Money in the vaultNepal has been saving more than it has been investing—no wonder growth is slow
Nepal’s gross national saving has been rising over the years, from 24 percent of gross domestic product (GDP) in 2001 to 40.3 percent in 2016. National saving, which is the sum of personal, business and government saving, is expressed as a percent of GDP. The figure for Nepal was the seventh highest in the world last year, according to the International Monetary Fund (IMF). Real GDP measures the value of final goods and services valued at constant prices. Economic growth is measured by the increase in real GDP. During the 16-year period from fiscal 2000-01 to 2016-17, the economic growth rate averaged 4 percent annually. Agriculture, industry and services as a percent of GDP in 2016-17 made up 32.6, 14.7, and 52.7 percent respectively. In 2000-01, the figures were 36.6, 17.3 and 46.1 percent respectively.
During the 16-year period, education and health recorded the highest average growth rate of 7.4 and 7.3 percent respectively. The second highest growth rate was in financial intermediation (6.9 percent) followed by public administration and defence (6.8 percent), fishing (6.7 percent), other community, social and personal activities (6.5 percent), transport, storage and communications (6.1 percent), and electricity, gas and water (4.6 percent). Thus, the expansion in GDP was primarily a result of the growth in financial, educational, health, social and personal services, transport and electricity services that were required to cater to an ever-growing population’s rising need for such services. Observing their present performance, we can assume that these areas will steer the growth trajectory in the future too.
According to the World Economic Outlook published by the IMF in April 2017, Nepal’s gross national saving of 40.3 percent in 2016 was the seventh highest in the world after Suriname, Equatorial Guinea, China, Singapore, Qatar and Panama. In 2014 and 2015 too, Nepal took the sixth position with figures of 45.7 and 43.8 percent respectively. Likewise, Nepal’s total investment as a percent of GDP averaged 37.2 percent during the last five years (2012-16). Total investment includes gross fixed capital formation and change in stock. According to the Central Bureau of Statistics, change in stock averaged 29.2 percent of the total investment during the years 2012-13 to 2016-17. In other words, gross fixed capital formation represented 70.8 percent of the total investment.
Among other Saarc countries, total investment as a percent of GDP averaged 20.7 percent in Afghanistan, 28.6 percent in Bangladesh, 61.1 percent in Bhutan, 34.2 percent in India and 29.5 percent in Sri Lanka during the last five years. According to the IMF, Nepal’s average investment ratio is the second highest among Saarc countries after Bhutan. However, Nepal’s average growth rate of 4 percent during the last five years (2012-16) was one of the lowest in the Saarc region where the growth rate ranged between 4 percent in the Maldives and 6.8 percent in India. In 2016, Nepal’s per capita GDP was recorded at $733, the second lowest after Afghanistan’s $565.
In each of the five years, investment exceeded saving in Bhutan, India, Maldives, Pakistan and Sri Lanka while saving exceeded investment in Afghanistan, Bangladesh and Nepal. This means that there was a current account deficit in the former five economies and a current account surplus in the latter three economies. Accordingly, during the five-year period, Nepal’s current account surplus of an average of 6.3 percent of GDP was a little lower than Afghanistan’s 7.1 percent. This implies a comfortable external sector position attributed to remittance.
To conclude, increased saving is the foundation of long-term growth. Nepal’s saving ratio, one of the highest in the world, needs to be productively and efficiently channelised into capital formation, output and employment. Towards this end, a favorable climate to attract and foster investment needs to be built. Priority should be given to providing adequate infrastructural services like power, roads and irrigation. Government policy should be friendlier to the economy and investment. Appropriate incentives to promote investment, industry, growth and employment should be arranged.
Likewise, provisions in the existing policies and laws besides procedural complications, which are likely to undermine and compromise the process of a self-sustained growth momentum, should be changed. Mobilising the maximum amount of economic resources like capital, labour and technology, and ensuring their best allocative efficiency will result in the country’s structural transformation and development effectiveness. Productivity enhancement through managerial efficiency and technological improvements will ensure optimal allocation of scarce resources. Now is the time to act to utilise the increased level of saving for the maximum good of the country, economy and people through greater investment in infrastructure and productive ventures.
Basyal is a former executive director of Nepal Rastra Bank and former senior economic advisor to Ministry of Finance