Economic trends: Bright spots and malaise

Published On: January 1, 2020 10:41 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, Jan 1: The year 2019 was a mixed bag for the country's economy. There were some bright spots in the economy, notably the robust growth momentum. However, some problems continued to plague the economy. The year also offered a hope for the New Year 2020 as the progress in at least three national pride projects indicates that they are nearing completion. As the New Year approaches, Republica has compiled five positive and five worrying signs of the economy.

The country's economy grew by 7.1% in the last fiscal year – FY2018/19. The growth has remained robust. This is the third continuous year that the economy has expanded by over 6%. This is in contrast with average growth rate of 4.1% between FY2006/07 and FY2015/16. Nepal's economy is poised to expand by over 6% again in the current fiscal year, according to various projections including by the World Bank, Asian Development Bank and the International Monetary Fund. The challenge, however, is to sustain this momentum.

The number of taxpayers has grown significantly as the government widens its tax net. In line with the plan to shift the tax system that is largely tax-based to the one based on internal economic activities, there has been a huge growth in the number of individuals and firms receiving permanent account number in 2019. According to the finance ministry, the number of taxpayers obtaining PAN rose by 34.8% between mid-July and mid-November alone. During the period, the country added 755,443 more taxpayers.
At a time when almost all development projects are facing persistent delays, there are few that showed remarkable progress in 2019. The 69-km Nepal-India cross-border petroleum pipeline came into operation this year. Based on the performance in 2019, the chances are very high that two national pride projects – Upper Tamakoshi Hydropower Project and Gautam Buddha International Airport – will be completed in 2020. The completion will not only end a drought of development projects in the country but also contribute to the growth momentum. 

Nepal, which has been reeling under ever expanding trade deficit, has gained nominal progress in its trade performance this year. According to Nepal Rastra Bank, Nepal's trade deficit fell 12% year-on-year to Rs 307.78 billion in the first quarter, largely due to a sharp drop in the import of electrical equipment, readymade garments, petroleum products and gold. The central bank's data shows that exports increased by 14.4% to Rs 27.17 billion in the first three months of the fiscal year, compared to a growth of 16.1% in the previous year.
Imports were down 10.3% to Rs 334.95 billion against an increase of 43.6% in the same period last year. Reduced imports helped the country save Rs 20 billion.

Despite the effort to bring in notable amount of foreign investment, the situation is not as encouraging as expected. The statistics posted poor status when it comes to both foreign direct investment (FDI) commitment and realization. In FY2018/19, Nepal received Rs 13.07 billion in FDI against the pledged Rs 24.99 billion. Likewise, as against FDI commitment of Rs 55.73 billion in FY2017/18, the highest year-on-year figure for the past five years, Nepal was able to see only Rs 17.51 billion in actual investment. Nepal received investment commitments worth Rs 10.76 billion in the first three months of the current fiscal year, up from Rs 4.8 billion during the same period last year.
Remittance, which has been the most reliable source of foreign currency to finance the country's expanding trade deficit, also does not paint a rosy picture. According to the Nepal Ratra Bank, remittances inflow to the country fell 2.3% to Rs 304.97 billion in the first four months of FY2019/20 compared to the corresponding period of the last fiscal year. The drop in the remittances has been attributed to an effect of the government ban on workers to visit Malaysia for employment for over a year. Malaysia is a major destination for Nepali workers. 

Despite government claims that it has improved investment climate by reforming over a dozen laws in a year, performance of manufacturing sector suffered during the year. Global Competitive Report 2019 published by the World Economic Forum in October this year, has ranked Nepal 108th out of 141 economies. Nepal is the worst performer in South Asia in terms of competitiveness. Although the long term labor problem and load-shedding have been eased to some extent, the country still suffer plethora of hindrances when it comes to implementing policies. As a result, the manufacturing sector is expected to contribute only around 6% to the GDP.

Like in past years, the government has been struggling to spend capital expenses enough for capital formation. Data shows the government has managed to spend only 10% of the allocated budget worth Rs 408 billion till December-end or in first five months of FY2019/20. Despite having two-thirds majority and the constitutional provision that has made the budget announcement almost one and a half months in advance, the government has failed to boost capital spending. In FY2018/19, the government spent 73.4% of the development budget, out of which 16.4% was spent in the last week of the fiscal year. The slow capital expenditure also means inability in creating sufficient jobs, failing to achieve the targeted growth and persisting liquidity crunch in financial sector.

The country's only stock exchange did not perform well in 2019. The market remained fairly stable in terms of the index and market capitalization. However, it failed to boost the investors' confidence. The secondary market was in bearish trend mainly in the second half of the year and hovered at its lower level most of the time. The local bourse was adversely affected largely due to technical glitches in the Nepse Online Trading System, hike in interest rate due to persisting crunch in lendable fund with the banks, and the sector's regulator failing to implement effective reform measures.

Tourist arrivals have been on a rising trend. The country has already welcomed nearly one million tourists in the first 10 months (as of October) of 2019. In 2018, Nepal welcomed nearly 1.17 million international tourists, up from 940,218 in 2017. This steady growth in tourist arrivals has been a key in driving growth in service sector. While spending and average length of stay of tourists have been declining, the surge in tourist numbers has boosted the confidence of tourism entrepreneurs. Moving further, the government's decision to celebrate Visit Nepal Year 2020 campaign, completion of new airport in Bhairahawa, construction of several big hotels and increased air connectivity are certain to increase tourist arrivals in 2020.

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