Nepal’s economy to post modest recovery in fiscal 2021

Nepal’s gross domestic product (GDP) is anticipated to grow by 3.1 per cent in fiscal year 2021 from a contraction of 1.9 per cent in fiscal 2020, according to the Asian Development Outlook (ADO) 2021, the flagship economic publication of the Asian Development Bank (ADB).

Growth is expected to recover from the low base in the last fiscal, as a result of the gradual lifting of nationwide lockdown since July 2020, and a pickup in domestic demand. The ongoing vaccination campaigns against the coronavirus (COVID-19) pandemic will also help strengthen the economic impetus, the ADB stated.

“The COVID-19 contagion that seemed to have tapered off until end-March 2021 is now spreading rapidly. If strict containment measures that have been initiated to tackle this second wave of infections are necessary for a prolonged period in the remainder of this fiscal year, then GDP growth will be lower than the forecast,” informed ADB Officer-in-Charge for Nepal Sharad Bhandari.

Agriculture is expected to rise by 2.4 per cent in fiscal year 2021 as paddy yield is likely to increase by 1.3 per cent, owing to a good monsoon and increased acreage under production.

Manufacturing and service industries gradually reopened following the end of the lockdown since July 2020. The affected industries, including micro, small, and medium-sized enterprises (MSMEs) have been receiving economic support in the form of concessional lending and refinancing of existing loans to mitigate the adverse effects of the downturn.

Construction began to pick up, while the completion of some major projects of the government is expected to boost economic recovery. The Upper Tamakoshi Hydropower is expected to begin its first phase of production, while water from the Melamchi Water Supply Project began flowing since March 2021. Overall, industry is expected to grow by 2.5 per cent after contracting by 4.2 per cent in fiscal 2020. The services sector is expected to grow by 3.4 per cent in fiscal year 2021, though hospitality, travel, and tourism subsectors will take a longer time to recover.

The ADO 2021 forecasts inflation to moderate to an average of five per cent in fiscal 2021, down from 6.2 per cent in fiscal 2020, on the back of a good harvest, smoother supply chains, and subdued non-food prices. The current account deficit is expected to widen from 0.9 per cent of GDP in fiscal year 2020 to 2.5 per cent in fiscal year 2021, owing to increased import growth.

GDP growth of 5.1 per cent is envisaged for fiscal year 2022 in anticipation of vaccination progress against COVID-19, regional and global economic recovery from this pandemic, assumption of a good monsoon leading to better harvest, and steady inflows of workers’ remittance. Inflation is forecast to remain contained at an average of six per cent in fiscal 2022, assuming a better harvest, subdued oil prices and modest uptick in inflation in India, the major trade partner of Nepal. The current account deficit is expected to widen from 2.5 per cent of GDP in fiscal 2021 to 3.8 per cent in fiscal 2022 as imports of capital goods increase.

The main downside risk to the outlook centres on a resurgence of COVID-19 infections. Political uncertainties and policy inconsistencies, as well as recurrent natural calamities like floods and landslides, could also undermine growth prospects. A weaker than expected regional and global recovery would limit employment opportunities abroad for Nepali workers, constrain remittance and earnings from exports, and dampen Nepal’s growth.