Painting a grim picture, the IMF today predicted a down slide in Nepal's economy, which was hit by a massive earthquake early this year and facing unrest and disruptions to economic activity owing to protests by the minority groups over the new Constitution.
Noting that the earthquakes in April and May claimed thousands of lives and caused major damage, the IMF said it also caused economic growth to slow to 3.4 per cent in 2014/15, down from 5.5 per cent in 2013/14.
Losses in agricultural production and damage to transport systems further pushed up prices, raising inflation to about 7 per cent, the IMF said in a statement after the conclusion of its latest mission to the Himalayan country.
It said growth in Nepal is expected to gradually rebound to about 4.4 per cent in 2015/16 and around 5.4 per cent by 2016/17, as economic activity recovers from the earthquakes and reconstruction gains momentum.
"Inflation is projected to rise to about 8.5 per cent over the next 12 months. However, over time, as agricultural production recovers and transportation infrastructure improves, inflationary pressures should ease," it said.
"Recent developments have heightened the downside risks to growth. Continuation of the recent disruptions to economic activity and transportation and trade routes in certain parts of the country could severely affect growth and inflation in this fiscal year," the IMF said.
"Another important downside risk relates to the government's capacity to boost capital spending. Owing also to the delays in setting up the National Reconstruction Authority, the increase in expenditure may be more limited than expected," said Geert Almekinders, who led the IMF team to Nepal from September 20 to October 1, to hold its annual discussions.
"Stepped-up foreign aid and higher inflows of remittances will further boost liquidity pressures in the financial system, necessitating active liquidity management to avoid excess inflation relative to India," the IMF said.
It said fiscal policy needs to facilitate post- earthquakes reconstruction and medium-term growth through higher public investment.
The 2015/16 budget is ambitious and it is opportune that the budget speech labeled the current fiscal year as the "Year of Implementation," it said.
Since the promulgation of new Constitution on September 20, Nepal's Terai regions (plains) have been on the boil. More than 40 people have died in southern and western Nepal in the protests.
Madhesis, the Indian-origin inhabitants of the Terai plains, have opposed the Constitution, saying it does not protect their interests.
