A Report on

Growth Trend in Nepal

(Assignment: Economic Environment Analysis)

Submitted To Mr. Satyendra Timilsina Faculty: Economic Environment Analysis Ace Institute of Management

Submitted By Aleena Shrestha Prakash Shrestha Shobhit Shakya EMBA Fall 2011, 3rd Semester Ace Institute of Management New Baneshwor April 2013

Table of Contents

Introduction ........................................................................................................................................... 2 Recent Achievements ............................................................................................................................ 3 Current Challenges ................................................................................................................................. 5 References: ............................................................................................................................................. 6 Annexures ............................................................................................................................................... 7

Economy - Overview
Nepal is among one of the poor and least developed countries in the world, with about onequarter of its population living below the poverty line. Agriculture is the mainstay of the economy, providing a livelihood for three-fourths of the population and accounting for a little over one-third of GDP. Industrial activity mainly involves the processing of agricultural products, including pulses, jute, sugarcane, tobacco, and grain. Nepal also does not have reserves of oil or gas, and has only small coal reserves. Commercial energy consumption in Nepal is made up of hydroelectricity, coal, and oil products. Non-commercial energy sources, such as wood, animal wastes, and crop residues, account for a significant share of the countrys total energy consumption. Nepals main import is petroleum products such as kerosene, diesel, jet fuel, gasoline, etc. Nepal imports more than 10,000 barrels of oil per day for products such as Nepal has considerable scope for exploiting its potential in hydro-power, with an estimated 42,000 MW of feasible capacity, but political instability is proving as a barrier for foreign investment while investment from private and public sectors not able to invest at larger scales. The gross domestic product (GDP) of Nepal grew by 4.6% in Fiscal Year 2012 (ended in July 2012), up from 3.8% a year earlier. Good weather allowed a bountiful harvest, and robust increases in tourist arrivals and migrant worker remittances underpinned the recovery. Inflation moderated to 8.3% from near double digits in the previous year as food price hikes abated, but non-food inflation remained high, reflecting increases in the administered prices of fuels. Although banks liquidity constraint eased, growth in credit was slow because there were few attractive investment opportunities. Political uncertainties continued, marked by the dissolution of the Constituent Assembly on 27 May without agreement on a new constitution. It has been the defining feature of the Nepali state during the last two decades. Nepal has had 20 governments since the introduction of democracy in 1990. The country is still emerging from the conflict with some aftershocks. In the past five years, Nepalis have witnessed the signing of a peace agreement between the former Maoist rebels and the state, a new interim constitution, the election of a Constituent Assembly, the abolition of monarchy and declaration of a federal republic, five governments, and the rise of strong ethnic identity movements. The constitution, which was supposed to lead to a major restructuring of Nepal into a federal state, has recently experienced a setback as the Constituent Assembly failed to deliver the new constitution by the deadline of May 27, 2012. Political uncertainties are adding to the already poor investment climate. Due to the political instability, economic issues are on the backburner, and growth is slow particularly with the poor performance of nonagricultural sectors. Revenue collection grew robustly, but there was underspending on capital projects, reflecting limited implementation capability. The external position has strengthened as remittances and tourism receipts offset a widening trade deficit.

