Economic growth expected to decelerate to 4.1 % in 2023, inflation at 7.4

The Asian Development Bank (ADB) has projected a 4.1 percent economic growth rate in Nepal in 2023 while inflation is forecast to be at 7.4 percent.

According to the Asian Development Outlook (ADO) April 2023, Nepal’s economic growth rate is projected to decelerate in 2023 as compared to last year due to under tight monetary policy, slackened domestic demand, the unwinding of pandemic stimulus, and persistent global headwinds.

GDP growth is expected to pick up to 5.0% in 2024, however, with the dissipation of inflation, increased infrastructure spending, and further recovery in tourism and related services. The successful conclusion of the International Monetary Fund’s Extended Credit Facility review on 28 February 2023 showed Nepal’s economy on a sustainable path, with fiscal risks mitigated, external risks largely contained, and sustainable debt management ensured.

The report says average inflation accelerated to 8.0% in the first 6 months of 2023. Food inflation edged up to 5.6% and nonfood inflation climbed to 8.6% as prices rose for housing, utilities, and transportation. Inflation is expected to moderate to an average of 7.4% in 2023 as tighter monetary and fiscal policies take further hold in the second half of the fiscal year. Inflation is expected to decelerate to 6.2% in 2024, assuming a normal harvest, subdued oil prices, and a decline in Indian inflation.

The report assesses the main downside risk to the outlook is a global downturn hitting Nepal’s tourism and remittance receipts. A drastic tightening of global financial conditions to tame rising inflation would require tighter domestic monetary policy, which would erode investment and domestic consumption, dragging down growth. Intensified geopolitical turmoil and any natural hazards such as landslides or floods would further dampen growth prospects.

Similarly, as per the ADB, growth in all production sectors in Nepal is forecast to moderate in 2023. Agriculture growth will likely ease from 2.3% in 2022 to 2.0% in 2023. Preliminary estimates show that rice output increased by about 7.0%, but winter rainfall has been scanty, likely affecting winter crop yield and overall agriculture output. Despite a boost to industry expected with 700 megawatts of hydroelectricity added to the national grid, sector growth will likely decelerate by half from 10.2% to 5.1% as manufacturing and construction are hit by higher interest rates, import restrictions, a slowdown in domestic consumption, and dampened external demand.

Growth in services will moderate from 5.9% to 4.4% after credit controls and a hike in interest rates slow real estate, wholesale, and retail trade. While tourism growth has been strong, international tourist arrivals are still only half of their pre-pandemic numbers, according to the report.