Nepal’s economy is rebounding after two years of down turn and the landlocked Himalayan country is poised to achieve a growth rate of 5.5 per cent in 2016/17, says an assessment by the International Monetary Fund. (IMF).
Domestic political instability, weak financial sector, slowing remittances impacting financial sector liquidity, and lower growth in India due to the demonetization shock are amongst the key downside risks.
Nepal should put in place policies that will extend the cyclical recovery into a sustained period of high and inclusive growth, the global soft lender of last resort said after discussing the state of the economy with the Nepalese officials in Kathmandu this month.
According to the IMF, the normalization of economic activity is supported by a good monsoon, accommodative monetary policy, and rising government spending. Inflation has been decelerating due to base effects related to last year’s trade disruption but is expected to remain above India’s inflation. More recently, the authorities have also been able to advance reforms in a number of areas.
About the medium-term outlook, the global lender says, it critically depends on efforts to sustain and deepen the nascent reform momentum. Stronger policies are needed to enhance confidence amid ongoing political uncertainty. They are also needed to strengthen key institutions and administrative capacity, which are critical for overcoming poor service delivery and chronic under-implementation of the budget, and for boosting private investment and growth.
Raising Nepal’s potential growth requires sustained efforts to build policy implementation capacity, improve the business climate, and develop the hydropower sector. Structural reforms to deregulate product and factor markets should complement prioritized investment to upgrade transportation infrastructure and improve power supply.
According to the IMF, the current account surplus reached 6.3 percent of GDP in 2015/16 on account of lower imports from the trade disruption. Exports also suffered. The growth rate of remittances slowed sharply, to 1 percent in 2015/16, from an annual average of 15 percent during the previous 5 years, due to weak growth in oil-producing host countries. Gross reserves of the central bank reached a record $8.7 billion, covering more than nine months of imports, in January 2017.
IMF cautions that the growth would fall below the average of the past decade and could even fall short of what is needed to substantially improve the social indicators, if there is no strong policy regime and if remittances remain on a low growth path. More so as the budget under-spending worsened in 2015/16.
In its view, the macroeconomic policy mix should be rebalanced toward a more accommodative fiscal position and a tighter monetary stance. It welcomes Nepal’s plans and efforts ‘to scale up government spending to rebuild after the earthquakes and address infrastructure gaps to boost medium-term growth’.
So the IMF’s caveat: have a realistic budget that effectively prioritizes spending to maximize growth dividends, including in social spending areas most important for inclusive growth. “The scaling up of government spending should not exceed the economy’s aggregate absorptive capacity and should be anchored in a medium-term expenditure framework to ensure quality and fiscal sustainability”.
On the outlook and risks, the IMF report has this to say: Growth may reach 5.5 percent in 2016/17, supported by a good monsoon, accommodative monetary policy, and rising government spending. Inflation is at a multi-year low as prices normalize following last year’s disruptions. In the absence of strong policies and sustained reforms, growth would likely revert to the average of the past decade and fall short of substantially improving living standards and social indicators. Risks to the baseline are broadly balanced with the main downside risks pertaining to domestic political stability and the financial sector.
Sustaining and deepening the nascent reform momentum observed in recent months would help boost growth and allow more progress in achieving the sustainable development goals (SDGs). Efforts should focus on strengthening key institutions and administrative capacity to overcome the chronic under-implementation of the budget and boost private investment and growth, the report states.
rama rao malladi