Recent Achievements

The proportion of poor people has declined substantially in recent years. The percentage of people living below the international poverty line (people earning less than $1.25 per day) has halved in only seven years. At this measure of poverty the percentage of poor people declined from 53.1 percent in 2003/2004 to 24.8 percent in 2010/2011. With a higher poverty line of $2 dollars per capita per day, poverty declined by one-quarter to 57.3 percent. Even though the GDP growth rate had dipped on 2011 it has risen to 4.63 on 2012 showing improvements. The volume of trade has been increasing steadily. It has reached rupees 48562.6 million. Not only with India, but trade with other countries are also seeing good growth. However the trade deficit is seen increasing. Huge number of Small Foreign Investment is coming to Nepal via the Non Resident Nepali, who are investing in Shopping Mall, Plaza, Real Estate Business, Tourism etc. The World Banks new report Migration and Remittance Factbook 2011 says Nepal is among the top five countries with remittance amounting to 23 percent of the GDP. Remittance inflow to Nepal in 2010 was 3513 million US dollars. The Tax revenue of the Government saw a substantial increase during the fiscal year 2010/2011. The revenue looks to steadily increase after that as well. The tourism industry has seen a substantial improvement in the last few years. Total tourist arrivals increased to 22.1 percent during fiscal year 2011-12. The trend seems to be going upwards since the end of the decade long Maoist Armed Struggle. According to statistics of Nepal Tourism Board (NTB), a total of 598,204 foreign tourists entered the country via aerial route in 2012. Road transportation has also seen some positive improvements. During the first eight months of fiscal year 2011/2012 the total roads in Kilo Meters has risen from 23,209 KM of 2010/2011 to 23,454. However lack of other transportation services like railway and cable ways seems to be still problems for Nepal. Net primary enrollment in schools has increased from 81 percent in 2002 to 94.5 percent in 2010. Gender and social parity have been achieved in primary education. The Gender Parity Index for secondary school net enrollment has also increased from 0.87 (2007) to 0.98 (2010). The maternal mortality rate declined from 538 in 1996 to 380 per 100,000 live births, earning Nepal the MDG Millennium Award in 2010. The infant mortality rate dropped from 79 in 1996 to 39 in 2010. At least one-third of deliveries are now in the presence of trained health workers. Full immunization coverage rose from 43 percent in 1996 to 87 percent in 2011. Gender disparities in political participation are decreasing both in elected and administrative government. Women now make up over 30 percent of the representatives in parliament. Implementation of an inclusion policy of women in the civil service shows positive trends. Nepals economic growth continues to be adversely affected by the political uncertainty. Nevertheless, real GDP growth is estimated to increase to almost 5 percent for 2011/2012. This is a considerable improvement from the 3.5 percent GDP growth in

2010/2011 and would be the second-highest growth rate in the post-conflict era. Sources of growth include agriculture, construction, financial, and other services. The contribution of growth by consumption fueled by remittances has declined since 2010/2011. While remittance growth slowed to 11 percent (in Nepali rupee terms) in 2010/2011, it has since increased to 37 percent. Remittances are estimated to be equivalent to 25-30 percent of GDP. Inflation has been reduced to a three-year low to 7 percent. Despite political uncertainties, Nepal maintained a policy of prudent fiscal management. International reserves rose to a record high, covering eight months of goods and services imports, and commercial banks have adequate liquidity. The rapid expansion of expenditures (22 percent of GDP estimate for 2011/2012) has been supported by a strong revenue performance (about 15 percent of GDP) and the availability of foreign aid (2.5 percent) and domestic borrowing (2.5 percent). But expenditure quality remains an issue.

