Nepal: Economy

The catastrophic 7.8 magnitude earthquake on 25 April and its aftershocks are estimated to have slashed Nepal's Gross Domestic Product growth in financial year (FY) 2015 (ended 15 July 2015) by over 1.5 percentage points from the 4.6% Asian Development Outlook 2015 projection a month before.

Selected economic indicators (%) 2015 2016
  ADO 2015 Update ADO 2015 Update
GDP Growth 4.6 3.0 5.1 4.8
Inflation 7.7 7.2 7.3 9.0
Current Account Balance (share of GDP) 2.7 5.1 3.5 -1.0

Source: Asian Development Outlook 2015; Asian Development Outlook 2015 Update

Economic performance

Although the earthquake struck Nepal in the tenth month of FY2015, the impact on growth seems to be sizable, especially on the large services sector, which is now estimated to have grown by only 3.9%, compared with 6.0% in the scenario with no earthquake.

Inflation in FY2015 was below forecast as food and other prices moderated under good supply and lower fuel prices in the first three quarters of the year. The deceleration of remittance inflows from Nepal’s many overseas workers in the first 3 quarters of FY2015 initially weakened the external position, but the surge in transfers in the last quarter in response to needs created by the earthquake, and the slowdown in imports immediately after the earthquake, fueled a robust current account surplus.

Economic prospects

In FY2016, a subpar monsoon will constrain agriculture growth, while the expected delay in getting reconstruction started, coupled with economic dislocation and damage to infrastructure, will curtail industry and services growth. Accordingly, GDP growth will likely be held moderately below the Asian Development Outlook 2015 projection.

In FY2016, inflation is expected much higher as price pressures mount owing to the expected drop in the agricultural harvest, higher demand as the pace of reconstruction picks up, and persistent supply bottlenecks. Larger imports combined with a more normal increase in remittances will likely push the current account into a small deficit. Underspending of the budget has been a persistent problem, especially in capital spending, for which just 70% of planned expenditure is generally realized. The government’s capacity for expenditure has to be drastically enhanced to ensure that reconstruction is fast and efficient.

The total cost of recovery from the earthquake is estimated at about $7.1 billion (a third of GDP), about $5.2 billion to repair damage to buildings and infrastructure and the balance to cover economic losses from forgone income. Development partners have pledged about $4 billion in grants and concessional loans, to be disbursed over 5 years. Allocations for reconstruction are about $910 million in FY2016. The government is simplifying procedures for capital spending and has established the National Reconstruction Authority to speed implementation. Even with a modest increase in borrowing to finance reconstruction projects, fiscal sustainability is likely to be maintained.

Excerpted from the Asian Development Outlook 2015 Update.