Population 31.006 million
GDP 19.415 US$ billion
@rating
country
Business climate
assessment
| 2010* | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
4.8 |
3.9 |
4.6 |
3.8 |
|
Inflation (yearly average) (%)
|
9.5 |
9.6 |
8.3 |
8.3 |
|
Budget balance (% GDP)
|
-0.8 |
-1 |
0.1 |
-2.5 |
|
Current account balance (% GDP)
|
-2.4 |
-0.9 |
4.7 |
0.6 |
|
Public debt (% GDP)
|
35.4 |
33.3 |
33.3 |
31.3 |
| (e) Estimate (f) Forecast *2009/2010, 2010/2011, 2011/2012, 2012/2013 fiscal year: from July to June | ||||
STRENGTHS
- Household consumption, the main growth driver, is supported by private transfers
- Dynamic services sector, especially tourism
- The main trading partner (i.e. India, 65% of exports) is a dynamic economy
WEAKNESSES
- Heavily dependent on agricultural sector and vulnerable to climatic vagaries
- Landlocked and difficult to access many of the country’s regions
- Low productivity in the secondary sector
- Recurrent electricity and fuel shortages
- Lack of a political consensus, raising fears of exacerbated social and political tensions
Risk assessment
The economy relies on remittances
Private consumption is the main growth driver, buoyed by substantial transfers from expatriate workers (living mainly in India and the Middle East), which represent 23% of GDP. Transfers will remain high in 2013, boosting household income. However, this substantial expatriate proportion of the population deprives the country of labour and maintains a dependency on transfers which do not do much to stimulate productive investment. Moreover, FDIs are limited by the uncertainties driven by political instability and its effects, i.e. social unrest and bureaucratic delays mainly. The development of sectors which could perform well, especially the hydroelectric sector whose potential is under-exploited, is hampered by this instability (and by other shortcomings like the lack of roads or inadequate electricity supply). Confidence will only be re-established, which in turn will stimulate investments, if a political consensus is achieved. The government declared the 2012-2013 fiscal year an “investment year” and the aim is for the authorities to identify 50 projects during the year which are highly attractive to foreign investors.
On the supply side, the country suffers from persistent shortcomings in agriculture (1/3 of GDP and 70% of the labour force), which is dispersed and heavily dependent on weather conditions. And the monsoon, which in 2012 was poor, is likely to limit harvests in 2013 with yield below that recorded for 2012. Manufacturing is still underdeveloped and concentrated on textiles. Tourism is continuing to expand, making related services the main GDP component (47% of GDP).
Inflation slowed somewhat in 2012 with falling food prices despite the rise in administered energy prices and a moderate depreciation of the rupee. It is expected to remain stable in 2013.
An almost balanced budget and a still significant trade deficit
The budget for fiscal year 2012/2013 (starting on 15 July) was only agreed in November due to a deadlock, while at the same time funds started to run out. Spending will be stable and directed in the first instance towards infrastructures and social transfers. Fiscal revenues will rise thanks to improved tax collection and higher customs revenue. Public debt will stay at a modest level, limiting the country’s vulnerability despite its narrow tax base.
As for the external accounts, the trade deficit will remain substantial with the pervasiveness of imports of numerous products (gold, soya, capital goods). Worth noting is the revival of exports due to stronger growth in India in 2013. Nepal is acutely dependent on its neighbour (65% of exports in 2012). Informal, cross-border trade is also substantial and necessary for certain populations living in the south of the country.
The current account balance will post a slight surplus however, as a result of sustained flows of tourist arrivals (especially from India and China) and above all a large transfer balance surplus.
Critical political tensions
The political situation between the two main political parties is extremely tense, a legacy of a decade-long civil war which ravaged the country until 2006. A new constitution has not been ratified yet. As a result the government was dissolved in May 2012. Power is currently exercised by an interim government led by Prime Minister Bhattarai of the Maoist Party. He is strongly controversial, even within his own party, split in two since June 2012 with the formation of Nepal Communist Party (Unified Marxist Leninist). Parliamentary elections are due to take place in 2013, raising fears of heightened tension in the run-up to and after the election. As there is still no consensus even on the holding of elections, there is no chance of the new Constitution being ratified. It is therefore unlikely that appeasement will prevail in 2013, as there are still many contested items, in particular regarding the nature of the future political system (election of the president, one or two chambers, etc.) and the federalism issue. These disagreements are unlikely to impact on economic policy as the government is likely to continue to be led by the Maoists. There could be sharp social and ethnic tensions, if the deadlock persists.
