An Overview of Nepali Economy!

The recent development in the macroeconomic indicators has been in the positive trend, but the usefulness of the same remains the question. The economic growth rate has been lower than the estimate on one hand whereas the inflation rate, the trade deficit and the remittance has been in the rising end.

            Though the estimated growth rate of the GDP was 5.5 percent, the GDP growth rates remained much less, less than the growth rate of previous year (4.5 percent). The GDP growth rate at the basic price showed the rate of 3.56 percent whereas the growth rate at the producer’s price did not cross 3.7 percent. This justifies the lack of proper research and development (R&D) in the making of plans which not only made the targets ambitious but also did not help tackle the contingencies that would come in between the smooth implementation of the development program. The most contradictory part of the macroeconomic planning remains that the priority of the Nepali macro economy is agriculture; and the GDP of the agriculture sector shows increment by a frustrating 1.3 percent compared to the growth of 5 percent last year. The non-agriculture sector, though, is expected to deliver the growth rate close to 5 percent. The recent per capita GDP of the country is $717 whereas the per capita GNI is $721 but the socio-economic phenomenon show that almost 80 percent of the nation’s income or wealth is owned by the top 20 percent earning population of the country which brings the effectiveness of the per capita GDP under question. The recent per capita GDP in the base price of 2000/01 is Rs. 25,545.00 whereas the same in the current price is Rs. 62,510.00 which signifies the killer inflation rate the country is facing. The facility of the social security lacks in our country which asks to develop the saving habit to prepare for the future contingencies but the savings rate as per the GDP still looks sinking down which is yet not a good sign for the overall economy.

GDP and Related Indicators

Indicators		Fiscal Years
		06/07	07/08	08/09	09/10	10/11	11/12	12/13*
Real GDP (At Basic Price)*	Rs. In Billion	493.70	522.30	542.70	565.80	587.50	613.90	635.80
Growth Rate	In %	2.8	5.8	3.9	4.3	3.9	4.5	3.6
Real GDP (At Producer’s Price)	Rs. In Billion	532.00	564.50	590.10	618.50	639.70	670.70	695.20
Growth Rate	In %	3.4	6.1	4.5	4.8	3.4	4.6	3.7
Nominal GDP (At Producer’s Price)	Rs. In Billion	727.80	815.70	988.30	1192.80	1375.00	1536.00	1701.20
Per Capita GDP	US Dollar	410.00	491.00	497.00	610.00	718.00	706.00	717.00
Per Capita GNI	US Dollar	414.00	496.00	502.00	614.00	722.00	713.00	721.00
Per Capita GDP (In 2000/01 Price)	Rs.	21129.00	22110.00	22793.00	23561.00	24144.00	24979.00	25545.00
Per Capita GDP (in current price)	Rs.	28905.00	31946.00	38172.00	45435.00	51896.00	57202.00	62510.00
Gross Consumption/GDP	In %	90.20	90.20	90.60	88.60	85.50	88.50	90.70
Gross Domestic Savings/GDP	In %	9.80	9.80	9.40	11.40	14.50	11.50	9.30
Gross National Savings/GDP	In %	28.60	33.20	35.90	35.90	37.40	40.00	38.40
Gross Fixed Capital Formation/GDP	In %	21.10	21.90	21.40	22.20	21.30	20.00	21.20
Gross Capital Formation/GDP	In %	28.70	30.30	31.70	38.30	38.40	34.90	37.80
Gap between Gross Domestic Savings and Gross Investment/GDP	In %	-18.90	-20.50	-22.30	-26.90	-23.80	-23.40	-28.50

Source: Economic Survey 2012/13, Ministry of Finance

In the context of Nepali Economy, the biggest challenge is to bring the inflation rate to single digit. This fiscal year also the Consumer Price Index (CPI) is 10.6% which is 2.3% higher than previous year’s CPI. Basically, CPI is based on the inflation rate on food and non-food items and the prices of which are in the increasing trend of 11.3% and 9.3% respectively. Since last 4 years GDP Deflator is in decreasing trend but this fiscal year the GDP Deflator is in the constant rate of 6.7% as that of previous year. The observations show direct and indirect dependence of more than 80% of the population on agriculture sector in the country but with the lack of advancement in the agriculture as well as primary sector the growth of this sector had gradually reduced. Thus, we can vividly observe the fluctuations in the growth rate of primary sector. Besides in the secondary sector also we cannot find sufficient growth as expected, the main reason behind this could be the reduction in the growth rates of industrial outputs along with the shutdown of big industries.

