Nepal’s economy to post modest recovery of 3.1% in FY2021

KATHMANDU: Nepal’s gross domestic product (GDP) is anticipated to grow by 3.1% in fiscal year (FY) 2021 from a contraction of 1.9% in FY2020, says the Asian Development Outlook (ADO) 2021, the flagship economic publication of the Asian Development Bank (ADB).

Growth is expected to recover from the low base in FY2020, as a result of the gradual lifting of nationwide lockdown since July 2020, and a pickup in domestic demand. The ongoing vaccination campaigns against the coronavirus disease (COVID-19) pandemic will help strengthen the economic impetus.

“The COVID-19 contagion that seemed to have tapered off until end-March 2021 is now spreading rapidly. If strict containment measures that have been initiated to tackle this second wave of infections are necessary for a prolonged period in the remainder of this fiscal year, then GDP growth will be lower than the forecast”, said ADB Officer-in-Charge for Nepal Sharad Bhandari.

Agriculture is expected to rise by 2.4% in FY2021 as paddy yield is likely to increase by 1.3%, owing to a good monsoon and increased acreage under production. Manufacturing and service industries gradually reopened following the end of the lockdown since July 2020. The affected industries, including micro, small, and medium-sized enterprises (MSMEs) have been receiving economic support in the form of concessional lending and refinancing of existing loans to mitigate the adverse effects of the downturn.

Construction began to pick up, while the completion of some major projects of the government is expected to boost economic recovery. The Upper Tamakoshi Hydropower is expected to begin its first phase of production, while water from the Melamchi Water Supply Project began flowing since March 2021. Overall, industry is expected to grow by 2.5% after contracting by 4.2% in FY2020. The services sector is expected to grow by 3.4% in FY2021, though hospitality, travel, and tourism subsectors will take a longer time to recover.

The ADO 2021 forecasts inflation to moderate to an average of 5.0% in FY2021, down from 6.2% in FY2020, on the back of a good harvest, smoother supply chains, and subdued non-food prices. The current account deficit is expected to widen from 0.9% of GDP in FY2020 to 2.5% in FY2021, owing to increased import growth.

GDP growth of 5.1% is envisaged for FY2022 in anticipation of vaccination progress against COVID-19, regional and global economic recovery from this pandemic, assumption of a good monsoon leading to better harvest, and steady inflows of workers’ remittance. Inflation is forecast to remain contained at an average of 6.0% in FY2022, assuming a better harvest, subdued oil prices and modest uptick in inflation in India, the major trade partner of Nepal. The current account deficit is expected to widen from 2.5% of GDP in FY2021 to 3.8% in FY2022 as imports of capital goods increase.

The main downside risk to the outlook centers on a resurgence of COVID-19 infections. Political uncertainties and policy inconsistencies, as well as recurrent natural calamities like floods and landslides, could also undermine growth prospects. A weaker than expected regional and global recovery would limit employment opportunities abroad for Nepalese workers, constrain remittance and earnings from exports, and dampen Nepal’s growth.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.