Nepal’s economy is expected to grow at the rate of 6.2 percent in the current fiscal year ending mid-July due to strong performance of the agriculture sector and stepped up government spending, according to the latest Asian Development Bank Nepal Macroeconomic Update. The multilateral financial institution said that the country’s economy was expected to achieve 6.3 percent growth in the next fiscal year.

The Asian Development Bank’s growth forecast is slightly lower that the growth rate of 6.5 percent projected by the International Monetary Fund. Meanwhile, an optimistic government expects to achieve an economic growth rate of over 7 percent. Finance Minister Yuba Raj Khatiwada had forecasted a growth rate of 8 percent when he presented the budget statement for the current fiscal year to Parliament.

“The outlook is for a stable growth on the back of strong domestic demand, fueled by a larger budget allocation to sub-national governments and accelerated post-earthquake reconstruction,” said Mukhtor Khamudkhanov, Asian Development Bank’s country director for Nepal. “Challenges to smooth implementation of fiscal federalism and maintaining fiscal discipline at large could pose potential risks to the outlook. Nepal has the potential to achieve and sustain a higher growth rate over a long period of time if these challenges are addressed.”

The farm sector will likely grow from 2.8 percent in the last fiscal year to 4.5 percent this year, owing to a good monsoon that is expected to boost paddy production to 5.5 million tonnes, a rise of 8.4 percent from the previous year. The industry sector is expected to expand by 7.1 percent, buoyed by improved electricity supply and efforts to improve the investment climate. The services sector will likely grow by 6.4 percent this fiscal year with the expansion of wholesale and retail trade, hotels and restaurants, and financial intermediation.

Source: Asian Development Bank

Inflation is projected to rise to 4.4 percent from 4.2 percent in the last fiscal year, partly reflecting somewhat higher inflation expected in India, stable oil prices, and higher government expenditure under the new federal structure. Revenue collection has primarily increased on higher import growth and an improved tax system. The budget as of mid-January is in surplus by Rs173.3 billion owing to strong revenue growth and a marginal slowdown in recurrent expenses.

Though capital expenditure has surged in the fiscal year through mid-February, its execution stands at only 22.5 percent. “This could again lead to a spending spree in the last month of the fiscal year, undermining the quality of capital projects,” the update said.

With a rising trade and current account deficit, Nepal increasingly faces the risk of external sector instability. Data up to mid-February 2019 show that the trade deficit has surpassed net invisible earnings, widening the current account deficit to $1.5 billion, marginally up from a deficit of $1.4 billion in the year earlier period.

The current account deficit is projected to widen further to 9.3 percent of the Gross Domestic Product this fiscal year, up from 8.2 percent a year earlier, on increased imports of capital and consumer goods and services, the update said. “Given the growing importance of the services sector in Nepal’s economy, coherent actions are needed to bridge the trade deficit via export diversification in the services sector,” said economist Manbar S Khadka. “A host of issues pertaining to infrastructural, institutional, and procedural barriers need to be addressed to promote the services sector.”