Nepal's growth to drop to 3.4% this year: World Bank

With Nepal's economy hit by two devastating earthquakes this year and now facing a domestic political turmoil, the World Bank has said that it expects the country's growth rate to drop from an estimated 5% to 3.4% in 2015.

"From an expected 5%, GDP growth is expected to drop to 3.4% this year and to tick up to 3.7% in 2016," the World Bank said in its South Asia Economic Focus Fall 2015 report released yesterday.

"Although macroeconomic fundamentals remain strong, weak execution of public investment slows down both infrastructure development and post-disaster reconstruction," it said.

Growth of Nepalese economy is projected at 3.7% in Financial Year 2015-16 as the effects of the earthquake, sub-optimal planting season, increased protests and nationwide strikes, and delays in adopting the budget and establishment of the Reconstruction Authority, all took a toll on activity, especially in the first part of the year, the report said.

Growth is expected to pick up to 5.5% in FY 2016-17 on the back of the increased investment (both public and private) as the political process stabilizes and the earthquake recovery speeds up in earnest, it felt.

Consequently, the reconstruction will lead to a surge in imports, which will tip the current account balance into deficit, despite increasing remittances, the WB said.

Similarly, fiscal spending on capital expenditure is expected to grow leading to a larger deficit. However, financed by combination increased foreign grant assistance and concessional borrowing, it will not endanger debt sustainability, it said.

Inflation is expected to remain in high single digits, despite lower oil and food prices and falling inflation in India, reflecting domestic bottlenecks.

It said Nepal faces several simultaneous challenges ahead- effective implementation of post-earthquake recovery coupled with completion of political transition to a new federal constitution while leveraging its endowments (hydropower potential, human capital) to achieve a faster growth and create economic opportunities for its citizens at home.

Delays or missteps in any one of these challenges may lead to permanently forgone opportunities and income, it said.

Remittances accounting for a whopping 29% of GDP in FY 2014-15 have allowed Nepal to maintain a sizable current account surplus in 2015, it said.

They grew by 12% in FY 2014-15 in spite of a slowdown in outmigration, reflecting a post-disaster surge in flows, it added.