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Current Macroeconomic Development & Outlook
Chandan Sapkota
Asian Development Bank
Nepal Resident Mission
National Banking Institute, Kathmandu, 25 March 2015
2015-03-25 1
The views expressed in this document are those of the author and do not necessarily reflect the
views and policies of the Asian Development Bank, or its Board of Governors, or the governments
they represent.
2015-03-25 2
Presentation Outline
Asian Economic Outlook
NEPAL: FY2014 Economic Performance GDP growth
Inflation
External sector
Fiscal and monetary developments
NEPAL: FY2015 and FY2016 Economic Prospects GDP growth
Inflation
External sector
Developing Financial Sector in Nepal
Policy Challenge: Accelerating Capital Spending
Largely based on Asian Development Outlook 2015
2015-03-25 3
Asian Economic Outlook
4
f: forecast
9.3 7.3
6.2 6.5 6.3 6.3 6.3
0
2
4
6
8
10
2010 2011 2012 2013 2014 2015f 2016f
GDP growth (%)
5-year average: 7.1
10-year average: 7.6
Developing Asia Extends Steady Growth
1.15
0.55
0.13
0.52
0.05 0.04 0.00.20.40.60.81.01.21.4
PRC India Indonesia US Japan Germany
Contributions to global GDP growth, 2015 (percentage points)
5
Global GDP growth: 3.5%
Asia accounts for about 60% of global growth; still fastest-growing region
Major Asian Economies Large contributors to
Global GDP Growth
0.0
1.0
2.0
3.0
4.0
US Euroarea
Japan
GDP growth (%) 20142015f2016f
6
• Reforms in DMCs
• Recovery in advanced economies
• Reduction in commodity prices
• Moderation in PRC
f: forecast
Key Growth Drivers for Asia
40
60
80
100
120
140
160
2010 2011 2012 2013 2014 2015 2016
Commodity price indexes 2010=100
Beverage
Food
Brent crude
Gold
Natural gas
Copper
7
Sources: World Bank Pinksheets; Bloomberg
Futures
Commodity Prices Tumbled
8
f: forecast
4.4 6.0
4.1 3.8 3.1 2.6 3.0
0
2
4
6
8
2010 2011 2012 2013 2014 2015f 2016f
Inflation (%)
5-year average: 4.3 10-year average: 4.1
Easing Inflation Pressures
-10
-5
0
5
10
15
Current account (% of GDP)
PRC
Developing Asia
US
European Union
Japan
9
f: forecast
Lower Import Bills Widen CA Surplus
2015-03-25 10
NEPAL: FY2014 Economic Performance
• Growth accelerated to an estimated 5.2%
• Inflation abated but remained high
• Continued budget execution weakness
• External situation strengthened
2015-03-25 11
FY2014 Overview
2015-03-25 12
GDP Growth (Basic Prices)
GDP growth accelerated to
5.2% in FY2014
Favorable monsoon
Agricultural growth at
4.7%
Strong remittance inflows
Services growth at 6.1%
Industrial output sluggish
Binding supply-side
constraints
4.3
3.8
4.6
3.5
5.2
0
2
4
6
2010 2011 2012 2013 2014
Percentage points
Supply-side contributions to growth
Services Industry Agriculture
Note: Years are fiscal years ending on 15 July of that year.
