encouraging enough.
Agricultural productivity is too low to reduce poverty
- The rural poor account for 70% of the poor in the Asia-Pacific region. Agriculture in the region appears neglected although it provides jobs for 60% of the working population in Asia-Pacific.
- Poverty reduction in the Asia-Pacific region happened mainly in urban areas – this also applies for Nepal.
- Low agricultural productivity is the major reason for agriculture’s failure to reduce poverty
- Slow progress in technological adaptation and innovation in farm practices due to the low literacy levels among the rural poor, low mechanization rates, inability to produce on a mass scale because of restrictions on land ownership and limited knowledge of the quality aspects of production, distribution and marketing are the major reasons for the low agricultural productivity.
- Low product prices and high input prices have also made agriculture less attractive.
- In many countries, the tax system discriminates against agriculture.
- Increasing agricultural productivity is necessary to reduce poverty and income inequality.
Economy may pick up in 2008 – when risks are carefully watched
- GDP growth expected at 4%, based on hopes of the peace process moving forward, with government spending to support economic activity, and the revival of tourism, services and transportation
- Low agricultural productivity with poverty reduction largely restricted to urban areas
- Poverty is highest in the rural areas due to almost stagnant productivity and dependence of agriculture on weather
- Political tensions need to be settled for promotion of growth and more progress in poverty reduction.