Nepal Development Update, April 2014

Abstract

The enabling environment for the
 development of Nepal has improved, but opportunities need to
 be effectively leveraged through focused policy action.
 Nepal has significant resources in the form of remittances
 from abroad, but the economy cannot use these resources in a
 productive manner to enhance the overall welfare of all
 citizens. Specific priorities for development include: (1)
 creating a growth promotion vision and agenda; (2)
 resolution of Nepal s fiscal paradox ; (3) boosting
 investments; and (4) tackling enduring financial sector
 risks and managing excess. After a difficult year in FY13,
 the economy is poised to recover, albeit modestly. In FY13,
 Nepal achieved only modest growth of 3.6 percent. This was
 due largely to poor performance of the agricultural sector
 as well as very modest levels of industrial activity.
 Nepal s internal and external balances are sound but not for
 the right reasons. Low expenditure and robust revenue
 growth accounted for a large budget surplus and declining
 debt. Nepal s external position is comfortable because of
 large remittance inflows. On the external side, Nepal has
 benefited from the depreciation of the rupee but also and
 much more significantly- from a sharp further increase in
 inward remittances which are expected to amount to over 30
 percent of GDP in FY14. Monetary policy has sought to
 achieve a delicate equilibrium between controlling inflation
 and supporting economic activity but the optimal balance may
 evolve and call for corrections. For FY14, the outlook is
 cautiously optimistic. As remittances have become a defining
 feature of the Nepali economy the country must learn to
 manage excess liquidity.