Post on 23-Dec-2015
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Asian Development Outlook (ADO) 2015: NEPAL
Chandan Sapkota
Asian Development Bank
Nepal Resident Mission
ADO launch (press conference), Kathmandu, 24 March 2015
2015-03-24 2
The views expressed in this document are those of the author and do not necessarily reflect the
views and policies of the Asian Development Bank, or its Board of Governors, or the governments
they represent.
2015-03-24 3
Presentation Outline
FY2014 Economic Performance GDP growth
Inflation
External sector
Fiscal and monetary developments
FY2015 and FY2016 Economic Prospects GDP growth
Inflation
External sector
Developing Financial Sector in Nepal
Policy Challenge: Accelerating Capital Spending
2015-03-24 4
FY2014 Economic Performance
• Growth accelerated to an estimated 5.2%
• Inflation abated but remained high
• Continued budget execution weakness
• External situation strengthened
2015-03-24 5
FY2014 Overview
2015-03-24 6
GDP Growth (Basic Prices)
GDP growth accelerated to
5.2% in FY2014
Favorable monsoon
Agricultural growth at
4.7%
Strong remittance inflows
Services growth at 6.1%
Industrial output sluggish
Binding supply-side
constraints
4.3
3.8
4.6
3.5
5.2
0
2
4
6
2010 2011 2012 2013 2014
Percentage points
Supply-side contributions to growth
Services Industry Agriculture
Note: Years are fiscal years ending on 15 July of that year.
2015-03-24 7
Inflation
Annual average inflation stayed
high at 9.1% in FY2014
• Higher food prices offset gains
from falling prices of non-food
items
• Food inflation averaged 11.6%
despite good agricultural harvest
• Transport costs rose
• Supply-side bottlenecks
persisted
• Food inflation worsened in India
0
5
10
15
20
Aug2010
Feb2011
Aug Feb2012
Aug Feb2013
Aug Feb2014
Aug Jan
% change
Monthly inflation
Overall Food & beverage Nonfood & services
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Current Account Balance
Current account surplus expanded
to 4.7% of GDP in FY2014
Export growth 5.1%
Import growth 13.9%
Trade deficit 30.9% of GDP
Worker’s remittance growth
11.9%
28.2% of GDP ($5.5 bn)
BOP surplus surged to $1.3
billion
Forex reserves increased to
$6.9 billion
Covers 10.2 months of
imports of goods and
services
-40
-30
-20
-10
0
10
20
30
40
2010 2011 2012 2013 2014
% of GDP
Current account indictors
Exports Oil imports
Non-oil imports Tourism and travel
Workers' remittances Current account balance
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Fiscal and Monetary Developments
Budget deficit: 0.1% of GDP
Actual expenditure: 82.4% of
allocation Budget execution shortfalls
Long-standing procedural and
procurement inefficiencies
Robust revenue mobilization Revenue including grants 21.3% of
GDP
Monetary conditions remained
accommodative
Interbank rate close to zero
Lending and deposit rates declined Real deposit rate negative
Credit to private sector dropped
Monetary policy cannot compensate for
deficiencies caused by structural as well as
supply-side bottlenecks
-10
0
10
20
30
2009 2010 2011 2012 2013 2014 2015
% of GDP
Fiscal indicators
Domestic revenue Grants
Recurrent expenditure Capital expenditure
Fiscal deficit or surplus
BE -10
-5
0
5
10
15
Jul2012 Jan2013 Jul Jan2014 Jul Jan
%
Commercial banks' weighted average rates Nominal deposit rate Real deposit rateNominal lending rate Real lending rateInterbank rate
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FY2015 and FY2016 Economic Prospects
Economic outlook is less favorable than in FY2014
Encouraging news from power sector bolstered
business and investor confidence
Substantial moderation of inflation
External position expected to weaken
Downside risk of political instability Unsettled constitutional and governance issues
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FY2015 and FY2016 Overview
FY2015: 4.6%
Unfavorable monsoon
Natural disasters (floods
& landslides)
Political uncertainty
(Improved business
confidence and reform-
oriented budget)
FY2016: 5.1%
Normal monsoon
Timely full budget & effective budget execution
High remittance inflows
Normalization of political uncertainties
Strong investor confidence
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GDP Growth Outlook for FY2015 and FY2016
FY2015: 7.7%
Expected agricultural shortfall and increase in civil service salaries
Inflation forecast lower than central bank’s target
Sharp drop in international oil prices
Multiple downward revisions to domestic fuel prices
Lower inflation in India
Food inflation to remain relatively high
FY2016: 7.3%
Inflation expected to edge
lower
Better harvest
Broadly stable oil and
commodity prices
Excess liquidity reined in
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Inflation Outlook for FY2015 and FY2016
FY2015: 2.7% of GDP
Stable export growth
Lower import growth
Substantially lower oil
import bill
Slowdown in remittance
inflows
Pick up in export growth
Continued lower fuel
prices lowering import bill
growth
Strong remittance inflows
Strong tourism receipts
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Current Account Outlook for FY2015 and FY2016
FY2016: 3.5% of GDP
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Developing Financial Sector in Nepal
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Comparative State of Access to Finance
0
20
40
60
80
100
120
140
160 Outstanding deposits with commercial banks 2011 (% of GDP)
0
20
40
60
80
100
120 Outstanding loans from commercial banks in 2011 (% of GDP)
0
20
40
60
80
100
120 Account at a formal financial institution in 2011 (% age 15+)
South Asia avg
OECD avg
0
10
20
30
40
50
60
70
Bhutan(2009)
Sri Lanka(2011)
Nepal(2013)
Bangldesh(2013)
India(2014)
Pakistan(2007)
PRC(2012)
Percent of firms with a bank loan/line of credit
OECD avg
South Asia avg
Total deposit: 73% of GDP
Total Credit: 68% of GDP
NPL (Share of total loan) declining; 2.9% in mid-July 2014
CAR: 12%
Stock market capitalization: 54.8% of GDP
Fairly stable finance sector compared the time when real estate and housing prices collapsed. Banking sector troubles surfaced prompting proactive role of the central bank
Persistent excess liquidity Lack of investment-ready projects and favorable business environment
Rate of deposit mobilization > Rate of credit outflows
Declining lending and deposit rates
Ongoing consolidation of BFIs
Strengthened regulatory and supervisory capacities
Financial sector vulnerability persists
Bond market development at nascent stage
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Status of Finance Sector
Liberal licensing regime led to too many BFIs and unhealthy competition. Faster and effective consolidation is better.
