The Asian Development Bank has lowered Nepal’s growth forecast for the current fiscal year as the economy reels from high inflation, sluggish trade and monetary tightening.
The Manila-based bank says Nepal’s economy is expected to grow by 4.7% in the 2022-23 financial year, compared to an estimate of 5.8% in the last financial year.
According to an update from the flagship economic publication Asian Development Outlook 2022, other factors affecting gross domestic product (GDP) growth are rising dengue fever cases in the country’s fragile and strained healthcare system, and global geopolitical unrest that could further dampen growth prospects.
Import control measures have weighed on the country’s economic activities. Even as Nepal’s biggest festivals and festive season are fast approaching, market and consumer confidence is at rock bottom, traders and economists say.
Weak market confidence is weighing on consumption, the main driver of the country’s economic growth.
The World Bank has also painted a bleak picture of Nepal’s economy. According to the budget statement, the government is targeting 8% growth for the current fiscal year, nearly double the World Bank projection.
According to the Nepal Development Update released by the World Bank in April, Nepal’s economy is expected to grow by 4.1% in 2022-23.
“The government’s estimates are still baseless,” said economist Keshav Acharya.
“All the economic indicators except a few are not performing well. A layman can understand which direction Nepal’s economy is heading.”
These are the basics: the credit crisis, high interest rates due to monetary tightening and the underperformance of the stock market and the agricultural sector.
Other indicators fueling weak growth are inflation hitting near double digits, trade restrictions, housing sector under pressure and weak revenue base due to an import ban.
Moreover, the number of tourists has not improved and the government’s investment expenditure is very dismal.
A rebound in tourism in Nepal could be halted by rising dengue fever cases, airline security measures and general and provincial elections scheduled for Nov. 20, insiders say.
After dengue has killed more than a dozen people and infected thousands, the Ministry of Health and Population is preparing to declare a dengue epidemic in the country.
The deadly virus has been registered in 75 of the country’s 77 districts.
Monetary tightening has also become worrisome for the economy.
Nepalese banks have been raising borrowing costs since August in an attempt to calm the economy and dampen price inflation.
The Federation of Nepalese Chambers of Commerce and Industry issued a statement on Thursday criticizing the decision of banks and financial institutions to raise interest rates.
On September 17, most banks announced an interest rate of 12.13% for term deposits.
The federation said the increase in the interest rate on deposits will increase the pressure on the interest rate on loans.
Rising lending rates will impact entrepreneurs and businesses already impacted by Covid-19, followed by external factors, the leading private sector organization has said.
Fears are growing that slowing economic activity and rising interest rates could push the country into recession.
But amid the grim storyline, there are a few bright spots.
The industrial and manufacturing sectors are expected to grow on the back of increased hydropower generation and plant capacity utilization. Provincial and federal elections in November will stimulate spending.
“It is hoped that hydropower generation and spending in the upcoming elections will boost economic growth to some extent. Even then, we don’t expect the economy to grow by more than 5%,” Acharya said. “Economic activities have been practically compressed.”
While the direct impacts of trade and financial exposure to Russia and Ukraine are minimal for countries like Nepal, the fallout from rising commodity prices, higher borrowing costs and weaker external demand are important.
In Nepal, the economic recovery is facing headwinds from accelerating inflation.
“Rising inflationary pressures led to higher interest rates,” Acharya said.
Higher interest rates help fight inflation by increasing the cost of borrowing, thereby encouraging individuals and businesses to borrow less and spend less.
“In a country like Nepal, a rise in interest rates will reduce private sector investment because the profit margin is reduced,” Acharya said. “No one will invest if there is no return.”
The Asian Development Bank says GDP growth is expected to slow, largely reflecting the tight monetary policy needed to stem a rise in imports, a sharp drop in foreign exchange reserves and inflationary pressures.
“Downside risks to growth may stem from tighter policy measures that may be needed to curb imports, which will depress domestic production and consumption, negatively affecting growth,” said Arnaud Cauchois, Asian Development Bank country manager for Nepal.
“A resurgence in Covid-19 infections driving lockdowns, an escalation in dengue fever straining the fragile healthcare system, disasters triggered by natural hazards and geopolitical unrest could further dampen growth prospects.”
The Asian Development Bank said in its update that agricultural growth would likely be boosted by a normal monsoon, but fertilizer shortages could negatively affect paddy production.
The report said growth in services could slow due to a slowdown in real estate activity and wholesale and retail trade, induced by credit control measures and higher interest rates.
But the provincial and federal elections scheduled for November will stimulate spending, supporting GDP growth.
The government’s fiscal policy reflected in the budget speech is somewhat expansionary, focusing on strengthening agriculture, industry, infrastructure and social welfare.
The Asian Development Bank said monetary policy, however, is restrictive, aimed at curbing strong credit growth to contain domestic demand, rising prices and rising imports.
“Nothing works in the economy without price stability,” Acharya said. “Inflation continues to rise steadily. Inflation needs to come down.”
Inflation in Nepal is likely to ease slightly to 6.1% in the current fiscal year, ending in mid-July 2023, from 6.3% in the last fiscal year, held back by tight monetary policy, a normal harvest, somewhat subdued oil prices and modest inflation. decline in India.
The country’s current account deficit is estimated to narrow to 8.1 percent of GDP in the current fiscal year, due to moderation in merchandise imports and stable remittances.
Emigration for overseas employment has accelerated, surpassing pre-pandemic levels. Imports related to Covid-19 will have decreased significantly, and lower oil prices will help lower Nepal’s import bill.
“Import control policy for a long time will hold back the economy, although it is justifiable in the short term,” Acharya said. “The import ban is not a cure.”