Nepal: Risk Assessment
Country Rating1
Rating: D
Business Climate Rating1
Rating: D
Risk Assessment2
High growth driven by remittances from expatriate workers
Economic growth rebounded in 2010/2011, driven by household consumption that benefited from expatriate worker remittances. On the supply side, the agricultural sector, representing one-third of GDP, has improved its performance thanks to better weather conditions than in 2009. And the services sector recorded strong growth, particularly retail and wholesale commerce, tourism, transport, communications, property, and financial services. In manufacturing, however, production stagnated amid frequent labour strikes and repeated power failures.
In 2011/12, economic growth is expected to remain buoyant. The inflow of transfers from expatriate workers (which represent over 20% of GDP), mostly originating in the Gulf monarchies and Asia, will likely stay high and remain a major source of household income. Investment moreover could increase especially in the construction sector.
Deterioration of Nepal's financial position
The current account came back into balance 2010/11 as a result of the recovery of exports, the influx of transfers from expatriate workers, and the slowdown of gold imports, which had tripled in volume in 2009 amid a crisis of confidence. In 2011/12 the current account balance is expected to remain stable. The external debt will thus stay at sustainable levels.
A public financial budget has not been adopted for 2010/11 yet as a result of recurrent Maoist opposition. In this context, spending has not been under control with a deficit resulting in consequence. In 2011/12, supposing continued political instability the fiscal balance could again be in deficit.
The banking sector has remained weak as a result of the increase in the number of banks, the rapid expansion of credit (particularly in the property sector), low capital ratios, and inadequate oversight.
Further deterioration in the political situation
May 2010 was the target date set for the completion of a new constitution by the constituent assembly. With the discussions still in progress at that date, however, the three main Nepalese parties agreed on a one-year mandate extension for the constituent assembly. In view of the many remaining bones of contention, however, finalisation of the new constitution may be delayed beyond the extended target date. Moreover, in the wake of the resignation of Prime Minister, M. Madhav Kumar Nepal in June 2010, under the pressure exerted by the Maoist opposition, the political situation in Nepal deteriorated. And the constituent assembly has still not succeeded in naming a successor. With the political instability likely to persist in this context, little progress is expected on wrapping up the peace process and resolving the major problem posed by the coexistence of two armies - The People's Nepalese Army and the national army. In this context, economy policy consistency and continuity could be affected.
Strengths
- Private transfers underpinning household consumption, the main economic engine
- Dynamic services sector
- End of the civil war
- Dynamism of the main trading partner, India, market for 60% of Nepalese exports
Weaknesses
- High dependence on the agricultural sector, employer of 60% of the population
- Vulnerability to weather conditions
- Low productivity in the secondary sector
- Lack of infrastructure
- Recurring shortages of energy and fuel