The Asian Development Bank has cut its forecast for Nepal’s economic growth in the current fiscal year 2021-22 to 4.1 percent, from 5.1 percent earlier, largely due to high Covid-19 infection and risks, though reduced now, and slowed growth in tourism and services.

The coalition government led by the Nepali Congress has set an ambitious 7 percent economic growth target this fiscal year, ending mid-July 2022, even as experts have been warning of the possible third Covid-19 wave. The growth target is slightly higher, by 0.5 percentage points, compared with that set by the then KP Sharma Oli administration.

The multilateral funding agency said that several risks cloud developing Asia’s outlook, including Nepal. The main threats come from the Covid-19 pandemic, including the emergence of new variants, slower-than-expected vaccine rollouts, and waning vaccine effectiveness.

In Nepal, heightened public precautions and the government’s plan to vaccinate 72 percent of the population are expected over time to quell infection rates, the bank said.

As of Tuesday, 19 percent or 5.62 million of the 30 million population have been fully vaccinated.

Nepal’s economy is reviving from the Covid-19 pandemic-induced contraction of 2.1 percent in 2019-20, despite a surge in infections that led to strict containment measures in May and June 2021 in most districts, including the Kathmandu Valley.

According to the Asian Development Bank, Nepal has been estimated to grow at 2.3 percent in the last fiscal year 2020-2021, ending July 15, 2021, below the earlier estimated forecast of 3.1 percent.

The bank said that in the last fiscal year, agriculture expanded by 2.4 percent, up from 2.2 percent a year earlier, owing to a good monsoon and increased acreage under cultivation. The industry sector grew by 1.7 percent, after contracting by 3.7 percent, on stronger domestic demand and a large increase in exports.

Services, which had contracted by 4 percent—mainly on account of tourism, which directly and indirectly accounts for about 8 percent of GDP, and saw an 80.8 percent collapse in tourist arrivals—grew modestly by 2.5 percent.

On the demand side, private consumption dominated spending on strong growth in remittances. Fixed investment expanded modestly by 4 percent, following a large 12.4 percent contraction, as public and private activity increased.

The bank said that fiscal policy for the current fiscal year remains expansionary, focused on strengthening health care, employment generation, expansion of social protection for the poor and vulnerable, and promoting agricultural productivity.

Monetary policy will continue to be accommodative through a dedicated large refinancing facility, concessional lending for priority projects, and facilities for affected businesses.

Average inflation fell to 3.6 percent in the last fiscal year from 6.2 percent a year earlier. Food inflation eased to 5 percent, while non-food inflation fell markedly to 2.5 percent on a rebound in imports and very slight price increases for most goods and services.

With the growth in the current fiscal year accelerating less than forecast, projected inflation is revised to 5.2 percent, somewhat below the 2021 forecast.

Nepal’s imports surged by 25.7 percent in the last fiscal year after contracting by 19.3 percent a year earlier as the economy began to normalize. Despite a 30 percent increase in exports and 8.2 percent increase in remittances, the current account deficit rose sharply to 8 percent of GDP, substantially above the 2.5 percent deficit forecast in 2021, according to the report.

Financing, nevertheless, was adequate to meet the large deficit and gross foreign exchange reserves grew marginally to $11.7 billion, a cover for 10.2 months of imports of goods and services.

Import growth will remain high in the current fiscal year as investment activity intensifies based on a sustained revival in economic activity.

Even with continued strong growth in exports and favourable remittances, the current account deficit will stay high, estimated at 5 percent of GDP, exceeding the 2021 forecast.