World Bank predicts modest growth for Nepal’s economy

Nepal’s economy is projected to grow at a snail's pace this fiscal year amid eroding private sector confidence, following political uncertainty, corruption scams, market anomalies and climate threats.

 

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The World Bank said on Tuesday that the country’s economy would grow 3.3 percent in the fiscal year 2023-24, ending mid-July, up from last year’s 1.9 percent.

 

The growth forecast of the multilateral funding agency is nearly half of Nepal government’s projection.

 

Nepal’s growth is facing one after another challenge.

 

Frequent political changes, a big drag on businesses for over a decade, have dampened private investment. Thriving corruption and lack of accountability have stalled growth and forced tens of thousands of young Nepalis to try their luck abroad.

 

Externally, geopolitical uncertainty has triggered a rise in commodity prices for an import-driven economy like Nepal, impacting all sectors. Projects built with loans worth billions of rupees have become victims to geopolitics.

 

Economists say Nepal’s economy is limping. They say the World Bank has rang an alarm bell for Nepal to correct its investment climate.

 

Frequent political changes cloud investment prospects, according to the report.

 

“When we were analysing the industrial capacity utilisation survey, most private firms viewed that political changes are one of the top 10 factors that impact business operations,” said Nayan Krishna Joshi, an economist at the World Bank’s Nepal office.

 

The ongoing political unrest and economic slowdown have fueled public frustration in Nepal.

 

This fiscal year has been characterised by a marked surge in sophisticated scams. There were four most notorious ones—fake Bhutanese refugees, gold smuggling, cooperative funds embezzlement, and the Lalita Niwas land grab.

 

The alleged involvement of top political leaders in these scams exposed how large-scale and organised corruption and financial irregularities have been taking place, promoted and protected by powerful political leaders. This has significantly eroded public trust in the government and the private sector too.

 

“The worst is yet to come,” said a senior official at the country’s central bank.

 

Economist Keshav Acharya said the World Bank’s growth forecast is fair and objective.

 

“Except tourism, all indicators of the country’s economy are dismal.”

 

He said that political uncertainty is weighing on the economy. “We are not sure the new government will last six months,” he said. “This instils a sense of fear in both domestic and foreign investors.”

 

The external factors range from the Red Sea crisis to the volatile petroleum market.

 

In India, according to economists, the protectionist policy ahead of general elections has made everything expensive in Nepal.

 

The surprise change in the government in Nepal has brought a new twist to the policies of its southern and northern neighbours.

 

“India is now showing reluctance to buy and sell electricity, which is not a good sign,” said Acharya.

 

“On the other hand, in Nepal, China's Belt and Road Initiative, which argues that infrastructure is a symbolic project of national development, remains confined to paper,” said Acharya.

 

“There are no investments from both India and China. The donors too are cautious about investing.”

 

According to the ‘Nepal Development Update’, a biannual report by the World Bank unveiled on Tuesday, a contraction in the production of key construction materials like cement and iron and steel bars, coupled with declining imports of goods related to the construction sector and construction material prices, and lower public investment, suggests a slowdown in construction activities in the second quarter of the current fiscal year.

 

The World Bank said that the economy would rebound in the next fiscal year with a projected growth of 4.6 percent. However, the forecast is subject to multiple risks, including a slowdown in growth in partner countries, notably India, Gulf countries, and Malaysia which could lead to a drop in remittances and tourism.

 

“Further business environment reforms aimed at attracting more private investment will be needed to support medium-term growth,” it said.

 

In the service sector, the contraction in wholesale and retail trade led to a decline in goods imports.

 

Nepal’s imports declined by 2.66 percent to Rs1.03 trillion in the first eight months of the current fiscal year that ended in mid-March.

 

However, accommodation and food service activities fueled growth due to a significant increase in tourist arrivals, which went up by 45.8 percent in the first half of the current fiscal year.

 

The service sector is expected to be the key driver of growth in the coming years.

 

Accommodation and food services are poised to benefit significantly from the rise in tourist arrivals. The ongoing construction of new five-star hotels and government policies supporting real estate loans are expected to further stimulate the accommodation subsector, the World Bank said.

 

Nominal public consumption, as measured by the growth of wages and goods and services, contracted 11 percent year-on-year. Similarly, nominal public investment, proxied by capital spending, declined by 5.6 percent.

 

Economists say that consumption, the use of goods and services by households, stayed subdued due to the mass exodus of young people.

 

They say that as over a million young people leave the country each year for foreign jobs, consumption has been curtailed.

 

“Youngsters were the main customers at the restaurants, bars and coffee shops,” Pramod Jaiswal, former president of the Restaurant and Bar Association, who owns Mela Restaurant, recently told the Post.

 

“Fresh graduates in the country became owners of restaurants. And people who returned from abroad during the pandemic too invested in the restaurant business as they saw the industry as secure and lucrative,” he said.

 

 

The World Bank said that emigration remains an attractive choice for Nepalis due to limited job opportunities at home and significantly higher wages abroad, where migrant workers earn on average three times more than domestic workers.

 

“Private investment remains very low particularly due to tightening regulation of working capital loans and weak domestic demands for investments,” Faris Hadad-Zervos, World Bank country director for Maldives, Nepal and Sri Lanka, told journalists on Tuesday.

 

“Weak domestic demands were observed through a contraction in wholesale and retail trade due to lower imports in the first half of the fiscal year,” he said.

 

According to the report, the geopolitical uncertainty is expected to trigger a rise in commodity prices impacting all sectors.

 

“A growth slowdown in partner countries might also lead to a drop in remittances and tourism, hindering economic growth,” the report said.

 

The growth in remittances has not translated into higher imports of consumption goods.

 

According to the central bank, Nepal’s remittance inflows increased 21.6 percent to Rs839 billion in the first seven months of the current fiscal year ending mid-February, compared to the same period last fiscal year.

 

Nepal’s foreign exchange reserves reached a historic high of Rs1.84 trillion in mid-February, according to the country’s central bank. The bank blamed the development to a halt in investment and contraction of imports.

 

Abdoul Ganiou Mijiyawa, senior country economist of the World Bank for Nepal, said that people do not feel confident about investing when there are frequent changes in the government. “With government changes, the policies also change. People will keep money with themselves or save,” he said.

 

On the external side, the high dependency on remittance inflows exposes the country to external shocks, the World Bank said.

 

Thus, there’s a need to strengthen Nepal’s international competitiveness for other sources of external earnings, such as tourism and foreign direct investment, by boosting exports of goods, the report said.

 

“Nepal’s capital expenditure is the lowest in the South Asia region. Bureaucratic hassles have been creating hindrances for foreign investors,” said Hadad-Zervos. “In the absence of basic service and [supportive] ecosystem, it will be difficult for the investors to come and invest in Nepal.”