The Asian Development Bank has scaled down its gross domestic product (GDP) growth forecast for Nepal’s economy for the current fiscal year to 4.1 percent from its earlier projection of 4.7 percent.

The multilateral funding agency said in its latest report that Nepal’s downturn reflects tighter monetary policy, slackened domestic demand, the unwinding of the Covid-19 stimulus and persistent global headwinds.

Nepal’s GDP growth was officially estimated at 0.8 percent in the first quarter of this fiscal year 2022-23, ending mid-July, significantly down from 3 percent a year earlier.

The government had proclaimed achieving 8 percent growth in this year’s budget statement. But six months into the fiscal year, it slashed the figure to 4.5 percent after conducting a mid-term review.

The International Monetary Fund (IMF) has also downgraded Nepal’s growth rate from its initial estimate. The IMF says the economy is expected to expand by 4.4 percent this fiscal year—from mid-July 2022 through mid-July 2023. It had previously estimated a 5 percent annual growth rate.

Key areas of the economy have contracted, mainly construction and manufacturing.

“There are downside risks to the outlook such as a global downturn hitting Nepal’s tourism and remittance receipts,” said ADB Country Director for Nepal Arnaud Cauchois.

“Accelerating capital budget spending through focused investment planning, financial management, and project readiness will help spur Nepal’s economic growth over the years.”

The monetary policy in the current fiscal year continues to aim to curb high credit growth to contain domestic demand, escalating prices and rising imports.

The central bank hiked the bank rate by 150 basis points to 8.5 percent and the policy rate by the same amount to 7 percent, which became effective in August 2022. This exerted further upward pressure on market interest rates.

The aim was to restrict private sector credit growth to 12.6 percent in the current fiscal year.

The ADB says Nepal’s GDP growth is expected to pick up to 5 percent in the next fiscal year, with the dissipation of inflation, increased infrastructure spending, and further recovery in tourism and related services.

Agriculture growth will likely ease from 2.3 percent in the last fiscal year to 2 percent in this fiscal year.

Preliminary estimates show that paddy output increased by about 7 percent, thanks to normal monsoon, but winter rainfall has been scanty, likely affecting winter crop yield and overall agriculture output.

Despite a boost to industry expected with 700 megawatts of hydroelectricity added to the national grid, industrial sector growth will likely decelerate by half from 10.2 percent to 5.1 percent as manufacturing and construction are hit by higher interest rates, import restrictions, a slowdown in domestic consumption, and dampened external demand, the ADB said.

Growth in services will moderate from 5.9 percent to 4.4 percent after credit controls and a hike in interest rates slow real estate, wholesale and retail trade.

While tourism growth has been strong, international tourist arrivals are still only half of their pre-pandemic numbers, the ADB said.

Growth in private consumption expenditure will slow, and public investment may grow marginally in this fiscal year. After rising by 5.4 percent in the last fiscal year, growth in private consumption expenditure will decelerate to 3.7 percent this fiscal year, dampened by higher prices and credit controls.

Public sector consumption is anticipated to expand by 3.6 percent in 2022-23, largely on election spending by provinces and the federal government.

Growth in private investment expenditure will slow from 8.8 percent in the last fiscal year to 4 percent this year, tamped down by import restrictions, which were lifted in mid-December 2022, higher policy rates, and a cash margin requirement for imports.

The cash margin requirement was lifted on January 19.

Public investment, having contracted by 6 percent in the last fiscal year, is expected to expand only marginally by 1.3 percent this fiscal year.

While the original 2022-23 budget was expansionary, the government downsized budget expenditure by about 14 percent during its mid-term review, largely to cover revenue shortfalls.

Inflation is forecast to edge up in the current fiscal year before moderating in the next fiscal year.

Inflation is expected to moderate to an average of 7.4 percent this fiscal year as tighter monetary and fiscal policies take further hold in the second half of the fiscal year, the ADB said.

The current account deficit is projected to narrow in this fiscal year.

Moderation in the deficit reflects both an easing trade deficit and buoyant remittance inflows.

Having deepened by 44.2 percent in the first six months of the last fiscal year, the merchandise trade deficit narrowed by 27.2 percent a year later, largely because of tight monetary policy and import restrictions.

Workers’ remittances, meanwhile, reversed 5.7 percent contraction to expand by 13.9 percent, thanks to increased migration for employment overseas.

The current account deficit narrowed sharply by 92.1 percent to $233.3 million and, coupled with broadly stable financial inflow, increased reserves by $765.3 million in the first six months of this fiscal year, bringing them to $10.3 billion providing import cover for 9.1 months.

The ADB said that intensified geopolitical turmoil and any natural hazards such as landslides or floods would further dampen growth prospects.