Last week, the World Bank and International Monetary Fund (IMF) came up with their respective reports highlighting the state of Nepal’s economy.
Both reports state that Nepali economy, which is currently going through a recession, will grow in the coming days mainly due to the positive indications in agriculture, tourism and remittances.
For the first time, the government has acknowledged that the nation is in a recession, which is primarily caused by a decline in industrial production, low investment, liquidity crisis, high-interest rates, widening trade deficit, low capital spending, and decrease in tax revenue.
The IMF’s prediction is that Nepal’s economy will grow by 3.5 percent in the current fiscal year. Similarly, the World Bank has projected that Nepal’s economy is poised to achieve a growth rate of 3.9 percent.
In September, the Asian Development Bank had anticipated Nepal’s economy to grow by 4.3 percent in 2024, up from the estimated growth of 1.9 in the fiscal year 2023.
Nepal’s external situation has improved because of responsible fiscal and monetary policies, robust remittances, and rising tourism. After slowing down in 2018, growth is anticipated to pick up in the fiscal year 2023/24 to 3.5 percent, although it will still be below potential due to weak domestic demand and high inflation.
The Extended Credit Facility (ECF) arrangement’s third review calls for a disbursement of about $51.3m, and the Nepali government and IMF team have agreed at the staff level.
Despite monetary easing, necessary balance sheet repairs have been preventing credit expansion. The ECF’s reforms seek to increase credit stability and promote economic growth while preserving external and price stability. In order to increase demand, the budget calls for accelerating the planned increase in capital spending.
Senior economist at the IMF Tidiane Kinda stated in a statement that regardless of monetary easing, loan growth has been constrained by the need to restore balance sheets following the credit boom and a downturn in the real estate market. In August, Nepal’s inflation maintained its high at 7.5 percent, according to the IMF, but it is anticipated to decline. The forecast for Nepal over the medium term is still positive, as planned investments in infrastructure, particularly in the energy sector, are anticipated to help sustain potential growth.
The Nepali government is working to strengthen Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT), notably by amending existing AML regulations to conform to global norms. On the country’s side, however, growth is projected to have slowed in the most recent financial year due to import restrictions from the previous year, regulatory uncertainty regarding land markets and construction licensing, lower credit flows, and weaker domestic demand in the context of significant post-Covid emigration outflows.
The resulting revenue shortfall caused the fiscal deficit to increase in the most recent fiscal year, but it did so at a level that still fits with a manageable level of public debt, demonstrating budgetary restraint. However, there seems to be a contradiction in the IMF, World Bank, and Nepal government’s perceptions.
The expansion of Nepal’s economic growth is predicted by the World Bank for the upcoming fiscal year. The World Bank claimed that it anticipates Nepal’s economy will rebound to a 3.9 percent growth rate in the fiscal year 2024. It also indicated that Nepal's Gross Domestic Growth Rate will stay at 1.9 percent this year.
According to the update, Nepal can revive its economy by fostering tourism as well as export and remittances. Even while Nepal’s economy currently benefits greatly from tourism, there are still chances for more investments to increase returns, particularly for local communities. This is significant since Nepal is one of many nations attempting to solve the Covid-19 pandemic-related development setbacks while attempting to limit massive biodiversity losses.
Within the next three years, Nepal hopes to become a middle-income country, and the government has been painting a picture of a thriving economy based on data showing rising remittances and improvements in the tourism industry. However, the general state of the nation’s economy is getting worse by the day.
Chiranjibi Nepal, former governor of Nepal Rastra Bank and a senior economist, points out that the World Bank's optimistic outlook is in contrast to the challenging reality on the ground. He emphasizes that to truly understand a country's financial condition, we must observe local financial developments. He argues that international reports tend to highlight the positive aspects and may not accurately reflect the true economic situation. Nepal's government should focus on policies that stimulate local financial markets instead of relying solely on external reports.
“These reports are made by financial backers which demonstrates the positive side. How could a financial backer focus his/her interest into destruction?” he says.
Senior economist Dr. Chandra Mani Adhikari says Nepal’s economy is distinct from other nations. This is the busiest time of year for Nepal’s economy, but it appears to be stagnating this year due to limited expansion, low wages, inflation, inadequate investment, corruption, lack of private sector confidence, youth migration, and sudden radical shifts in policy.
These are just a few of the economic features that Nepal is experiencing, Adhikari says, The Nepali economy has become stuck in a downward spiral of high inflation and sluggish growth.
“The banks have money deposited by particular persons that is fixed, and people are also cautious about spending because of the financial crisis, thus money movements in marketplaces are minimal these days. The government is unable to invest money on the market and reassure its citizens that everything is alright,” he says. “To stimulate the economy, the government should increase its development expenditure, which injects money into the market.”
