Growth challenges of Nepal's economy

Growth challenges of Nepal's economy
Republica, 15-Feb-10
Tula Raj Basyal

Mr. Basyal is former Executive Director of the Nepal Rastra Bank and former Senior Economic Advisor of the Ministry of Finance

The available macroeconomic indicators signal impending setbacks to Nepal’s economic growth. The budget and the monetary policy had projected a 5.5 percent growth for 2009/10. However, the unfavorable monsoon reduced the growth prospects of the agriculture. During the first five months of the current fiscal year, strong growth in the banking sector’s credit for non-productive purposes and weak growth for productive purposes also evidence weaknesses in the growth outlook of the economy. Large reduction in the export and the massive increment in the merchandise trade deficit coupled with the current account balance turning into a deficit of Rs. 19.6 billion in comparison to a surplus of Rs. 10.7 billion recorded during the corresponding period in the previous year further evidence the weakening growth outlook.

During the five months, there has been a large balance of payments deficit (Rs. 19.6 billion) in comparison to a surplus of Rs. 22.8 billion during the comparable period last year. Consequently, the foreign exchange reserve position weakened, with the import capacity of the foreign exchange reserve falling to an equivalent of 7 months’ goods and services imports from a level of 8.3 months’ during the same period last year. Uncertain and unfriendly economic environment even raised the risks of capital flight. On cash basis, foreign loans available for the government further contracted. Recurrent expenditure during this period in comparison to the same period in the previous year increased by Rs. 13.3 billion while the capital expenditure rose by Rs. 0.65 billion only. Continued reduction in the growth of demand deposits coupled with the continued rise in the growth of currency in circulation signaled symptoms of reduced business confidence and weakened investment climate in the economy. In addition to such a modest scenario for this year, the growth challenges that the Nepali economy has been facing in the recent years have remained quite daunting, as outlined in Table 1.

The table indicates the unfavorable economic development environment has adversely affected Nepal’s overall economic growth and also the per capita income growth. Consequently, the envisaged socio-economic development outcomes have remained largely unattained and the prospects of materializing these outcomes in the near future also remain quite distant.

Along with the changes in the growth patterns, there have occurred significant changes in the structure of the gross domestic product (GDP), with the contribution of the agriculture and industry going down. Further, employment growth has been constrained and productivity of the capital employed reduced. Table 2 shows the incessant decrement of various sectors’ contribution to the GDP.

Higher consumption, unproductive investments, lower saving, and excessive trade deficit marked the period following the advent of the new millennium. These developments were associated with lower economic growth. This calls for initiating measures for controlling excessive consumption, increasing saving, making the investments productive, reducing the trade deficit, and expediting the economic growth. Ensuring incentives for channeling more resources toward strengthening the export, raising production and productivity, generating employment opportunities, and making optimal utilization of available resources would remain crucial to accelerating the economic growth and improving the soundness and efficiency of the economy on a sustainable basis.

NepaliEconomy.com Comments
All look good EXCEPT the last paragraph. I THINK THE AUTHOR MISUNDERSTANDS THE CONCEPT OF GDP. Higher consumption and lower savings (they mean the same thing because savings are the difference between disposable income & consumption - cannot have higher consumption and higher savings) are associated with higher GDP growth because "C" is part of "C+Y+X-M+G". Unproductive investment is also good for GDP (in the short run at least) because it boosts income and employment of brokers, construction workers etc. Yes, Nepal needs to export more because that'll increase X in the above equation. Whether productivity is good for GDP is a different question - look at the US now, it has record productivity but anemic GDP. Higher productivity is certainly good for profitability of companies.