Economic Analysis
Nepal

Nepal

Population 29.3 million
GDP per capita 848 US$
D
Country risk assessment
C
Business Climate
Change country
Compare countries
You've already selected this country.
0 country selected
Clear all
Add a country
Add a country
Add a country
Add a country
Compare

Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) 0.6 8.0 6.3 5.0
Inflation (yearly average, %) 10.0 4.5 4.2 5.0
Budget balance (% GDP)* 1.4 -3.3 -3.5 -4.6
Current account balance (% GDP) 6.3 -0.4 -8.2 -6.3
Public debt (% GDP) 27.9 26.4 29.7 35.4

(e): Estimate. (f): Forecast. *Fiscal year 2019 from July 2018 to June 2019

STRENGTHS

  • Expatriate remittances support consumption, the main driver of growth
  • Dynamic services sector, especially tourism
  • Financial and technical support from India and China
  • Recipient of vast sums of international aid

WEAKNESSES

  • Heavily dependent on agriculture and weather conditions
  • Landlocked and poor accessibility to many regions of the country
  • Vulnerable to natural disasters: economy still affected by the 2015 earthquakes
  • Weak productivity in the secondary sector
  • Infrastructure shortcomings: electricity and fuel shortages
  • Recurrent political turmoil and violence

RISK ASSESSMENT

Growth loses speed but remains strong

Consumption (76% of GDP for the 2016/17 fiscal year) will continue to be the main growth driver. It should benefit from increasing remittances (27% of GDP) from expatriate workers thanks to the appreciation of the USD, and to an agreement that should be concluded in 2019 and will re-enable expatriation of workers to Malaysia. It will also benefit from an accommodative fiscal policy for lower and middle income earners, and rapid credit growth. These factors will ensure disposable income growth in a context of very high unemployment (nearly 40% in 2018, but only 2.7% if informal work, including in agriculture, is considered). However, growth momentum will remain constrained by the high prevalence of poverty and inflationary tensions associated with high transport costs. Inflation will be even stronger in 2019 on the back of rising Indian inflation, due to the peg of the Nepalese rupee to the Indian rupee, and because two thirds of the country’s imports are from India. Growth will also be spurred by the construction sector, thanks to infrastructure projects and continued reconstruction efforts. The increasing stability of the political scene and business friendly reform should also increase attractiveness for foreign investors. Moreover, agriculture – which still accounts for around 70% of total employment and a third of GDP – will benefit from a good monsoon season in 2019. While the government has set the target of 8% growth for fiscal year 2018/19, the Coface baseline scenario is that this target is too ambitious.

 

Although narrowing, twin deficits remain high, thus feeding public debt

The structural weaknesses of the administration, the recent decentralisation impetus, and the historical instability at the head of the state make reforms and budget implementation tedious. Spending cuts will be limited in order to accommodate the poorer fringes of the population and attract capital for investment (especially hydroelectric projects and transport infrastructure). The government will also subsidise some loans from national banks to stir education, employment growth and exports in the 2018/19 fiscal year. The budget deficit will decrease thanks to increased revenue from higher taxes for the richer fringes of the population, as well as taxes on alcohol, tobacco, luxury goods and vehicles. However, this will not prevent public debt from increasing especially because of the depreciation of the currency to Special Drawing Right (SDR) – as around half of total public debt is due to international institutions and denominated in this currency used by the IMF.

Nepal is highly dependent on India (65% of imports and 57% of exports) and China. The trade deficit will remain high as Nepalese production lacks diversity and competitiveness. Moreover, the depreciation of the currency will increase the import bill without spurring export growth. Import growth will also be related to imports of capital goods for the reconstruction efforts in relation to the 2015 earthquake, domestic consumption growth, and higher global energy prices. The trade deficit will not be compensated by the substantial remittances from expatriate workers and growing – but still very low in comparison – tourism revenues. Foreign reserve levels have been eroded by the frequent current account deficit, which is not compensated by capital inflows in the balance of payments, but they remain at a satisfactory level (covering nearly 10 months of imports in April 2018).

 

The new government bodes well for political stability

The new left-wing alliance between former rebel Maoists and the liberal communist party allowed for a majority government to be formed after the elections in December 2018. This is the first majority government in nineteen years. Since the end of the monarchy in 2008, ten governments of failed and tormented coalitions have reflected the country’s divide between the two left-wing factions and the Nepali Congress party. The divide also reflects opposing positions regarding preferred Chinese or Indian influence. The country remains a disputed zone of influence between the region’s two giants: it is the third main beneficiary of Indian aid and is also part of the Chinese Belt and Road initiative. Under the new coalition government, the country is expected to lean further towards China, although growing weariness regarding the extent of indebtedness towards China may limit new construction projects. Domestically, the coalition’s durability has yet to be proved, but its comfortable parliamentary majority should allow for the passing of laws that could improve the business environment. Weak rule of law, continued deterioration of freedom of expression, ethnic tensions, high levels of poverty and lingering impacts from the disastrous earthquake of 2015, will remain core weaknesses in the business climate and governance challenges in the country.

 

Last update : February 2019

Top
  • Croatian
  • English