During the five months, there has been a large balance of payments deficit (Rs. 19.6 billion) in comparison to a surplus of Rs. 22.8 billion during the comparable period last year. Consequently, the foreign exchange reserve position weakened, with the import capacity of the foreign exchange reserve falling to an equivalent of 7 months’ goods and services imports from a level of 8.3 months’ during the same period last year. Uncertain and unfriendly economic environment even raised the risks of capital flight. On cash basis, foreign loans available for the government further contracted. Recurrent expenditure during this period in comparison to the same period in the previous year increased by Rs. 13.3 billion while the capital expenditure rose by Rs. 0.65 billion only. Continued reduction in the growth of demand deposits coupled with the continued rise in the growth of currency in circulation signaled symptoms of reduced business confidence and weakened investment climate in the economy. In addition to such a modest scenario for this year, the growth challenges that the Nepali economy has been facing in the recent years have remained quite daunting, as outlined in Table 1 and Table 2.
Table 1
| Eight year periods | Economic growth | Avg annual population growth | Per capita income growth |
| 1991/92 to 1999/2000 | 4.8 percent | 2.5 percent | 2.5 percent |
| 2000/01 to 2008/09 | 3.6 percent | 2.2 percent | 1.4 percent |
Table 2
| Macroeconomic indicators | 1991/92 to 1999/2000 | 2000/01 to 2008/09 |
| Avg annual economic growth | 4.8 percent | 3.6 percent |
| Avg annual population | 2.5 percent | 2.2 percent |
| Per capita income | 2.5 percent | 1.4 percent |
| Agriculture, forestry and fishing sector | 2.9 percent | 3 percent |
| Non-agriculture sector | 6.2 percent | 3.9 percent |
| Electricity, gas and water | 5.4 percent | 7.1 percent |
| Community and social | 6.1 percent | 7.7 percent |
| Industry | 6.2 percent | 2.5 percent |
| Manufacturing | 6.5 percent | 0.4 percent |
| Services sector | 4.8 percent | 3.6 percent |
| Trade, restaurants and hotels | 5.8 percent | 0.6 percent |
| Transport, communications and storage | 7.8 percent | 6.2 percent |
The envisaged socio-economic development outcomes have remained largely unattained and the prospects of materializing these outcomes in the near future also remain quite distant.
The tables indicate the unfavorable economic development environment has adversely affected Nepal’s overall economic growth and also the per capita income growth. Consequently, the envisaged socio-economic development outcomes have remained largely unattained and the prospects of materializing these outcomes in the near future also remain quite distant.
Along with the changes in the growth patterns, there have occurred significant changes in the structure of the gross domestic product (GDP), with the contribution of the agriculture and industry going down. Further, employment growth has been constrained and productivity of the capital employed reduced. Table 3 shows the incessant decrement of various sectors’ contribution to the GDP.
Table 3
| GDP Contributors | 1991/92 | 1999/2000 | 2008/09 |
| Agriculture, forestry and fishing | 43.8 | 37.8 | 35.1 |
| Industry | 21.5 | 23.8 | 16 |
| Manufacturing | 8.8 | 10 | 7.1 |
| Construction | 10.7 | 11.8 | 6.1 |
| Electricity, gas and water | 1.5 | 1.5 | 2.4 |
| Agriculture and industry (combined) | 65.3 | 61.6 | 51.1 |
| Services sector | 34.7 | 38.4 | 48.9 |
| Consumption (in nominal terms) | 89.2 | 84.8 | 91.9 |
| Saving/GDP ratio | 10.8 | 15.2 | 8.1 |
| Export deficit | 10.3% | 9.1% | 21.6% |
Higher consumption, unproductive investments, lower saving, and excessive trade deficit marked the period following the advent of the new millennium. These developments were associated with lower economic growth. This calls for initiating measures for controlling excessive consumption, increasing saving, making the investments productive, reducing the trade deficit, and expediting the economic growth. Ensuring incentives for channeling more resources toward strengthening the export, raising production and productivity, generating employment opportunities, and making optimal utilization of available resources would remain crucial to accelerating the economic growth and improving the soundness and efficiency of the economy on a sustainable basis.
(Writer is former Executive Director of the Nepal Rastra Bank and former Senior Economic Advisor of the Ministry of Finance.)
Related story
Remittance inflows pose Dutch Disease risk in Nepalese economy
