The country’s economy is seeing rapid growth escalation following its nosedive of 0.2% recorded in fiscal 2015/16 caused by the devastating earthquake of 2015 and subsequent border blockade. The country had achieved 7.74% in fiscal 2016/17 and 6.3% cent in fiscal 2017/18. The Central Bureau of Statistics (CBS), in its recently unveiled forecast, has said that the country’s economy will grow by 6.81% in the current fiscal 2018/19.
Growth recorded in consecutive three fiscals has been encouraging, however fueled by imports. Agriculture production (basically paddy) and increased reconstruction have a key role to play. As per the forecasts made by the World Bank Group, Nepal will achieve growth above 6% on condition of favourable agriculture output and construction activities. With the slowdown in the global economy, South Asian economies including Nepal are witnessing encouraging growth. However, the major challenge for Nepal is to sustain the growth, and develop the fiscal buffer to cope up with the potential shocks in the medium term due to global uncertainty triggered by rising protectionism, trade wars and retaliation.
Sustaining high growth: major agenda of the govt
The government’s policy and program for fiscal 2019/20 unveiled by the President Bidhya Devi Bhandari in the Parliament has given priority to elevate growth and sustain it. The 15th five-year plan of the government has targeted to invest 9.3 trillion rupees in five years to achieve average 9.6% growth per annum.
The policy and program of the government has given emphasis on attracting private and foreign investment and mobilising capital (blending finance, collective investment and venture capital) from the capital markets to meet the investment gap to accelerate growth. Considering that industrial sector development is fundamental to sustain growth, the government has envisioned integrating micro, small and medium enterprises in value chain development and focusing on entrepreneurship development.
Sustaining growth is challenging for the government as it is fueled by imports. As a result, the country faces huge balance of payment deficit, already Rs 59 billon in the first eight months of this fiscal as import is ballooning and export is slowing to a crawl. On other hand, outflow of foreign currency to finance imports has caused depletion in foreign exchange reserve.
The government has allowed rise in imports even though trade deficit is alarming because imports are the key to boost revenue growth. But growth fueled by imports are unhealthy and unsustainable, according to economist Keshav Acharya, “We must develop robust manufacturing base to sustain the growth as strong manufacturing base enhances production, substitutes import, boosts export and creates jobs.”
Interpreting growth above 6% for three consecutive fiscal years by the government is questionable as experts do not agree citing that the country had achieved an average 4.4% growth on average for a decade before the earthquake and it is not possible for Nepal to have moved forward towards a higher growth trajectory without major structural reforms. This means the country requires rigorous reforms in legal, administrative and procedural fronts to develop competitive investment atmosphere as well as expedite mega infrastructure projects.
Similarly, strengthening the manufacturing sector, which contributes only 15% of the GDP at present must become the primary focus of the government. Growth of the manufacturing sector has been stagnated as investments slowed down in this sector due to anti-competitive policies and practices. Improvement in doing business climate and development of critical infrastructures should be prioritised to accelerate inclusive, broad-based and sustainable growth.
Composition of the economy
Agriculture, manufacturing and service sectors contribute 27%, 15% and 58% respectively of the GDP. The country’s GDP (in terms of consumer price) is expected to hover around Rs 34.64 trillion in the fiscal 2018-19. Contribution of the service sector has been marginally increasing every year squeezing the contribution of agriculture and manufacturing sectors.
Nara Bahadur Thapa, Executive Director of Nepal Rastra Bank has said that increasing contribution of the service sector is not a healthy sign for the economy stating that Nepal’s service sector growth is triggered by imports and consumption backed by remittances. To develop a resilient economy, we must have strong manufacturing sector and agriculture production base, said Thapa, “Nepal’s abnormal shift to the service sector led economy from agrarian economy skipped the phase of industrial development due to premature de-industrialisation. This could expose several challenges from even minor shocks in remittance inflow”.
The country’s economy is projected to grow by 6.81% as agriculture and non-agriculture sectors are expected to grow by 5.03% and 7.48% respectively in the ongoing fiscal 2018/19, according to Central Bureau of Statistics. Per capita income of Nepalis increased to $1,047 in fiscal 2018/19 from $1,005 of previous fiscal. Similarly, consumption expenditure as per centage to GDP stands at 79.52% which means gross domestic saving has been increased to stand at 20.48% of the GDP from 17.81% of the GDP of the previous fiscal 2017/18.
In terms of province-wise GDP, Province 3 contributes 41.35% of the country’s GDP followed by 14.6% by Province 1 and 12.83% by province 2. Karnali and far-west Province contribute lowest merely 3.44% and 6.38% to GDP respectively. However, in terms of growth Province 5 is the fastest growing with 7.37% growth followed by Gandaki Province and Province 3 with 7.06% and 7.04% respectively.