Macroeconomic Update August 2014

Chandan Sapkota and Deepak Bahadur Singh

Asian Development Bank
Nepal Resident Mission

Luncheon with journalists, 07 September 2014
2014-09-07 1
The views expressed in this document are those of the author and do not necessarily reflect the
views and policies of the Asian Development Bank, or its Board of Governors, or the
governments they represent.
FY2014 Economic Overview
Real Sector
Fiscal Sector
Monetary Sector
External Sector
FY2015 GDP Growth and Inflation Outlook
Mainstreaming Environment for Growth and Poverty Reduction
Key Economic Challenges
2014-09-07 2
Presentation Outline
2014-09-07 3
FY2014 Economic Overview
GDP grew by an estimated 5.2%

Low absorption capacity: Actual expenditure < planned
expenditure

Robust revenue mobilization and low fiscal deficit

Overall inflation moderating but remains elevated

Excess liquidity throughout the year

Favorable external sector
2014-09-07 4
FY2014 Economic Overview
2014-09-07 5
Real Sector
494 498
612
716
705 710 714
728
982
0
100
200
300
400
500
600
700
800
900
1000
FY2008 FY2009 FY2010 FY2011 FY2012 FY2013R FY2014P
Nominal per capita income (US$)
Nominal per capita GDP Nominal Per capita GNI
Nominal per capita GNDI
8.8
7.5
7.1
6.0
5.7
5.5
4.9
4.8
4.7
4.7
3.7
3.0
2.9
1.9
1.8
0 2 4 6 8 10
Wholesale and retail trade
Transport, storage and communications
Hotels and restaurants
Education
Public administration and defence
Health and social work
Fishing
Electricity, gas and water
Agriculture and forestry
Community, social and personal services
Mining and quarrying
Real estate, renting and business activities
Construction
Manufacturing
Financial intermediation
Sub-sectoral growth in FY2014 (% change)
0
5
10
15
20
25
FY2010 FY2011 FY2012 FY2013 FY2014
FDI commitment & actual inflow (NRs billion)
Service Energy
Manufacturing Tourism
Agriculture Mineral
Construction Total FDI commitment
4.3
3.8
4.6
3.5
5.2
0
1
2
3
4
5
6
FY2010 FY2011 FY2012 FY2013R FY2014P
Contributions to GDP growth
Agriculture Manufacturing
Construction Other industry
Wholesale & retail trade Real estate & renting
Other services GDP growth (basic prices)
2014-09-07 6
Fiscal Sector
71.8 71.6 70.8
82.6
74.9
0
20
40
60
80
100
120
FY2009 FY2010 FY2012 FY2013 FY2014R
Expenditure absorption rate
Recurrent Capital
15.4
15.9
14.6
15.4
3.5 3.4 3.2 3.3
0
5
10
15
20
FY2011 FY2012 FY2013 FY2014RE
Expenditures (% of GDP)
Total expenditure Recurrent Capital
8.8
9.8
10.5
11.9
13.4
13.0
13.9
15.3
16.2
0
2
4
6
8
10
12
14
16
18
FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013RFY2014P
Tax revenue (% of GDP)
-1.9
-2.4
-2.2
0.7
-0.1
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
FY2010 FY2011 FY2012 FY2013R FY2014P
Fiscal deficit (% of GDP)
2014-09-07 7
Monetary Sector
9.6
9.6
8.3
9.9
9.1
0
2
4
6
8
10
12
FY2010 FY2011 FY2012 FY2013 FY2014
Contributions to inflation (percentage points)
Food and beverage Non-food and services
Nepal-CPI India-CPI
0
1
2
3
4
5
6
7
A
u
g
S
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Interbank rate 91-day treasury bills rate
Interest rates
FY2013 FY2014
-30
-20
-10
0
10
20
30
40
50
60
70
M2 Net foreign
assets
Net domestic
assets
Credit to
private sector
Net claims on
Government
Monetary sector (% change)
FY2012 FY2013 FY2014
0
200
400
600
800
1000
1200
NEPSE index (closing) Market capitalization (Rs.
billion)
Number of listed
companies
Stock market performance
FY2012 FY2013 FY2014
2014-09-07 8
External Sector
-60
-40
-20
0
20
40
60
FY2010 FY2011 FY2012 FY2013 FY2014
Balance of payments (% of GDP)
Export (fob) Import (cif)
Net services balance Net income balance
Net transfers Capital account
Financial account CAB
BOP
0
5
10
15
20
25
30
0
100,000
200,000
300,000
400,000
500,000
600,000
R
e
m
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t
t
a
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s

(
%

o
f

G
D
P
)

