Nepal's Economic Boom: ADB Predicts 4.4% Growth This Fiscal Year

Kathmandu, April 10 -- According to the Asian Development Outlook report released on Wednesday, Nepal’s economy is expected to expand by 4.4% in the present fiscal year, which concludes in mid-July. This projection marks an increase from the previously estimated growth rate of 3.9% for the last fiscal year.

The main journal published by the Asian Development Bank stated that Nepal’s enhanced economic outlook can be attributed to a steady rebound in internal demand, progress with privatization reforms, and an upsurge in the revival of tourism along with associated sectors.

ADB Country Director for Nepal Arnaud Cauchois stated, “The manufacturing and construction industries, which experienced contraction during the previous fiscal period, are expected to grow this fiscal year due to steady oil and raw material costs, higher liquidity, and falling interest rates. These factors have facilitated an increase in credit availability across all productive sectors.”

According to the report, major production areas are anticipated to grow. The Ministry of Agriculture forecasts a 4% rise in rice production for this financial year, which is credited to favorable monsoons, the prompt supply of fertilizers, and the use of high-yield seed varieties.

Nevertheless, the limited winter precipitation could negatively impact winter crops, leading to an anticipated decline in agricultural growth from 3 percent in the previous fiscal year to 2.8 percent in the current one.

Major economic areas such as manufacturing and construction, which saw declines during the 2023-24 period, are expected to grow this fiscal year due to steady oil and raw material costs, enhanced liquidity, and falling interest rates. These factors have facilitated greater access to credit across various production industries.

As the administration seeks to accelerate capital spending with an aim for an 85 percent completion rate, the hindered construction sector is expected to expand, according to the report.

In general, industrial development is anticipated to increase to 3.9 percent, primarily due to the electricity segment, which saw a significant yearly growth of 21.4 percent during the initial quarter of this fiscal period and should continue expanding with the execution of hydroelectric initiatives.

Backed by greater availability of credit, enhanced commitments from foreign direct investments, and a recovery in global tourism numbers, the expansion of the services sector is anticipated to reach 4.8 percent.

Higher internal consumption in the latter part of this financial year will bolster both the wholesale and retail industries.

The transportation and logistics sectors will gain advantages from enhanced roadway systems and an increase in tourism.

The sector for information and communication services will see enhancement as well, recording a 29% rise in exports during the initial half-year period of this fiscal year, up from just 4.9% growth in the prior year.

The recent modifications to the Foreign Investment and Technology Transfer Act as well as the Company Act, which permit foreign direct investment in Nepal’s information technology industry, are expected to accelerate development even more, according to the report.

According to the report, total investments should contribute an additional 6.6 percentage points to GDP growth. Addressing the private sector’s worries about investing and improving government services will encourage more private investment.

Service-based sectors are now permitted to invest in special economic zones, which were formerly accessible exclusively to manufacturing industries.

The changes were designed to streamline the procedures for registering and dissolving businesses. These new regulations help Nepalese firms operate abroad by allowing them to establish branches, engage in commerce, and transfer earnings back to Nepal.

The process for returning international investments and profits has been simplified as well. To address worries from businesses regarding hold-ups, the new regulations require deciding bodies to operate within a limit of seven days whenever statutory timeframes apply.

It is anticipated that public investment will increase by 18.6 percent during the present fiscal year, as the execution of projects is set to speed up following the pledges outlined in the midterm budget review.

Any projects that haven't entered the implementation stage will be delayed until the end of the fiscal year.

Personal spending, accounting for approximately 80% of the nation's GDP, is expected to increase by 2%, contributing 1.6 percentage points to economic growth as a result of robust incoming remittances.

According to the report, fiscal policy will bolster economic growth due to increased public spending from greater allocations towards employee compensation along with heightened expenditures on goods, services, transfers, and social security within the present fiscal year’s budget.

As Nepal boosts its electricity production and upgrades transmission infrastructure, exports are set to rise, making it a steady net exporter of power.

Imports, particularly those of capital equipment, are expected to increase with greater government spending on infrastructure. Additionally, net service imports will grow as a result of increased travel expenses for Nepalese citizens traveling overseas.

In summary, the report indicates that net exports of goods and services will detract from economic growth because of the substantial influx of imports.

The gross domestic product (GDP) is projected to expand by 5.1% in the upcoming fiscal year of 2025-26, driven by governmental changes aimed at enhancing the implementation of capital budgets, as well as progress in the tourism sector and associated service industries.

Likewise, improved agricultural output via mechanization and superior irrigation systems, dependent on a good monsoon, might also boost economic growth.

The Asian Development Bank stated that Nepal's economy is projected to experience modest expansion during the present fiscal period as well as the subsequent one.

It is anticipated that the inflation projection will stay below the upper limit set by the central bank, provided there is an average yield from crops and a slight decrease in inflation in India, which is the primary supplier of imported goods.

In the past fiscal year, Nepal's external sector achieved greater stability thanks to increased foreign exchange reserves and a careful approach to monetary policy.

Even with increased imports during the second half of this fiscal year, substantial flows from remittances are anticipated to maintain the current account surplus at 0.1% of GDP.

For the fiscal year 2025-26, projections indicate a deficit amounting to 2.4 percent of GDP due to an increase in goods and services imports.

Additionally, there are possible threats to economic stability.

Continuing increases in tariffs might lead to a worldwide economic slowdown, which could affect Nepal’s tourism revenue and remittance inflows. Additionally, reduced international assistance may hamper progress since Nepal depends on external support to meet its developmental requirements.

Failing to implement the capital budget fully could also undermine growth potential.

ADB stated that Nepal's growth projections were established before the US government announced new tariffs on April 2nd.

As per ADB, the baseline projections solely encompass tariffs that were implemented earlier. Nevertheless, the forecast includes an assessment of how increased tariffs might impact growth in Asia and the Pacific.