2015-03-25 13
Inflation
Annual average inflation stayed
high at 9.1% in FY2014
• Higher food prices offset gains
from falling prices of non-food
items
• Food inflation averaged 11.6%
despite good agricultural harvest
• Transport costs rose
• Supply-side bottlenecks
persisted
• Food inflation worsened in India
0
5
10
15
20
Aug2010
Feb2011
Aug Feb2012
Aug Feb2013
Aug Feb2014
Aug Jan
% change
Monthly inflation
Overall Food & beverage Nonfood & services
2015-03-25 14
Current Account Balance
Current account surplus expanded
to 4.7% of GDP in FY2014
Export growth 5.1%
Import growth 13.9%
Trade deficit 30.9% of GDP
Worker’s remittance growth
11.9%
28.2% of GDP ($5.5 bn)
BOP surplus surged to $1.3
billion
Forex reserves increased to
$6.9 billion
Covers 10.2 months of
imports of goods and
services
-40
-30
-20
-10
0
10
20
30
40
2010 2011 2012 2013 2014
% of GDP
Current account indictors
Exports Oil imports
Non-oil imports Tourism and travel
Workers' remittances Current account balance
2015-03-25 15
Fiscal and Monetary Developments
Budget deficit: 0.1% of GDP
Actual expenditure: 82.4% of
allocation Budget execution shortfalls
Long-standing procedural and
procurement inefficiencies
Robust revenue mobilization Revenue including grants 21.3% of
GDP
Monetary conditions remained
accommodative
Interbank rate close to zero
Lending and deposit rates declined Real deposit rate negative
Credit to private sector dropped
Monetary policy cannot compensate for
deficiencies caused by structural as well as
supply-side bottlenecks
-10
0
10
20
30
2009 2010 2011 2012 2013 2014 2015
% of GDP
Fiscal indicators
Domestic revenue Grants
Recurrent expenditure Capital expenditure
Fiscal deficit or surplus
BE -10
-5
0
5
10
15
Jul2012 Jan2013 Jul Jan2014 Jul Jan
%
Commercial banks' weighted average rates Nominal deposit rate Real deposit rateNominal lending rate Real lending rateInterbank rate
2015-03-25 16
FY2015 and FY2016 Economic Prospects
Economic outlook is less favorable than in FY2014
Encouraging news from power sector bolstered
business and investor confidence
Substantial moderation of inflation
External position expected to weaken
Downside risk of political instability Unsettled constitutional and governance issues
2015-03-25 17
FY2015 and FY2016 Overview
FY2015: 4.6%
Unfavorable monsoon
Natural disasters (floods & landslides)
Political uncertainty
(Improved business confidence and
reform-oriented budget)
FY2016: 5.1%
Normal monsoon
Timely full budget & effective budget execution
High remittance inflows
Normalization of political uncertainties
Strong investor confidence
2015-03-25 18
GDP Growth Outlook for FY2015 and FY2016
4.3
4.6
3.5
5.2
4.6
5.1
0
1
2
3
4
5
6
FY2011 FY2012 FY2013R FY2014P FY2015f FY2016f
Supply-side contributions to growth (% pts)
Agriculture Industry Services GDP growth (basic prices)
FY2015: 7.7%
Expected agricultural shortfall and increase in civil service salaries
Inflation forecast lower than central bank’s target
Sharp drop in international oil prices
Multiple downward revisions to domestic fuel prices
Lower inflation in India
Food inflation to remain relatively high
FY2016: 7.3%
Inflation expected to edge lower
Better harvest
Broadly stable oil and commodity prices
Excess liquidity reined in
2015-03-25 19
Inflation Outlook for FY2015 and FY2016
9.6 9.6
8.3
9.9
9.1
7.7 7.3
0
2
4
6
8
10
12
FY2010 FY2011 FY2012 FY2013 FY2014 FY2015f FY2016f
Contributions to inflation (% pts)
Food and beverage Non-food and services Nepal-CPI India-CPI
FY2015: 2.7% of GDP
Stable export growth
Lower import growth
Substantially lower oil import bill
Slowdown in remittance inflows
Pick up in export growth
Continued lower fuel prices lowering import bill growth
Strong remittance inflows
Strong tourism receipts
2015-03-25 20
Current Account Outlook for FY2015 and FY2016
FY2016: 3.5% of GDP