Migration and remittances
Overseas migrants Workers' remittances (% of GDP)
60
65
70
75
80
85
90
95
100
105
110
1
-
J
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-
1
1
1
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2
1
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0
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1
3
1
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-
1
3
1
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-
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3
1
7
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1
3
4
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-
1
3
2
1
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4
2
5
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4
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1
4
1
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-
1
4
1
9
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-
1
4
Nominal exchange rate (NRs/US$)
2014-09-07 9
FY2015 GDP Growth and Inflation Outlook
2014-09-07 10
FY2015 GDP Growth and Inflation Outlook
4.3
4.6
3.5
5.2
4.6
0
1
2
3
4
5
6
FY2011 FY2012 FY2013R FY2014P FY2015f
Contributions to GDP growth (percentage points)
Agriculture Industry
Services GDP growth (basic prices)
9.6
9.6
8.3
9.9
9.1
9.5
0
2
4
6
8
10
12
FY2010 FY2011 FY2012 FY2013 FY2014 FY2015f
Contributions to inflation (percentage points)
Food and beverage Non-food and services
Nepal-CPI India-CPI
GDP growth (basic prices)
Estimated to grow by 4.6%
Lower agricultural output
Improvement in industrial sector growth
Sustained services sector growth
Inflation
Inflation to remain elevated at 9.5%
Lower agricultural harvest
Rise in administered fuel prices & transport cost
Increase in public sector salary & allowance
Disruptions in domestic distribution system due
to natural disasters
2014-09-07 11
Mainstreaming Environment for Growth and Poverty
Reduction
2014-09-07 12
1. A need for high, inclusive and sustainable growth
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
CO2 emissions (metric tons per capita)
One of the major challenges is to
not only achieve high and inclusive
economic growth, but also to
ensure that it is environmentally
sustainable.

Economic activities without due
consideration for environmental
sustainability may start tapering off
in the medium-term, undermining
prosperity in the long run.
Nepals GDP growth pattern has so far been minimally damaging to the environment as
the industrial sectors contribution to growth is relatively low. But, what when the industrial
sector comes out of currently shrinking and hibernating state?
Climate change-driven events like melting glaciers pose a grave risk to Nepals economy,
and could cause losses equal to almost 2.2% of annual GDP by 2050 and 9.9% by 2100.
But, if mitigation and adaptation steps are taken the damage could be limited to around
2.4% of GDP by 2100.
2014-09-07 13
2. State of the Environment: Brief Overview
43.8
42.8
42.2
39.5
38.9
37.3
34
36
38
40
42
44
46
1965 1978 1985 1994 2011 2013
Total forest area as % of total land
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
M
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t
a
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H
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T
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n
N
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l
Ecological belt Development region All
Uncultivable land due to flooding /soil erosion (% of
total land
2001
2012
0
10
20
30
40
50
60
70
80
90
Noise level in Kathmandu (dBA), June 2013
Day Night WHO guideline
0
50
100
150
200
250
300
350
Annual mean concentration of particulate matter
(PM2.5 and PM10)
PM2.5 PM10 WHO-PM2.5 WHO-PM10
Weak environmental monitoring and enforcement and increase in
noncompliance due to fluid political situation and gaps in governance
Un-harmonized and old policy, act and regulation. Needs to cover
emerging issues
Unabated land use change, deforestation, natural resource exploitation,
watershed degradation and loss of biodiversity
Updates required in design standards of major infrastructure to make
them suitable to the fragile geology, environment and climate resilient
Unplanned, unregulated urbanization with land, air and water pollution.
Dying rivers. Encroachment in space and heritage. Increasing
vulnerabilities
Misuse of pesticides and agrochemicals
Lack of SEA and cumulative impact assessment in key policy and master
plan preparations
2014-09-07 14
3. Key Challenges Related to Boosting Economic Activities


The current safeguards priorities of the government:
Conserve forest and biodiversity with community participation
Reduce CC and disaster vulnerability
Prepare disaster early warning systems, prepare relief program,
and ensure post disaster management
Ensure environmental sustainability and green growth
Improve urban environment
Promote renewable and energy efficient technologies
Watershed management ecological restoration in fragile hilly
areas
Approach for payments for environmental services and carbon
sequestration
2014-09-07 15
4. Governments Strategy
Some of the major recommendations to stimulate environment-friendly
inclusive economic growth are:

Strengthen the country safeguards system
Update design standards for environment friendly and climate smart
infrastructure development
Institutional strengthening by restructuring organizational structure on safeguards
Promote planned, regionally balanced, regulated, green and disaster resilient
urban centers
Promote for climate risk adaptation and implement climate resilient infrastructure
Reverse the process of land degradation
Prepare climate resilient economy by focusing on agriculture, industry and
infrastructure
Protect ecosystem and biodiversity (terrestrial and aquatic) and ensure payment
for ecosystem services
Mainstream climate change and DRM risks in all plan and program
Scale up renewable and alternative energy
Establish effective disaster risk management (DRM) at policy and institutional
level and remain prepared for pre, emergency relief, and post disaster response

2014-09-07 16
5. Recommendations
2014-09-07 17
Thank You!