Price

Indicators		Fiscal Years
		06/07	07/08	08/09	09/10	10/11	11/12	12/13*
Consumer Price Index3	% change	5.9	6.7	12.6	9.6	9.6	8.3	10.6*
GDP Deflator2	% change	7.3	5.6	16.1	14.4	11.7	6.7	6.7
Primary Sector	% change	6.1	3.3	21.4	25.1	15.6	3.1	6.2
Secondary Sector	% change	5.7	11.0	14.4	9.2	13.6	3.6	9.3
Service Sector	% change	8.3	5.3	12.9	8.9	8.2	10.4	6.3
Wholesale Price Index4	% change	9	9.1	12.8	12.6	9.8	6.4	9.8*
Salary and Wages Rate Index5	% change	9.8	9.7	15.3	17.2	18.0	27.4	7.8
Salary	% change	6.3	10.9	10.5	20.2	0.0	19.3	0.0
Wages	% change	10.9	9.4	16.9	16.3	24.0	29.6	9.6

Source: Economic Survey 2012/13, Ministry of Finance

            

Revenue earning and the expenditure pattern are the most important phenomenon associated with the Public Finance in an economy. All other things revolve around these basics. Coming to the latest year, the revenue generation shows a decrement of around 5 percent from the previous year, the reason for this might be the shrink in the business that was observed due to the effects of pre and post-election. It would look interesting to see that the government expenditures in totality has increased but as usual, the trend show that the expenditure on capital and development heading has increased with randomized effects in the implementation. The encouraging news also would be that both the tax and non-tax revenue has increased per unit of GDP but the government expenditure as per the GDP has not shown significant increment which is deepened due to the problem of inefficiency. Foreign grants have decreased and foreign loans have increased which might not give good impression but one has to realize that there is no free lunch in the world and the habit of easy money worsens the habit further. Loans, at least give some burden to the country to improve efficiency which has not been observed significantly in the least developed or developing economies. Total outstanding debt is seen decreasing slightly but since the foreign debt is greater than the domestic debt and the dollar rates are hiking like nothing as a result of comparatively weakening Indian currency, the scenario might not look good in coming days. But there is one thing the people in the country can cheer about, i.e. earlier a child in Nepal would born with a debt of Rs. 19,484 but now the loan amount has slightly decreased and so a child is born with a loan amounting Rs. 18,780 only. The overall scenario of the public finance looks slightly improving.

Public Finance

Indicators		Fiscal Years
		06/07	07/08	08/09	09/10	10/11	11/12	12/13*
Revenues	% change	21.3	22.7	33.3	27.2	11.4	23.2	18.5
Total Government Expenditures	% change	20.5	20.8	36.1	18.2	13.7	14.8	19.4
Recurrent Expenditure	% change	15.1	18.6	39.7	18.2	12.6	15.8	14.6
Capital Expenditure	% change	34.2	34.7	36.6	23.5	16.8	8.6	28.7
Debt Servicing (Principal & Interest)	% change	12.2	-0.7	18.6	5.3	5.4	17.9	NA
Revenue/GDP	In %	12.1	13.2	14.5	15.1	14.7	15.9	17.0
Tax Revenue/GDP	In %	9.8	10.4	11.8	13.4	12.9	13.8	14.8
Non-Tax Revenue/GDP	In %	2.3	2.8	2.7	1.5	1.5	2.1	2.2
Total Government Expenditure/GDP	In %	18.4	19.8	22.2	21.8	21.5	22.1	23.8
Foreign Grants/GDP	In %	2.2	2.5	2.7	3.2	3.3	2.6	2.7
Budget Deficit/GDP	In %	4.1	4.1	5	3.5	3.6	3.5	3.7
Foreign Loan/GDP	In %	1.4	1.1	1	0.9	0.9	0.7	1.5
Domestic Loan/GDP	In %	2.5	2.5	1.9	2.5	3.1	2.4	2.2
Total Outstanding Debt	Rs. In Billion	332.7	375.6	425.1	440.4	443.6	523.2	511.1
Outstanding Domestic Debt	Rs. In Billion	103.8	116.0	125.7	148.1	184.2	213.9	211.7
Outstanding Foreign Debt	Rs. In Billion	216.6	250	277	256.2	259.6	309.3	299.4
Per Capita Outstanding Debt	Rs.	13212	14711	16416	16773	15576	19484	18780
Total Outstanding Debt/GDP	In %	45.7	46.1	43.0	36.9	32.3	34.1	30.1
Outstanding Domestic Debt/GDP	In %	15.9	15.4	15.0	15.4	13.4	13.9	12.4
Outstanding Foreign Debt/GDP	In %	29.8	30.6	27.9	21.5	18.9	20.1	17.6

