Nepal's economy is estimated to grow at 6.5 percent in this fiscal year 2019-20, way below the ambitious 8.5 percent target set by the government, according to the World Bank.

The World Bank said in its report entitled South Asia Economic Focus published on Sunday that the gross domestic product growth rate was forecast to reach 7.1 percent in 2019 and 6.4 percent in 2020.

The Asian Development Bank has projected a growth rate of 6.3 percent while the Institute for Integrated Development Studies, a research wing of Kathmandu University, has arrived at the figure of 6.02 percent. The government has set a target of 8.5 percent growth to make Nepal a middle-income country by 2030.

Economist Bishwambher Pyakuryal said the government mainly considers the supply side, agriculture production in particular, as a base to estimate economic growth.

“Lack of coordination among the key institutions of the government and lack of a mechanism to conduct a trend analysis in changing macroeconomic variables has led the government to make rampant projections which often yield figures highly deviated from reality,” said Pyakuryal, who is a professor of economics at Tribhuvan University and has several decades of research experience.

Pyakuryal said the multilateral institutes carry out a cross-country analysis to make their projection which is largely flawless due to this reason. “However, these institutions have also failed to take into account the changes in local consumption habits while carrying out their demand analysis to make macroeconomic projections,” he said.

The World Bank's forecast is based on soaring services and construction activity due to

rising tourist arrivals and higher public spending. The government aims to boost tourist arrivals to 2 million annually by organising the Visit Nepal 2020 campaign. According to the multilateral lending institution, the construction of big hotels and the completion of Gautam Buddha International Airport in Bhairahawa will contribute significantly to Nepal’s growth rate.

The World Bank expects investment and government consumption to drive the economy to achieve the targeted growth. It has pointed to an increase in public consumption due to increased spending on salary and goods and services. In addition, efforts aimed at building the capacity at the sub-national levels and the implementation of performance-based contracts at the federal level will also result in higher overall public spending.

“The implementation of the 2019 national work plan to minimise the trade deficit along with investment-related initiatives, such as establishing a one-stop service centre, will support private investment,” said the World Bank report. The growth of private sector consumption is expected to drop due to increased import tariffs on selected agricultural products and consumer goods, said the report.

Government spending will increase to 29.7 percent of the gross domestic product by 2021 due to increased salaries of civil servants, higher social security spending and a pick-up in capital expenditure, according to the report.

Economist Raghubir Bista said the government might not achieve the targeted economic growth rate even with a rise in public expenditure. “Despite increased investment in infrastructure, capital expenditure is below the level necessary to achieve the ambitious growth target,” said Bista.

According to the World Bank report, Nepal’s inflation will remain between 4.5 and 5 percent. But the current macroeconomic report published by the Nepal Rastra Bank shows that inflation reached a near three-year high of 6.95 percent in mid-August following a sharp hike in food prices. If the trend continues during the rest of the fiscal year, Nepal’s inflation rate is likely to cross 6 percent.

The multilateral agency has attributed the rise in the consumer price index to higher public sector wages, increases in import duties on agricultural and industrial goods, and the removal of value added tax exemptions on some intermediate goods and services. Regular supply of electricity at low cost and low inflation in India is expected to offset some of the increase.