Nepal: Economy

Excerpted from the Asian Development Outlook 2015.

Robust agriculture and remittances boosted growth and the current account surplus. Growth is expected to slow this year with an unfavorable monsoon but revive in 2016 as the weather returns to normal. Concluding the protracted negotiations over the new constitution would strengthen the outlook. Nepal can leave behind dependence on agriculture and remittances for an economy with a higher growth trajectory if it invests more in eliminating major deficiencies in infrastructure.

Selected economic indicators (%) - Nepal                                                 2015           2016

GDP Growth                                                                                              4.6               5.1
Inflation                                                                                                    7.7               7.3
Current Account Balance (share of GDP)                                                  2.7               3.5

Economic performance

Growth in Nepal’s gross domestic product (GDP) accelerated to 5.2% in Fiscal Year 2014 (ended 15 July 2014) from 3.5% a year earlier. A favorable monsoon boosted agricultural output and a marked increase in remittance income, now amounting to 28.2% of GDP, bolstered spending on services, which accounts for over half of GDP. Growth in agriculture, at 4.7%, and in services, at 6.1%, was the highest in the last 6 years. Industry again advanced only marginally at 2.7%, as long hours of power outages and other supplyside constraints continued to stunt manufacturing and divert to imports consumer spending on finished goods.

Economic prospects

The economic outlook is less favorable than in FY2014 because agricultural output is crimped by a weak monsoon and the political situation is fluid. The Constituent Assembly, the second of which was elected in November 2013, failed again to write a new constitution, this time by the 22 January 2015 deadline agreed by all political parties. There is yet no unanimity among the political parties on how to proceed. Many of the outstanding issues that the earlier Constituent Assembly failed to resolve remain contentious, leaving uncertainty over the future course of politics regarding such basic matters as the number, names, and functions of proposed federal states, as well as on the overall structure of governance.

Considering the unfavorable monsoon and the lingering political uncertainty, GDP growth is projected to slow to 4.6% in FY2015, less than the government’s revised target of 5.0%.

Assuming a stable political situation, a normal monsoon, a timely budget and its effective execution, and strong remittance inflows, GDP growth is expected to rebound to 5.1% in FY2016.