Even now, the risks to the outlook are tilted to the downside as no new shocks have been included while making the current forecast of growth considering the increasing frequency of shocks in recent years. The report said that there is a downside risk because of the concerns over political stability in the country.
“Local elections in May 2022 and national and provincial elections in November 2022 were followed by successive changes in administration, the most recent being the collapse of the ruling coalition in March 2023,” reads the report. “Political stability remains important to manage the economy and ensure the continued pursuit of development priorities. Political stability may not be achieved in the forecast period.” Besides concern over political stability, higher-than-expected inflation, which will dampen consumption and growth, the possible impacts of likely rotations in government officials, and rising inequality from reduced investments in human capital, especially amongst those yet to recover from unemployment following the pandemic are other factors that could drag the growth down, according to the World Bank. Speaking at an interaction program organized in Kathmandu on Wednesday, Faris Hadad-Zervos, World Bank Country Director for Maldives, Nepal, and Sri Lanka said Nepal’s government’s move to adopt fiscal prudence such as import restrictions to address the challenges of the external sector came at a cost. “It has come at the cost of investment to advance the development agenda,” he said, adding, “This is a very delicate balance to strike which is not easy and there are trade-offs." He also talked about tightening monetary policy by hiking the policy rates which slowed credit growth. Though the move was taken to fight inflation, the high-interest rate caused by a raise in policy rate also sowed the investments. Thus, there has been a trade-off,” he said. Post Covid, Nepal had adopted an expansive fiscal and monetary policy that has resulted in a massive trade deficit and a sharp depletion of foreign exchange reserves. In order to stabilize the external sector, the government introduced import control measures and the central bank also hiked policy rates that resulted in higher interest rates for the borrowers. As a result, Nepal’s fiscal revenue and expenditure both decreased. “Amid measures taken to address pressures on the external sector, the Nepali economy has faced the unintended consequences of a slowdown in economic growth and lower fiscal revenue,” said Zervos. According to the World Bank, the import control policy resulted in a steep drop in fiscal revenues and slower growth in the first half of FY 2022/23 as goods imports fell, according to the World Bank. Nepal relies heavily on imports as a tax base, which contributes about half of total tax revenues through VAT, excise, and import duties. “For the first time in five years, Nepal’s fiscal balance was negative in the first half of FY23 at -0.3 percent of GDP as revenues fell across the board while expenditures remained flat,” the report said. “The downturn in revenue growth reflects not only lower imports but more sluggish economic activity as well.” Speaking on the occasion, Finance Secretary Toyam Raya said the situation has been improving along with easing pressure on the external sector of the economy. “Now, we hope revenue collection will gradually improve. There are also positive developments in the economy in this fiscal year in terms of international tourist arrivals, remittance, agriculture production, and hydropower production too,” he said.
