National 5 (Spotlight Weekly)

Silver Lining

The Asian Development Outlook 2004 projects four percent growth of Nepalese economy

By A CORRESPONDENT

The Asian Development Bank (ADB), in its Asian Development Outlook 2004 released on April 28, has projected that Nepal would achieve 4 percent economic growth this fiscal year.

Likewise, it projects that in 2005, Nepal can improve its economic growth rate to 5 percent. The favorable impacts of last year’s ceasefire, growth in agriculture and tourist arrival have been the contributing factors for this year’s growth.

In the last fiscal year, the growth rate was 2.6 percent – again an improvement over the previous years’ figure when the GDP had contracted by 0.6 percent. Its projection is based on condition that the security situation would not further deteriorate in the country.

“Fueled by strong performance in the agricultural sector and a rebound in trade and tourism, Nepal’s economy is expected to grow by about 4 percent in the fiscal year 2004 and about 5 percent in the fiscal year 2005,” states the report.

The Asian Development Outlook 2004 (ADO), an annual ADB publication that forecasts economic trends in the region, notes that a cease-fire between the Government and insurgents from January to August 2003 fostered a moderate economic recovery in the fiscal year 2003, following the downturn a year earlier.

“Nepal’s GDP grew in the fiscal year 2003 (14 July 2002 to 15 July 2003) by 2.6 percent, representing a marked improvement from the 0.4 percent decline in the fiscal year 2002,” the report adds.

The cease-fire particularly helped the hard-hit manufacturing sector, while a rebound of trade and tourism boosted growth in transportation and communications services output. “Despite the breakdown of the cease-fire in August 2003, the economic recovery is likely to continue in the fiscal year 2004,” the report forecasts. “However, economic performance in the medium term will fundamentally depend on a lasting resolution of the insurgency and reconciliation between the Government and political parties.”

The forecast is also based on assumptions that the global economic recovery will continue, the Indian economy will expand by about 7 percent and weather conditions will be normal.

Although the prospects for continued economic recovery are positive in FY2004–FY2005, the report notes: “The security situation continues to present a substantial risk to the economy, and urgent efforts are required to resolve the present crisis.”

Meanwhile, a recent report by the Nepal Rastra Bank (NRB) – the central bank – showed that despite the insurgency and unrest, the country will witness 4.5 percent economic growth in the current fiscal year.

The NRB stated that although persistent insecurity, non-improvement of sick industries and stagnant development expenditure has hurt the economy; the favorable weather, improving trend in global trade and growth in tourist arrival will help the sector to register the growth.

The projections by both the ADB and the NRB are in line with the government’s projections made at the budget of the current fiscal year. However, the persisting insurgency and widening of the scope and dimension of the political conflict could also undo the achievements anytime.

Insurance Market Waiting To Be Tapped

Experts have said that only 5 percent of the potential insurance market could be tapped till now in the country. At a program organized by the Nepal Insurers’ Association (NIA), its president Rajendra Kumar Khetan presented a report prepared by G.B. Bhari and Co. – an independent Chartered Accountant firm - stating that at present the total turnover of the insurance market in the country is around Rs 3.63 billion – a remarkable growth from Rs 1.51 billion only five years ago.

At present, there are 17 insurance companies including joint ventures. The contribution of the insurance sector to the GDP stands at 1.44 percent. “The insurance sector needs a lot of attention from the government to be able to rise up to its potentials,” said Khetan.

Finance Minister Dr. Prrakash Chandra Lohani said that the government was prepared to facilitate the growth of insurance sector. “But you need to be engaging in healthy competition benefiting the general public,” he said. Dr. Lohani urged the insurance companies to use their cash reserves in the investment in infrastructure development on BOOT basis.

The NIA has also demanded, among others, the permission to start reinsurance company and smoothening of foreign exchange usage. Madhav Upadhyaya, chairman of Insurance Committee, said that the government is planning to develop the ‘Emergency Insurance Fund’ as reinsurance company in future.

Responding to the concerns raised by the insurance companies, Dr. Yubaraj Khatiwada, a member of National Planning Commission (NPC), said that the government might not be in a position to lower corporate tax levied on insurance sector anytime soon – though the general direction of the government is towards realizing the objective. “With the trade regimes like WTO and SAFTA coming along, our companies need to be competitive.

Through tough negotiations at WTO, we have snatched a few years’ time before insurance sector would be eventually opened up for foreign companies,” he said. Khetan also raised issues of Tax Deduction at Source (TDS) and document hassles and urged the government to change those provisions.