5.0
3.4
4.7
2.7
3.5
0
1
2
3
4
5
6
FY2012 FY2013 FY2014 FY2015f FY2016f
Current account balance (% of GDP)
2015-03-25 21
Developing Financial Sector in Nepal
2015-03-25 22
Comparative State of Access to Finance
0
20
40
60
80
100
120
140
160 Outstanding deposits with commercial banks 2011 (% of GDP)
0
20
40
60
80
100
120 Outstanding loans from commercial banks in 2011 (% of GDP)
0
20
40
60
80
100
120 Account at a formal financial institution in 2011 (% age 15+)
South Asia avg
OECD avg
0
10
20
30
40
50
60
70
Bhutan(2009)
Sri Lanka(2011)
Nepal(2013)
Bangldesh(2013)
India(2014)
Pakistan(2007)
PRC(2012)
Percent of firms with a bank loan/line of credit
OECD avg
South Asia avg
Total deposit: 73% of GDP
Total Credit: 68% of GDP
NPL (Share of total loan) declining; 2.9% in mid-July 2014
CAR: 12%
Stock market capitalization: 54.8% of GDP
Fairly stable finance sector compared the time when real estate and housing prices collapsed. Banking sector troubles surfaced prompting proactive role of the central bank
Persistent excess liquidity Lack of investment-ready projects and favorable business environment
Rate of deposit mobilization > Rate of credit outflows
Declining lending and deposit rates
Ongoing consolidation of BFIs
Strengthened regulatory and supervisory capacities
Financial sector vulnerability persists
Bond market development at nascent stage
2015-03-25 23
Status of Finance Sector
Liberal licensing regime led to too many BFIs and unhealthy competition. Faster and effective consolidation is better.
Sound corporate governance
Continuous strengthening of NRB’s monitoring, supervision and regulatory capabilities Cooperatives need to be better supervised and monitored.
Enhancing internal project and loan assessment
Operation efficiency and product/package innovation
Improvement in investment climate
Enhance productive sector lending
Important for an efficient financial sector that helps to generate high, sustainable and inclusive economic growth
2015-03-25 24
Reducing Financial Sector Vulnerability
Inflation
0
2
4
6
8
10
12
14 Y-o-Y inflation
FY2013 FY2014 FY2015
0
2
4
6
8
10
12
14
16
Au
g
Sep
Oct
No
v
De
c
Jan
Feb
Mar
Ap
r
May Jun
Jul
Y-o-Y food inflation
FY2013 FY2014 FY2015
0
2
4
6
8
10
12
14
Au
g
Sep
Oct
No
v
De
c
Jan
Feb
Mar
Ap
r
May Jun
Jul
Y-o-Y non-food inflation
FY2013 FY2014 FY2015
9.6 9.6
8.3
9.9
9.1
7.7 7.3
0
2
4
6
8
10
12
FY2010 FY2011 FY2012 FY2013 FY2014 FY2015f FY2016f
Contributions to inflation (% pts)
Food and beverage Non-food and services Nepal-CPI India-CPI
Deposit & Credit
-10
0
10
20
30
40
FY2014 Mid-yearFY2014
Mid-yearFY2015
Growth of deposits (% change)
Commerical banks Development banks
Finance companies Total deposit
0
10
20
30
FY2014 Mid-yearFY2014
Mid-yearFY2015
Growth of credit (% change)
Commerical banks Development banks
Finance companies Total credit
-15
-10
-5
0
5
10
15
20
25
30
FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 Mid-yearFY2014
Mid-yearFY2015
Change in lending to construction and real estate (NRs billion)
Construction Real estate
Interest Rates & Stock Market
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
Interbank rate 91-day treasury bills rate
Interbank and 91-day Treasury bill rate (%)
FY2015 FY2014
0
2
4
6
8
10
12
14
Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
Weighted average rates of commercial banks
FY2015 Deposit FY2015 Lending
0
200
400
600
800
1000
1200
FY2012 FY2013 FY2014 Mid-yearFY2014
Mid-yearFY2015
Mid-year stock market performance
NEPSE index (closing) Market capitalization (NRs. billion)
2015-03-25 28
Policy Challenge: Accelerating Capital Spending
2015-03-25 29
Inadequate and Weak Capital Spending
Persistently weak capital spending Planned and actual spending
far below the required investment in infrastructure
Actual spending < planned spending
