Regions and Countries

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Nepal

Economic performance

Economic growth: Nepal’s economy was stable in FY2000 (ending 15 July). Real GDP grew by 6.4 percent in FY2000, up from 4.5 percent in FY1999, because of better performance in the agriculture and industry sectors. Growth in real agriculture sector output reached 5 percent in FY2000 partly because of improved weather. Increased production of principal food crops led the recovery in agriculture. In FY2000, rice production exceeded 4 million metric tons, an 8.6 percent increase in output over the previous year. Maize and wheat production also benefited from the favorable weather, with output expanding by 7.4 and 9.0 percent, respectively. Industry sector output grew by 8.7 percent in FY2000, compared with 6.0 percent the previous year. The number of tourists visiting Nepal declined by 3 percent in FY2000.

Employment: Because Nepal’s economy is dominated by subsistence agriculture, the labor force participation rate is high and the unemployment rate low. The overall unemployment rate in 2000 was less than 2 percent, but the urban unemployment rate was higher at 7 percent.

Inflation: Money supply growth continued to be rapid, with broad money (M2) increasing by about 22 percent in FY2000, compared with 21 percent in FY1999. At 3.5 percent in FY2000, inflation was at its lowest rate in more than 20 years after a more than 11 percent increase in FY1999. Increased agriculture sector output kept growth in the price of food items in check at less than 1 percent on average during the year. This helped to counteract increases in the administered prices of fuel, electricity, and water, which caused the nonfood price index to increase by 7 percent.

Fiscal balance: The fiscal deficit of 3.9 percent was the same in FY2000 as in FY1999. Domestic revenue collection was 5 percent lower than budgeted, with actual revenue totaling about 11 percent of GDP, roughly the same level as in the previous year. This low level of collections was offset by slower-than-budgeted growth in development expenditure, which rose by 17 percent rather than the 48 percent envisaged in the budget. Foreign grants and loans financed about 50 percent of development expenditures.

External sector: While the dollar value of net service receipts continued to fall in FY2000, this was offset by an increase in the dollar value of net transfers, mainly because of rising remittances. The current account deficit of 1.5 percent of GDP was smaller than the average deficit of 8 percent during the 1990s. Official loans and grants continued to decline from their peak in FY1998, but the $292 million net inflow more than offset the deficit in the current account. As a result, Nepal’s foreign exchange reserves grew from $887 million in FY1999 to $981 million by the end of FY2000, enough to cover about six months of imports. External debt as a percentage of GDP fell to about 48 percent in FY2000. Because of the concessional nature of borrowing, the external debt service ratio was at a manageable level of 5.3 percent of export earnings.

Domestic policies: To sustain growth rapid enough to reduce poverty, the Government will continue the reforms begun in the early 1990s and provide an environment conducive to private sector development. For this to occur, financial sector reform will need to increase the savings rate and channel these funds into productive investments. In FY2000, the Government continued to implement the Agriculture Perspective Plan, further liberalizing agriculture by removing fertilizer subsidies. Prioritizing development expenditures and preparing a three-year rolling expenditure plan are also being expedited to raise the efficiency of public sector investments.

ADB operations

Operational strategy: ADB’s operational strategy for Nepal, approved in 1999, focuses on achieving sustainable poverty reduction by generating productive employment opportunities and increased rural incomes from broad-based economic growth, improving basic social services, and protecting and improving the environment. The strategy calls for building effective institutions to implement socioeconomic development in a market economy. Five key elements of the strategy are being emphasized: improved governance to strengthen key institutions and promote private sector participation, support for the Government’s initiative in decentralization, private sector development, gender equity, and subregional cooperation.

Policy dialogue: The strategy emphasizes that building capacity to maximize and sustain the development impact of investments must take precedence over levels of assistance. Prerequisites for future interventions include garnering strong stakeholder support for ADB’s proposed assistance and formulating long-term institutional development strategies. ADB support to particular sectors/subsectors depends on progress toward strengthening the policy and institutional environment in them. Longer-term technical assistance would support policy and institutional reforms.

ADB is focusing on fewer sectors/subsectors and linking future lending to progress in addressing major country performance issues. Country-specific performance standards are regularly monitored and progress reports, which are prepared jointly by ADB and the Government, are part of the annual country strategy and program planning for Nepal.

Loans and technical assistance: In 2000, ADB approved four loans totaling $173.3 million for the agriculture, social, and financial sectors. ADB also approved nine technical assistance grants totaling $7.3 million.

Project implementation: Since joining ADB in 1966, Nepal has received 99 loans, of which 25 were active at the end of 2000. Contract awards totaled $48.3 million, bringing the cumulative figure to $1.2 billion. The contract award ratio was 15.9 percent, lower than the ADB-wide average of 21 percent. Disbursements during the year totaled $99.6 million, bringing cumulative disbursements to $1.2 billion. The disbursement ratio was 37 percent, higher than the ADB-wide average of 20.5 percent.

In the past three years, Nepal’s disbursement performance has exceeded the ADB-wide Asian Development Fund average. There has been a decrease in transferring key project staff, which has led to greater continuity in project implementation. Submission of audited accounts has been generally satisfactory. Local groups and communities are increasingly being involved in ADB-supported projects, particularly on gender issues. ADB is supporting the country’s governance reform program, including civil service reform and efforts to reduce corruption.

In 2000, the Nepal Resident Mission continued to support improved project implementation by holding monthly meetings with project managers, and, together with the Government and the World Bank, conducted quarterly meetings to review the portfolio and work toward better project implementation. A joint memorandum of understanding summarized five key areas of concern: (i) expediting consultant recruitment, (ii) streamlining procurement procedures, (iii) strengthening project management (particularly staff recruitment, transfer, and incentives), (iv) improving financial management and governance, and (v) enhancing portfolio/project monitoring and evaluation with key performance indicators. The Government agreed to a time-bound action plan to improve portfolio performance.

   

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