The growth rate this fiscal year will go up by a percentage point over last year´s on the back of rising agricultural output, strengthening remittances and higher tourism earnings, says the ADB´s Asian Development Outlook 2012, which was made public in Kathmandu on Wednesday. [break]
But since the projections are based on assumptions that weather conditions will remain normal and peace process would conclude on time, factors such as amount of rain and political consensus on promulgating the constitution by May 27 could affect the growth rate.
Nepal´s economic growth rate has stagnated at below 5 percent level for almost a decade due to the Maoist-led armed insurgency and political wrangling in the post-insurgency period - except in 2007/08 when GDP grew by 5.8 percent. Since then, the growth rate has ticked 3.8 percent in 2008/09 and four percent in 2009/10 before falling to 3.5 percent in the last fiscal year.
Last year´s fall was triggered by slower growth in workers´ remittances that underpinned consumer spending, correction in the real estate market and continued political uncertainties, according to the ADB. In the year, industrial growth also fell by half due to severe fuel and power shortages, and closure of several manufacturing plants due to labor-management disputes. "Although favorable weather allowed agricultural output to rebound, the gain was too little to prevent the economic growth from slowing," the ADB report says.
In the same year, growth rates of neighboring China and India also contracted, but stood at far higher level than Nepal´s at 9.2 percent and 6.9 percent, respectively. This year, China´s economic growth rate is expected to further moderate to 8.5 percent, while India´s economy is projected to expand by seven percent.
The higher growth projection for Nepal this year are expected to be supported by relatively sound macroeconomic conditions, with inflation moderating to eight percent from last year´s double digit threshold and current account moving to a surplus of 0.5 percent of the GDP, says Kenichi Yokoyama, the ADB country director for Nepal. Yet the government will need to work toward reducing subsidies, particularly to public enterprises, to preserve fiscal prudence.
The report also says Nepal needs to expand the tax base, by bringing the informal sector in the formal tax base, to reduce dependence on foreign aid. Currently, foreign aid finances about three-fifths of the government´s capital spending. "This warrants prudent debt management," says the report.
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