Source: Economic Survey 2012/13, Ministry of Finance

The main objectives of Monetary and Fiscal Policies are to control inflation, to promote economic growth, to promote external sector stability, full employment and equitable distribution of income and wealth in the nation. This fiscal year, we can observe there is remarkable reduction in both Narrow and Broad Money supply of the economy. There has been reduction in the growth of Net Foreign Assets due to increment in imports and comparatively low growth in remittance inflow. However, the deposit mobilization in this fiscal year has been increased due to the growth of private sector. Thus, the consolidation would show that due to the remarkable reduction in current deposits there has been reduction in Narrow Money supply and due to the reduction in fixed and saving deposits there has been reduction in Broad Money supply. Hence, there should be the proper utilization of various monetary as well as fiscal policies instruments so as to strengthen the economic system of the nation.

Money and Banking

Indicators		Fiscal Years
		06/07	07/08	08/09	09/10	10/11	11/12	12/13*
Narrow Money Supply (M1)	% change	12.2	21.6	27.3	8.0	5.2	18.5	1.6
Currency	% change	7.4	19.9	25.5	13.0	1.9	20.1	8.3
Current Deposits	% change	22.8	25.0	30.5	7.6	11.4	15.7	-10.5
Broad Money Supply (M2)	% change	14.0	25.2	27.3	14.1	12.3	22.7	6.2
Fixed and Saving Deposits	% change	14.9	27.0	27.3	15.5	14.8	24.0	7.6

Source: Economic Survey 2012/13, Ministry of Finance

When an open economy is dealt about, the external sector (or rest of the world) which gives scope for the exports and imports of goods and services becomes an important dimension. In recent days, Nepal has become a highly import-based economy, for two reasons basically- inefficiency and lack of prioritization. After the double digit growth rate in exports last fiscal year, the exports growth rate has again come down; on the contrary, the import growth rate has advanced further. The growth rate of trade deficit has also shown above 23 percent. The remittance income has significantly grown up but effects have been minor- though the consumption part of the GDP has shown growth, the investment part remains pathetic which will certainly add burden in the long run. Though the expenditure on tourism has shown some growth, the effects are not at all seen in the income from tourism which again raises questions on the unplanned and ineffective investments in the tourism sector. The BOP status has also gone down significantly and there is a slight increment observed in the Foreign Exchange Reserves. Though the Foreign Exchange Reserves has shown slight increment, the reserves are sufficient for our goods imports only for 10.2 months which should at least be 12 months and if imports of services are also added, the sufficiency time decreases further to 8.7 months. Though the strategy is always said to be about establishing import-substitution industries, the statistics do not support the implementation of the same.

External Sector

Source: Economic Survey 2012/13, Ministry of Finance

1Annual Preliminary Estimates; 2Base Year 2000/00=100; 3Base Year 2005/06=100; 4Base Year 1999/2000=100Ù; 5Base Year 2004/05=100Ù;

6Annual Average of Buying and Selling Rates

* Data for the first 10 months of the current fiscal year to the extent available, while it is for eight months in respect of other fiscal years.

##Including the data of Development Banks and finance companies since July 2010.

@Prior to reduced Bank Service Charge of March/April, 2012

Capital grants that used to be accounted for capital expenditures in the past have been included in current expenditures from FY 2011/12 following IMF’s GFS reclassification. Similarly, share and loan investment in public enterprises has also been removed from the capital grant budget head.

Note: Ratio of GDP is calculated at the current producers' Price. Some figures are updated accordingly as they are updated by the sources themselves.

Note: This article was published in Semi Annual Publication (Trade Off) in the month of August.