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Growth picked up in Nepal with a favorable monsoon and robust services growth. Inflation moderated on declining food prices, and the current account posted a large surplus on a surge in remittances and modest imports. Political uncertainty intensified with the dissolution of the Constituent Assembly, affecting budget operations and government policies. Growth is expected to slow following a poor monsoon. Improving economic performance depends on resolving political uncertainty and creating an enabling environment for business and investment.
Gross domestic product (GDP) rebounded to 4.6% in fiscal year 2012 (ended 15 July 2012), boosted by a favorable monsoon and robust services growth despite a slowdown in industry and lingering political uncertainties. Agricultural output grew by 4.9%, the highest rate in 4 years, while the 5.1% advance in services reflected a pickup in tourism and remittances-backed consumer spending. Industry continued to perform poorly, growing by a mere 1.7%, because of an unfavorable business and investment climate caused by labor disputes, persistent electricity shortages, and the prolonged and disruptive political transition.
|Selected Economic Indicators (%) - Nepal||2013||2014|
Current account balance
(share of GDP)
Source: ADB estimates.
The economic outlook for Nepal hinges on how political uncertainties are resolved, the weather, and remittance inflows. Investor confidence is depressed by concerns over the political transition, now in its fifth year, following the dissolution in May 2012 of the Constituent Assembly, which failed to agree on a constitution. Recently, the political parties agreed to form a caretaker government led by the Chief Justice, which is expected to hold a Constituent Assembly election by 21 June 2013.
In view of the unfavorable monsoon, the shortage of fertilizers during the peak paddy planting season, low business confidence, the lack of a parliamentary-approved full budget, and subdued growth in India, GDP is projected to slow to 3.5% in FY2013. Production of paddy is projected to fall by 11.3%, maize by 8%, and millet by 2%. The lack of a full budget is causing funding shortages for ongoing development activities. While the industry sector performance is expected to remain weak, services growth is expected to continue to grow at around 5.4%. With a favorable monsoon, adequate fertilizer supplies, the timely adoption of a budget, and moderate expansion of remittances, GDP growth would rebound to 4.2% in FY2014.
Source: ADB. 2013. Asian Development Outlook 2013. Manila.