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Annual Report 2002 : South Asia

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Nepal

Economic performance

Nepal’s economic performance weakened in FY2002 (ending 15 July 2002), registering negative growth for the first time in the past 2 decades. GDP contracted by 0.6%, after posting 4.6% growth in FY2001. This was attributed to a series of domestic and external shocks, especially the escalation of the insurgency, an irregular monsoon, and weak external demand. Agriculture sector growth slipped to 2.2% in FY2002 from 5.5% in FY2001, while industry sector output fell by 3.3% in FY2002, largely due to a nearly 10% drop in manufacturing production. Services sector output, particularly in tourism and the trade-related areas, declined by 1.8% in FY2002 after posting 5.3% growth in FY2001. The sector was adversely affected by the worsening domestic security and the global economic slowdown. Tourist arrivals dropped by about 40% in FY2002, resulting in an estimated 33% decline in tourism receipts. The inflation rate increased to 2.9% in FY2002, compared with 2.4% in FY2001.

The budget deficit (after grants) was contained at 3.3% of GDP in FY2002 from 4.5% in FY2001, at the expense of a sharp cut in development expenditure. The value of merchandise exports declined by 18.0% in FY2002, due to a drop in exports of ready-made garments, woolen carpets, and pashmina. The value of imports further declined by 11.4% in FY2002, reflecting weaker demand, particularly due to decreased manufacturing and development activities. By the end of FY2002, Nepal had $1 billion in foreign exchange reserves, enough to cover 8 months of imports and nonfactor services.

ADB operations

Operational strategy: ADB’s strategy focuses on government reforms and building effective institutions. In line with the 2002 CSP Update and the PPA, the operational priorities include generating employment and increasing rural incomes through broad-based, rapid economic growth; improving basic social services to enhance human resource development; and promoting good governance.

Loans, technical assistance, and grants: Two loans totaling $60 million were approved to support secondary education and improve the urban areas and the environment. Nine technical assistance totaling $3.9 million and two grants totaling $24 million were approved (see tables
1, 6, 7, 24, and 25 in the Statistical Annex).

Project implementation: Since joining ADB in 1966, Nepal has received 104 loans totaling $2,011 million, of which 25 were active at the end of 2002. Contract awards totaled $13.2 million, bringing the cumulative figure to $1,306.8 million. The contract awards ratio for 2002 was 3.7%—lower than ADB’s average of 22.6%. Disbursements totaled $28.2 million, bringing cumulative disbursements to $1,337.9 million. The disbursement ratio was 8.4%—lower than the ADB-wide average of 22.2% (see tables 14–23 in the Statistical Annex).

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