Nepal’s economy to grow by 4.3 percent : ADB

The Asian Development Bank (ADB) has projected that Nepal’s economy is poised to achieve a growth rate of 4.3 percent in the fiscal year 2024. This marks a notable improvement compared to the previous fiscal year, FY 2023, when the country's economic expansion was constrained, registering only a 1.9 percent growth rate.

However, the Manila-based agency has revised its growth forecast for Nepal for 2024. According to the Asian Development Outlook-September 2023, it now anticipates Nepal’s economy to expand by 4.3 percent in 2024, which is a downward revision from its previous forecast. Initially, the Manila-based agency had anticipated a five percent growth rate for Nepal’s economy in 2024. 

In FY 2024, ADB predicts that growth will be subdued due to ongoing restrictive macroeconomic policies, reduced external demand, and delayed monsoon rains. However, ADB acknowledges that the Nepal Rastra Bank's decision to decrease the policy rate is expected to result in reduced commercial interest rates and a boost in economic activities.

“Along with moderation in inflation and comfortable foreign exchange reserves, the Nepal Rastra Bank has adjusted its monetary policy stance by lowering the policy rate by 50 basis points to 6.5 percent, which is expected to help lower commercial interest rates and stimulate economic activities,” reads the Asian Development Outlook-September 2023 report. 

The ADB has acknowledged a notable progress in restoring external balance has been made but warned that fiscal challenges still persist. “Despite some progress in restoring price and external sector stability, fiscal challenges persist. While the estimated fiscal deficit for 2024 is moderate at 2.4 percent of GDP, much lower than the deficit of 6.1 percent in 2023, the actual deficit could be substantially higher if the government does not meet its ambitious revenue target for FY 2024,” said Jan Hansen, ADB Principal Economist for Nepal.

According to ADB, economic activities in 2024 will be curtailed by low domestic and external demand, continued weakness in investor confidence, high-interest rates, and deficient rainfall in June that will likely suppress agricultural output. 

The service sector is expected to perform well with expansions coming from real estate, wholesale and retail trade, and accommodation and food services. Agriculture growth may however decelerate owing to deficient rainfall in June and erratic weather patterns, further aggravated by lumpy skin outbreaks. 

The central bank’s decision to lower the policy rate by 50 basis points to 6.5 percent and relax provisions on working capital loans to revive investor confidence will help stimulate economic activities. 

While the government has prioritized capital budget execution with the issuance of guidelines for its effective implementation, fixed investment will provide the main impetus to growth in 2024, reversing the drag it exerted in 2023. According to ADB, there is little risk to external balance given the comfortable foreign exchange reserves the country now has.

“External risks remain relatively well contained. Considering the recent trends and the central bank’s prudent monetary policy stance, the target of maintaining foreign exchange reserves sufficient to sustain at least seven months of imports seems achievable,” reads the report. “Amid stable remittances and higher imports, the current account deficit is expected to widen to 1.8 percent of GDP as growth revives in FY 2024.”

The ADB report projects annual average inflation to fall to 6.2 percent in 2024 from 7.7 percent in 2023 on subdued oil price increases and a decline in inflation in India, Nepal’s main source of import.

Downside risks to the economic outlook in 2024 may arise from more contractionary economic policy by the authorities to stem price rises given the uncertainties centered around geopolitical tensions. This may dampen consumption and domestic production and adversely affect growth.