ADB projects Nepal's economy to grow by 4.3% in current fiscal

Kathmandu, Sept. 20

Nepal’s economy is expected to grow by 4.3 per cent at market prices in the current Fiscal Year 2023/24, up from an estimated growth of 1.9 per cent in FY 2022/23, says the September 2023 edition of Asian Development Outlook (ADO) published by the Asian Development Bank.

The ADB has also expected that the bank interest rates would go further down and economic activities would be stimulated.

The government has projected the economic growth of 6 per cent for this year.

"With moderation in inflation and comfortable foreign exchange reserves, the Nepal Rastra Bank adjusted its monetary policy stance by lowering the policy rate by 50 basis points to 6.5 per cent, which is expected to help lower commercial interest rates and stimulate economic activities," Jan Hansen, Principal Economist, ADB Nepal Resident Mission, said at a programme organised to launch the report in Nepal.

Services are expected to perform well with expansions coming from real estate, wholesale and retail trade and accommodation and food services. Agriculture growth may, however, decelerate owing to deficient rainfall in June and erratic weather patterns, further aggravated by lumpy skin outbreak in cattle, said the ADB.

The report projects annual average inflation to fall to 6.2 per cent in 2024 from 7.7 per cent in 2023 on subdued oil price increases and a decline in inflation in India, Nepal’s main source of import.

According to the central bank of Nepal, inflation stands at 7.52 per cent in mid-August this year.

“Despite some progress in restoring price and external sector stability, fiscal challenges persist. While the estimated fiscal deficit for FY2023/24 is moderate at 2.4 per cent of the Gross Domestic Product (GDP), much lower than the deficit of 6.1 per cent in FY2022/23, the actual deficit could be substantially higher if the government does not meet its ambitious revenue target for 2023/24,” said Hansen.

According to the ADB, external risks remain relatively well contained. Considering the recent trends and the central bank’s prudent monetary policy stance, the target of maintaining foreign exchange reserves sufficient to sustain at least seven months of imports seems achievable. Amid stable remittances and higher imports, the current account deficit is expected to widen to 1.8 per cent of the GDP as growth revives in FY2023/24.

Downside risks to the economic outlook in 2023/24 may arise from more contractionary economic policy by the authorities to stem price rises given the uncertainties centered around geopolitical tensions, maintained the ADB. This may dampen consumption and domestic production and adversely affect growth.

Manbar S. Khadka, Senior Economics Officer, ADB Nepal Resident Mission, said that increasing revenue is a challenge for the government. However, he expressed hope that the policies announced in the budget of the current FY 2023/24 could help in achieving the higher revenue although the annual target is 'quite ambitious'.

In its Nepal member factsheet, the ADB said that weak governance has long affected the effectiveness of development assistance to Nepal. "The country faces challenges towards ensuring the smooth implementation of federalism. These include limited capacity at subnational levels and slow progress in passing needed legislation and deploying staff, as well as lack of clarity on mandates and responsibilities and coordination among the three tiers of government," read the factsheet.

ADB has committed 494 public sector loans, grants and technical assistance of about US$7.7 billion to Nepal. However, cumulative loan and grant disbursements to Nepal amount to US$ 4.91 billion. 

 Published in The Rising Nepal daily on 21 September 2023.