April 11: Asian Development Bank has projected Nepal's economy to grow by 4.9 percent in the current fiscal year, down from the growth rate of 6.9 percent in FY 2017-18. A macroeconomic update unveiled by the ADB on Wednesday, April 11, attributed the slow pace of growth to the floods of August 2017.

This is a slight upward revision of the 4.7 percent growth forecast published in the September edition of the Macroeconomic Update 2017 reflecting somewhat better-than-expected harvest despite floods in mid-August, the report said.

Preliminary data from the Ministry of Agricultural, Land Management and Cooperatives show that paddy production this fiscal year will fall to 5.1 million tons, a decrease of 1.5 percent from a year earlier, ADB's Country Director for Nepal Mukhtor Khamudkhanov read the report during a function organised in the capital.

"The production of other summer crops like maize and millet are expected to increase in FY2018 compared to the previous year. Even with increased capacity utilization of industries, industrial growth is set to be lower in FY2018 from the high rate in FY2017, largely due to low investment in the manufacturing sub-sector for years owing to political instability and structural bottlenecks," the report states.

The services sector will however remain buoyant given the expansion of wholesale and retail trade, financial intermediation and travel and tourism sub-sectors, according to the report.

On the demand side, substantive growth in government expenditures and a moderate uptick in investment will drive growth in FY2018, ADB informed.

"The construction needs particularly for establishing provincial and local governments, the acceleration of post-earthquake reconstruction, and planned disbursement of relief grants to earthquake victims will induce growth. Government expenditures have increased significantly this fiscal year partly for local, provincial and parliamentary elections. Additionally, the government has apportioned fiscal transfer of Rs 232.2 billion (about 8.0 percent of GDP) to local and provincial governments under the federal structure of governance. Private investment has increased in sectors such as hydro and cement."

Meanwhile, ADB has envisaged 5.5 percent GDP growth for FY2019. According to ADB, this higher forecast hinges on the assumption of normal monsoon and acceleration of ongoing mega projects.

Notably, the Upper Tamakoshi Hydropower Project of 456 megawatt will likely be added to the national grid by FY2019, ending the country’s reliance on power import at least during the rainy season.

Average annual inflation is expected to rise moderately to 5.5 percent in FY2018 from 4.5 percent in FY2017. This is below the inflation target of 7.0 percent set by Nepal Rastra Bank, the central bank.

Inflation as of mid-February 2018 moderated on the back of modest oil prices, ease in the supply of goods, and subdued inflation in India-the major trading partner to whose currency the Nepali rupee is pegged, according to the report.

"It will nonetheless likely inch up in the remaining months of FY2018 as base effects erode and government expenditures increase with the fiscal transfers provided to meet spending needs of provincial and local governments and the planned disbursement of relief grants to earthquake victims," the report states.

The ADB report further states that the average annual inflation will likely edge up to 6.0% in FY2019, lower than the average inflation of 8.1% for FY2013-FY2017, assuming a normal harvest, a modest increase in oil prices and subdued inflation in India.

Meanwhile, revenue collection increased by about 21.0 percent year-on-year in the first seven months of FY2018 compared to a year earlier period. It increased primarily on higher import growth. As per the report, import growth has outpaced export growth leading to a widening trade deficit. Merchandise exports increased by 19.2 percent year-on-year to $ 523.7 million in the first seven months of FY2018, marginally lower than the 19.8 percent rate in the corresponding period a year earlier.

This edition of Macroeconomic Update’s Issue Focus sheds light on the importance of agricultural commercialization in Nepal and the need for its effective implementation by addressing legal, institutional, financial and infrastructural barriers. With about one-third share of GDP, agriculture continues to provide livelihood to two-thirds of the country’s population, but mostly at a subsistence level.

According to the report, Nepal today is largely a food deficient country evident in growing imports of agriculture and livestock products. Even the export performance of potentially competitive agro-products is discouraging. The inability to enhance agricultural productivity commensurate with growing population has fueled agricultural trade deficit. Productivity has stagnated owing to limits on the adoption of improved technology, poor market linkages, infrastructure bottlenecks, and quality issues.The report suggests that commercialized agriculture via contract and cooperative farming methods can be one of the major sources of revenue generation for the country if practiced on a wider scale.