Nepal in Economic MESS: IMF

Kathmandu November 20- The International Monetary Fund has warned that Nepal could descend into an economic mess due to the magnitude of the destruction caused by the April and May earthquakes and the ongoing Tarai unrest that has led to trade disruption and a severe fuel crisis. If the trade disruption is not resolved soon and comprehensively, it will be increasingly difficult for Nepal’s overall economic activity to catch up and register positive growth in this fiscal year, the IMF said in its latest report. “Downside risks to the near-term outlook have become more pronounced.”

The report prepared by the IMF on November 16 said that economic activity had been slowing markedly in recent weeks in the absence of viable alternative ways for Nepal to secure adequate fuel in the short term. “Industrial production and tourism are badly affected by the unavailability of fuel and other essential inputs. The government revenue, particularly customs revenue, is down considerably. And so is government spending,” the report said.

The IMF said that with the winter approaching and shortages of essential supplies worsening, the near-term outlook for Nepal’s population is bleak, particularly for those left homeless by the earthquakes. “Delays in starting with post-earthquake reconstruction are compounded by the trade disruption. Fuel shortages are affecting the delivery of emergency supplies to remote regions affected by the earthquakes.”

The report said that the country’s real GDP growth is estimated to have decelerated to 3.4 percent in 2014-15, compared to a pre-earthquake baseline forecast of 5 percent. Growth had accelerated to 5.5 percent in 2013-14 owing largely to a favourable monsoon. The average growth of 4 percent in the three previous years was lower than in the neighbouring countries.
Likewise, the report said that despite the growing import requirements of post-quake reconstruction, Nepal’s external sector situation further strengthened in 2014-15 with the balance of payments surplus reaching $1.43 billion, from $1.29 billion in the previous fiscal year, due mainly to the current account surplus, supported by sustained overseas remittances.

This has enabled Nepal to maintain adequate gross foreign exchange reserves of $8.28 billion as of mid-September 2015, which is enough for the import of goods and services for more than 11 months. Based on the reconstruction initiative, the government had projected a GDP growth of 6.0 percent for 2015-16. However, a prolonged drought, the blockade-like situation in the Tarai and the ensuing fuel crisis have delayed the start of recovery and reconstruction-related projects, posing risks to the growth and inflation outlook, the IMF said.

It said that Nepal had been trapped in a low-investment, low-growth equilibrium and remains one of Asia’s poorest countries, despite progress in poverty reduction. However, on the positive side, the current scenario has been deemed to be a temporary phenomenon, the IMF said. Once stability returns, there would be confidence-building measures, due mainly to the new constitution. Growth is expected to gradually rebound to around 5.5 percent by 2016-17, as economic activity recovers from the earthquake and reconstruction gains momentum, the IMF said.