The World Bank (WB) has revised Nepal’s economic growth forecast upward to 7.5 percent for this fiscal year on the back of big jump in agricultural output due to a good monsoon, elimination of power cuts and higher government spending, among others. Earlier, the multilateral lending agency had projected Nepal’s economy to expand by 6 percent in 2016-17. 

This is the highest growth rate since 1994, and is a result, in part, of a base-year effect, increased agricultural output, and greater investment as earthquake reconstruction gathered speed, it said. 

The growth estimate of the WB is higher than government’s forecast of 6.9 percent. Looking ahead, the economic growth will remain strong, but it is expected to moderate in line with country’s potential, averaging 5 percent over the next two fiscal years.

In its Nepal Development Update report released on Thursday, the World Bank said base effect (lower growth in previous year) was a major contributor to the estimated growth rate this fiscal year. “Had the growth rate in the last fiscal been in line with the average of recent years, the growth rate this year would not have been so spectacular,” it said. This cyclical rebound follows two challenging years where real GDP growth fell to 3.3 percent in 2015 due to the devastating earthquake and declined even further to a 14-year low of 0.4 percent in 2016 due to a complete disruption in cross-border trade with India. 

The WB said high inflation in the past two years induced by disruptions has moderated sharply in the first half of 2016-17. “Normalisation of imports and a favourable external environment, particularly the moderating inflation in India as a result of demonetisation, are the primary reasons for a deceleration of inflation.” 

Food prices have also declined. The new government has initiated a series of management reforms in electricity and health, with the most visible impact in the electricity sector with the elimination of power cuts in several major cities across Nepal, it said. “Efforts to reduce the financial and technical losses of the electricity utility, the Nepal Electricity Authority, are also showing results.”

Due to above-average monsoon, paddy production in fiscal 2017 is estimated to have hit a record high of 5.2 million tonnes, up from 4.2 million tonnes a year ago. About half a million households, eligible to receive housing reconstruction grants, have received the first of three tranches.  Second tranche payments have started and are expected to pick up by the end of fiscal 2017.  Meanwhile, more than 100 megawatts of new hydropower capacity, delayed by the earthquakes and the trade disruptions, have come on-stream.

Transport has revived while wholesale and retail trades have normalised, states the update, adding: “Tourism is also recovering, with arrivals reaching pre-crisis levels during the September-December 2016 tourist season.” However, while imports have rebounded, exports remain slow due to sluggish India-bound exports and continued appreciation of the effective exchange rate, the report said. As a result, the trade deficit continues to increase. While remittances continue to grow, albeit at a slower pace, external sector pressures are building up. 

“Government revenue and spending have performed well,” said Takuya Kamata, the World Bank’s Country Manager for Nepal said. “Revenue has exceeded the six months’ target, and spending, including on capital goods, has also significantly picked up compared to previous years and is on par with revenue.” Nonetheless, very ambitious expenditures envisioned in the budget have not materialised, leaving previously accumulated government deposits (10 percent of GDP) intact.

Credit grew rapidly over the past year, reaching the highest growth rate since 2012, but deposits growth slowed down. Consequently, banks are running up against prudential limits on lending.  Additionally, the government’s large cash balances have had the effect of a monetary tightening at a time when banks are trying to increase their capital base to meet the increased regulatory requirements for paid-up capital, the report said.

“Inflation will remain below the Central bank’s target of 7.5 percent in the fiscal year 2017, but will likely pick up in fiscal 2018 as the effects of the demonetisation taper off in India.