Washington:
The IMF has projected Nepal’s growth rate to pick up from 3.5 per cent in 2012-2013 to 4.5 per cent in 2013-14, attributing it to the recovery in agriculture, strong services, and rising public spending underpinned by timely budget approval.
“Growth is recovering, and inflation is moderating.
Output growth is expected to pick up to around 4 per cent in 2013-14, driven by a recovery in agriculture, strong services, and rising public spending underpinned by timely budget approval,” IMF representative Alexander Pitt said yesterday.
Inflation is projected to moderate further from recent levels but remain high, at eight per cent year-on-year.
“Growth of remittances is expected to moderate, but international reserves should continue to rise,” he said.
Key external risks to the outlook stem from a possible slower-than-projected recovery in India or a slowdown in countries that host Nepali workers, he said adding that domestic risks arise from the financial sector, especially cooperatives.
He said decisive reforms to increase public investment would likely strengthen confidence and private investment, raising growth beyond baseline projections.
Noting that the level of the exchange rate appears broadly in line with fundamentals, if remittances are taken into account, he said, however, remittances skew domestic activity to non-tradables and contribute to reducing the competitiveness of agriculture and industry.
“The peg to the Indian rupee serves as a useful and transparent anchor, and continues to benefit Nepal in view of its close economic relationship with India. Moreover, the depreciation of the Indian rupee has created an opportunity to benefit from enhanced competitiveness vis-vis third countries,” the IMF official said.
Observing that harnessing the financial sector and remittances to support economic development is difficult, Pitts said care must be taken to preserve financial sector soundness.
“In this context, the volatility and level of excess liquidity should be reduced, and policies implemented to facilitate monetary management, and to lean against inflation,” he said.
The IMF said financial sector reforms needed to be pushed forward.
“Fiscal policy needs to support growth and poverty reduction through much-needed capital expenditure.
Strong revenue growth in recent years, and ongoing efforts to improve revenue administration, are creating the fiscal space for this,” he said.
