Nepal witnessed a decelerated GDP growth in the year 2013 mainly due to unfavourable monsoon, shortage of chemical fertiliser and delay in announcing a full budget, according to the recently released Asian Development Bank outlook for 2014.
Inflation crept up to average 9.9 per cent, industry continued to languish, growing by merely 1.6 per cent as persistent electricity shortages, labour disputes and political uncertainty soured the investment climate, points out the ADB report.
However, services sector grew by 6 per cent on improvements in wholesale and retail trade and in hotels and restaurants, according to the ADB outlook.
However, the report projects favourable economic conditions in the year 2014 and 2015 in which the country is expected to attain a GDP growth rate of 4.5 per cent and 4.7 per cent respectively.
The economic outlook is more optimistic about fiscal year 2014 than in the year 2013, considering successful second Constituent Assembly election in November 2013, the favourable monsoon and expected strengthening in remittance inflows.
The successful political transition to a new government has boosted business and investor confidence, the report points out.
However, there is a downside risk of political instability arising from continued disagreement among the major political parties over unsettled constitutional and governance issues, especially those of federalism and the nature of parliamentary and the executive, the report cautions.
The GDP growth projection is somewhat less than the government's target of 5.5 per cent, according to the report.
Many factors such as wage pressures, upward adjustment of administered fuel prices, the continued weakening of the currency and high inflation in India, and persistent power shortage and other supply-side constraints are expected to drive inflation up to 10 percent in fiscal year 2014.
"Taming inflation requires financial policies and structural bottlenecks be effectively addressed, suggests the ADB outlook. ADB is prioritising hydropower development in Nepal in a massive way," says Kenichi Yokoyama, country director, ADB Nepal Resident Mission.
As the construction works of 456 MW capacity Upper Tamakoshi Project, a major hydropower project being funded by Asian Development Bank will be completed in 2016, Nepal will be relieved from the current power problem, he pointed out.
ADB will continue its support in governance reforms, capacity building and financial transparency in the country, he said.
