A significant drop in agriculture and delay in introducing a full budget dragged down growth in gross domestic product (GDP). Inflation remained high, and the current account surplus contracted as remittance inflows decelerated. Growth is expected to pick up with a favorable monsoon, the timely adoption of a full budget, and political stability following the successful Constituent Assembly election in November 2013.

Economic performance

GDP growth decelerated to 3.6% in Fiscal Year 2013 (ended 15 July 2013) because of an unfavorable monsoon, a shortage of chemical fertilizers, and the delay in introducing a full FY2013 budget. Agricultural output growth slowed sharply to 1.3%, the lowest rate in the past 5 years, while services grew by 6% on improvements in wholesale and retail trade and in hotels and restaurants. Industry continued to languish, growing by a mere 1.6% as persistent electricity shortages, labor disputes, and political uncertainty soured the investment climate.

Selected Economic Indicators (%) - Nepal 2014 2015
GDP Growth 4.5 4.7
Inflation 10.0 9.5
Current Account Balance (share of GDP) 3.6 3.7

Source: ADB estimates.

Economic prospects

The economic outlook is more optimistic than in FY2013, considering the successful second Constituent Assembly election in November 2013 (following an 18-month hiatus from the end of the first assembly), the favorable monsoon, and expected strengthening in remittance inflows. The successful political transition to a new government has boosted business and investor confidence. The Constituent Assembly is expected to pass legislation that will promote investment in key sectors and mandate structural reforms. However, there is a downside risk of political instability arising from continued disagreement among the major political parties over unsettled constitutional and governance issues, especially those of federalism and the nature of parliament and the executive. These issues have the potential to create hurdles to drafting a new constitution like those that stymied the earlier Constituent Assembly.

Taking into account the favorable monsoon, more rapid growth of remittance inflows, and the timely introduction of a full budget - and assuming political stability - GDP is projected to grow by 4.5% in FY2014, somewhat less than the government’s target of 5.5%. Normal monsoon rains and adequate supplies of chemical fertilizers have allowed full paddy planting in most of the country. The budget - with a sharp 41.1% boost planned for expenditure and underpinned by positive political developments and clearer government direction - has strengthened business and investor confidence, and so prospects for a boost to industrial activity and exports. Higher remittance-backed consumer demand and an uptick in tourism will support services growth at around 5%. More than half of growth will come from services, and the balance largely from agriculture.

GDP growth is expected to pick up to 4.7% in FY2015, assuming a normal monsoon, a timely budget, continued strong remittance inflows, a revival in real estate and housing, and the better growth outlook in India.

Source: ADB. 2014. Asian Development Outlook 2014. Manila.