Report

Nepal’s Economic Growth Rate to Decline Further
South Asia’s growth rate projected to remain at 5.4 pc in 2002

- By Business Age Reporter

Faced with an upsurge of insurgency and worsening security situation, Nepal’s economic growth is expected to decline to at the most 3.5 per cent in 2002 from 5 per cent in 2001. Assuming that the security situation improves, growth could potentially recover to about 5 per cent in 2003, according to the Asian Development Outlook 2002 (ADO), released by the Asian Development Bank recently in Kathmandu.

In 2001, agricultural output in Nepal weakened and tourism, manufacturing, and trade were adversely affected by the escalating insurgency and the deaths of members of the royal family, says the ADO, an annual publication analyzing and forecasting economic trends in the Asian and Pacific region.

ADO growth forecasts for 2002-2003 are based on assumptions that, in addition to an improved security situation, the global economic slowdown and the impact of September 11 events on the global economy will be modest and short-lived. The continued good performance of India’s economy should also help Nepal.

Growth in the agriculture sector is forecast to decline to about 3 per cent in 2002 from 4 per cent in 2001 due to uneven monsoon rains. As manufacturing and tourism continue to suffer from the insurgency and external conditions, industry and service sectors are expected to grow at 3.5 per cent in 2002 compared to 2.5 per cent and 7.3 per cent, respectively in 2001.

The recent renewal of the 1996 Nepal-India Trade Treaty has ended the uncertainty surrounding Nepal’s exports to India. However, the new provisions in the Treaty will require Nepal’s industries to become more competitive to maintain their export growth. Nepal will also be subject to a gradual removal of quotas in the United States as part of the World Trade Organization’s agreement on textiles and clothing.

In 2001,because of an expanding labor force and soft economic conditions, there was a 47 per cent underemployment rate coupled with a 7 per cent urban jobless rate.

Domestic revenue collection recorded a strong 16 per cent improvement in 2001 thanks to improved tax administration. However, the budget deficit widened to 4.2 per cent of GDP in 2001 from 3.3 per cent in 2000 due to higher spending on security together with a salary increase for the civil service and the implementation of a voluntary early retirement scheme. Budget deficit is likely to widen to 6 per cent of GDP in 2002 due to the downturn in the economy, fall in the growth of domestic revenue, and increased spending on security.

In 2001, Nepal experienced a sharp downturn in export growth, particularly of garments and woolen carpets. Imports also fell because of sagging demand in manufactured imports and raw materials.

The current account deficit remained at 4.4 of GDP in 2001. Foreign exchange reserves totaled US $1 billion – an amount sufficient to cover seven months of imports of goods and services.

Foreign-aid dependence became more pronounced in 2001, with foreign loans and grants financing 58 per cent of development expenditures. This was a sharp increase from the 47 per cent level on average over the previous years.

External debt as a proportion of GDP declined to less than 47 per cent. The debt service ratio fell as well, accounting for a manageable 3.9 per cent of exports.

The ADO notes that historically, high population and low economic growth have spawned poverty. To reduce poverty, Nepal needs to restore law and order, achieve more rapid and broad-based economic growth, while carrying out structural reforms, including improved governance and domestic resource mobilization.

Higher growth is expected in South Asia with GDP rates projected at 5.4 per cent in 2002 and 6.4 per cent in 2003, compared to 4.9 per cent in 2001. Bangladesh and India will maintain high growth, while Nepal’s growth will slow down slightly. The economies of Pakistan and Sri Lanka will pick up, recovering from the global slowdown, the impact of terror attacks on exports and tourism, and domestic disturbances. Afghanistan will likely experience rapid growth over the next few years as rehabilitation, renewed confidence, and reestablished external economic relationships boost productive capacity.