Sound corporate governance
Continuous strengthening of NRB’s monitoring, supervision and regulatory capabilities Cooperatives need to be better supervised and monitored.
Enhancing internal project and loan assessment
Operation efficiency and product/package innovation
Improvement in investment climate
Enhance productive sector lending
Important for an efficient financial sector that helps to generate high, sustainable and inclusive economic growth
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Reducing Financial Sector Vulnerability
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Policy Challenge: Accelerating Capital Spending
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Inadequate and Weak Capital Spending
Persistently weak capital spending Planned and actual spending
far below the required investment in infrastructure
Actual spending < planned spending
• Insufficient capital investment to bridge infrastructure gap
• Spending on land, buildings, furniture & fittings, civil works, vehicles and plant & machinery
0
2
4
6
8
10
2005 2006 2007 2008 2009 2010 2012 2013 2014
% of GDP
Budgeted and actual capital spending
Actual Budgeted
Raising quality and quantity of capital
spending is one of the pressing
challenges
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Low Absorption Capacity
71.8 71.6 70.8
82.6
74.9
0
20
40
60
80
100
120
FY2009 FY2010 FY2012 FY2013R FY2014P
Actual spending (% of planned spending)
Recurrent Capital
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Bunching of Capital Spending
0.1
0.6
3.1
2.0 2.2
3.5
3.3
4.9
6.6 5.0
8.4
24.1
0
20
40
60
80
100
120
Aug-13 Sep Oct Nov Dec Jan-14 Feb Mar Apr May Jun Jul
Monthly expenditure in FY2014 (NRs billion)
Recurrent Capital Financing
2015-03-24 23
Relatively Low Level of Investment
Fixed investment is
lower than LDC
average
Middle income
countries’ average
GFCF : 29% of GDP
Nepal’s GFCF
averaged 21.2% of
GDP over 2004-2013 Public : 3.8% of GDP
Private: 17.4% of
GDP
2015-03-24 24
Low Provision and Quality of Infrastructure
0
1
2
3
4
5
6
7
8
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14
-20
15
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2014-2015 Global Competitiveness Index
Maximum Minimum Nepal score
Higher capital investment essential for Generating aggregate demand quickly
Accelerating recovery & establishing more sustainable growth patterns
Encouraging tech innovation
Spurring private-sector investment by increasing returns
Higher quantity: Close infrastructure gap
Higher quality: Productivity-enhancing investment
Initially private investment contingent upon public capital investment
Crucial for boosting aggregate demand
2015-03-24 25
Need for Higher Capital Investment
Bureaucratic hassles
Project approval
Inter and intra ministry coordination
Structural issues
Limited capacity of line ministries (planning & implementation)
Lack of strong pipeline of projects ready for implementation
Legislation hurdles (procurement & processes)
Low project readiness
Detailed design
Land acquisition
Project staff and offices
Procurement plans
Weak contractors’ capacity & construction management
Political instability
Poor quality at entry affects budget allocation efficiency as well
2015-03-24 26
Why is Capital Spending low? - Inefficient Budget Execution
Improve quality at entry
Project readiness assessment
A standard framework needed (request, approval and monitoring)
Better inter and intra ministry coordination
Sector investment plans and human resources strategy
Address structural issues
Enhance planning & implementation capacities of implementing agencies
Project bank: Strong pipeline of key national infrastructure projects
Update relevant legislations to boost quality and quantity of spending
Prudent public finance management
Strengthen monitoring and evaluation
Standard monitoring framework
Incentives for better project performers
2015-03-24 27
What Needs to Be Done?
2015-03-24 28
THANK YOU!
Selected Economic Indicators (%)
FY2015 FY2016
GDP growth 4.6 5.1
Inflation 7.7 7.3
Current account balance (share of GDP) 2.7 3.5