Nepal: Risk Assessment
Country Risk Rating
Business Climate Rating
- Private transfers sustaining household consumption, the main driver of growth
- Lively services sector, especially tourism
- Financial and technical support from India and China
- Considerable international solidarity
- Heavily dependent on the agricultural sector and vulnerable to weather events
- Isolated and difficult access to many of the country's regions
- Economy strongly affected by the earthquakes of April and May 2015
- Weak productivity of the secondary sector
- Infrastructure shortcomings, recurrent electricity and fuel shortages
- Recurrent political difficulties and violence
Growth is expected to benefit from reconstruction efforts
Growth slowed sharply in 2016, because of the delays in the reconstruction of the areas and infrastructure damaged by the earthquakes which struck in April and May 2015. Growth is expected to rebound in 2017 - reconstruction programs having been planned. However, the country suffers from ongoing delays in the implementation of the budget which could, once again, hamper activity. However, investment is expected to increase, while exports will still be impeded by the destruction of the means of production and deteriorating infrastructure, already inadequate before the disaster. Household consumption, the main engine of the economy, should continue to benefit from substantial expatriate remittances (29% of GDP in 2015). Its strength will however be limited by the inflationary tensions associated with high transportation costs and the slight oil price increase.
The Nepalese economy is poorly diversified and remains heavily dependent on agriculture, which employs 70% of the population and accounts for one third of GDP. Having been hit by crop destruction, harvests are expected to be more abundant in 2017, which will support the sector. Despite the expected rebound in investment, notably in construction, the industrial sector is likely to continue to be affected by shortages, especially of energy, while the hydroelectric potential is still under-exploited (about 1% exploitation in 2015). Finally, the tourism sector is expected to recover but will continue to be adversely affected by the damage caused by the earthquake.
Despite substantial international aid, the current account balance and public deficit will continue to deteriorate
In 2017, the budget significantly higher than in the past year, will prioritize the sectors affected by the earthquakes. The fiscal balance is therefore likely to remain in deficit for the second year in a row. However, public debt is likely to remain contained. Furthermore, the country will benefit from the financial support of the international community and donations will help limit borrowing. Nonetheless, the Nepalese government's ability to turn the economy round seems problematic, with the country suffering from a low budget implementation rate. During the 2015/2016 tax year, almost 50% of spending was carried out in the last month, which meant poorly organized and poor quality spending.
With regard to the external accounts, the country runs a significant trade deficit with a high level of imports of many products. Despite substantial remittances by expatriate workers and the rebound in tourism revenues, higher imports of capital goods needed for the reconstruction effort are likely to result in a worsening current account balance.
Political stability likely to remain uncertain
Political instability has prevailed since the end of the civil war in 2006. The first national elections which followed the abolition of the monarchy took place in 2008. The situation between the two main political parties is tense. The November 2013 elections enabled a return to relative political stability. The Assembly, elected in November 2013, was tasked with drafting the new constitution and the earthquakes which struck in spring 2015 and popular discontent pushed the various political leaders into making an effort at national unity. The Constituent Assembly adopted a draft constitution in September 2015. However, the negotiations over the Constitution were conducted in a climate of violence and several minority groups still object to the division of some provinces and are organizing protests in the south of the country. In 2016, the country underwent a new period of political instability, with the prime minister stepping down following a no-confidence vote in Parliament. A new coalition was formed and Pushpa Kamal Dahal (Communist Party) was appointed as prime minister. On his first visit to India, he promised to amend the Constitution. Relations between the two countries deteriorated after the Constitution was adopted and this trip helped forge closer links. Nevertheless, the new leadership team can only govern by maintaining alliances with the many parties represented in Parliament.
The country's political stability remains in the balance and another period of instability and violence cannot be ruled out with social and ethnic tensions running high. Finally, shortcomings in the business climate are expected to persist.