Current Challenges
Poor reliability and access to power are the most serious infrastructure bottlenecks to growth. Increasing access to electricity in a timely and cost-effective manner is one of the most significant development challenges facing Nepal today. Efforts to reduce the 16-hour loadshedding gap during the dry season have been unsuccessful. Its neighbors, China and India, are among the fastest-growing economies in the world, and India is hungry for Nepals potential energy. Poor physical connectivity has been another major challenge to Nepals development efforts. Its road density is one of the lowest in South Asia. Over one-third of the people in the hills are more than four hours away from an all-weather road. In addition, 15 out of 75 district headquarters are yet to be connected by a road. The quality of the road network is also poor 60 percent of the road network, including most rural roads, cannot provide all-weather connectivity. The rising imports and declining exports (in dollar terms) contributed to the high trade deficit for Nepal. Nepal foreign trade deficit has increased by 5.8 percent to stand at Rs. 333 billion during the fiscal year 2010/11, up by Rs. 18 billion compared to the previous year. In the five years to 2009, net Foreign Direct Investment (FDI) in Nepal averaged only 0.1 percent of GDP as compared to an average of 1.9 percent for low-income developing countries. Investments in Nepal are constrained by a challenging regulatory and legal framework for foreign investment, poor governance and accounting practices, weakness in the domestic banking sector together with lack of a swap market for the Nepali rupee, poor implementation of property rights, and heightened political uncertainty. In addition, the countrys logistical limitations, absence of supporting infrastructure, and the relatively smaller size of projects constrain investments, especially in the manufacturing sector. The uncertainty related to the budget has contributed to significant under-execution of spending plans for the economy. Also the effect of slowing Indian economy would also affect the performance of the Nepali economy. A weakened agriculture output due to delayed monsoon also affect the countrys economy. Productive agriculture is a crucial element of inclusive growth, enhancing the efficiency of irrigation systems will continue to be critical to increase agricultural productivity, incomes, and rural livelihoods. Increasing access to secondary education (grades 9-12) remains a major challenge, as evidenced by the disturbingly low net enrollment rate of 24 percent at this level. More than half of primary students do not enter secondary schools, and only one-half of them complete secondary schooling. In addition, fewer girls than boys join secondary schools and, among those who do join, fewer complete the 10th grade. While there has been substantial progress on health indicators, malnutrition remains very high. About 47 percent of children under 5 are stunted, 15 percent wasted, and 36 percent underweight. Although there has been a declining trend for these rates over the past five years, they remain alarmingly high. Nepal is highly susceptible to climate change risks and ranks 11th in the world in terms of vulnerability to earthquakes. Climate change is expected to intensify N epals already pronounced climate variability and increase the frequency of climate extremes such as droughts and floods.

Preoccupation with the prolonged political transition has overshadowed economic issues. As a result, inadequate attention has been given to reforms that could improve the investment climate, stimulate growth, and create more private-sector jobs. The financial sector continues to experience liquidity shortage and remains vulnerable. NRB in response has been strengthening capacity for supervision and regulatory enforcement. But social indicators are improving rapidly; the latest Nepal Living Standard Survey indicates a significant reduction in both poverty incidence and income inequalitythis is seen in large part due to the high level of remittance inflows that may exceed 25 percent of GDP. Inflation remains highnear double digitwith the legacy of past monetary expansion, imported inflation, and Nepals own domestic price pressure because of high remittance inflows. High civil service wage hikes are also adding to inflationary pressure.

In FY2013, GDP growth is expected to dip to 3.8% - falling below the Asian Development Outlook (ADO) 2012 forecast of 4.0% - as the late monsoon and fertilizer shortages undermine agriculture and as the inability to approve a budget for all of FY2013 creates fiscal drag. Remittance inflows and tourist arrivals will sustain expansion in services, but growth in industry will remain constrained by persistent power outages, sporadic fuel shortages, and long-standing structural bottlenecks and policy distortions. Though it faces enormous challenges, Nepal is not without some significant assets. The evidence is compelling that the strength behind development in Nepal is highly concentrated at the community level. Success stories abound, from forestry user groups and womens groups to community-based programs in rural drinking water, rural roads, micro-hydropower generation, community management of schools, and the Poverty Alleviation Fund (PAF). Many of the truly community-owned efforts demonstrated great viability even during the height of the conflict. Where a supportive framework has been created for communities to undertake such activities, there have been impressive development successes. Risks include revenue erosion because of a weaker economy and, as remittance growth gets slower as the base has expanded. Compliance may be becoming a major issue as significant VAT evasions are reported. On the expenditure, additional spending needs may arise from army integration and the needs to address financial sector weaknesses. The outlook is that of elevated uncertainties for economic development and the action by the newly formed government is awaited.

References:
http://en.wikipedia.org/wiki/Economy_of_Nepal http://www.tradingeconomics.com/nepal/gdp-growth-annual http://www.theodora.com/wfbcurrent/nepal/nepal_economy.html http://www.myrepublica.com/portal/index.php?action=news_details&news_id=47502 http://www.worldbank.org/en/news/press-release/2012/11/20/developing-countries-to-receive-over400-billion-remittances-2012-world-bank-report http://www.mof.gov.np

GDP - real growth rate (%) Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 GDP 3.4 3.7 2.6 -0.6 3 3 2.7 1.9 3.2 4.7 4.7 4.6 3.5

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