• Insufficient capital investment to bridge infrastructure gap
• Spending on land, buildings, furniture & fittings, civil works, vehicles and plant & machinery
0
2
4
6
8
10
2005 2006 2007 2008 2009 2010 2012 2013 2014
% of GDP
Budgeted and actual capital spending
Actual Budgeted
Raising quality and quantity of capital
spending is one of the pressing
challenges
2015-03-25 30
Low Absorption Capacity
71.8 71.6 70.8
82.6
74.9
0
20
40
60
80
100
120
FY2009 FY2010 FY2012 FY2013R FY2014P
Actual spending (% of planned spending)
Recurrent Capital
2015-03-25 31
Bunching of Capital Spending
0.1
0.6
3.1
2.0 2.2
3.5
3.3
4.9
6.6 5.0
8.4
24.1
0
20
40
60
80
100
120
Aug-13 Sep Oct Nov Dec Jan-14 Feb Mar Apr May Jun Jul
Monthly expenditure in FY2014 (NRs billion)
Recurrent Capital Financing
2015-03-25 32
Relatively Low Level of Investment
Fixed investment is
lower than LDC
average
Middle income
countries’ average
GFCF : 29% of GDP
Nepal’s GFCF
averaged 21.2% of
GDP over 2004-2013 Public : 3.8% of GDP
Private: 17.4% of
GDP
2015-03-25 33
Low Provision and Quality of Infrastructure
0
1
2
3
4
5
6
7
8
GC
I 20
14
-20
15
Institu
tion
s
Infr
astr
uctu
re
Ma
cro
eco
nom
ice
nvir
on
me
nt
Health
and
prm
ary
edu
ca
tion
Hig
her
ed
uca
tio
na
nd
tra
inin
g
Goo
ds m
ark
et
effic
ien
cy
Lab
or
ma
rket
effic
ien
cy
Fin
ancia
l m
ark
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deve
lopm
en
t
Techn
olo
gic
al
rea
din
ess
Ma
rket siz
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Busin
ess
so
ph
istication
Inn
ovatio
n
Mo
re c
om
pet
itiv
e
2014-2015 Global Competitiveness Index
Maximum Minimum Nepal score
Need for Higher Capital Investment
• Suppressed economic growth requires a boost to aggregate demand
• Initially, private investment continent upon public capital investment
• Higher quantity and quality of capital investment Boosts economic performance by accelerating recovery & establishing more
sustainable growth patterns
Generates aggregate demand quickly
Enhances productivity growth
Encourages technological innovation
Spurs private-sector investment by increasing returns
• Higher quantity: Close the infrastructure deficit
• Higher quality: Productivity-enhancing investment (infrastructure + human
capital)
• Monetary policy: Relatively less effective
• Fiscal policy: More effective; transmission mechanism direct and less
lags; Stabilization measures (short-term) & structural changes (long-term) (Michael Spence. 20 Feb 2014. Why Public Investment?. Project Syndicate)
Bureaucratic hassles
Project approval
Inter and intra ministry coordination
Structural issues
Limited capacity of line ministries (planning & implementation)
Lack of strong pipeline of projects ready for implementation
Legislation hurdles (procurement & processes)
Low project readiness
Detailed design
Land acquisition
Project staff and offices
Procurement plans
Weak contractors’ capacity & construction management
Political instability
Poor quality at entry affects budget allocation efficiency as well
2015-03-25 35
Why is Capital Spending low? - Inefficient Budget Execution
Improve quality at entry
Project readiness assessment
A standard framework needed (request, approval and monitoring)
Better inter and intra ministry coordination
Sector investment plans and human resources strategy
Address structural issues
Enhance planning & implementation capacities of implementing agencies
Project bank: Strong pipeline of key national infrastructure projects
Update relevant legislations to boost quality and quantity of spending
Prudent public finance management
Strengthen monitoring and evaluation
Standard monitoring framework
Incentives for better project performers
2015-03-25 36
What Needs to Be Done?
2015-03-25 37
THANK YOU!
Selected Economic Indicators (%)
FY2015 FY2016
GDP growth 4.6 5.1
Inflation 7.7 7.3
Current account balance (share of GDP) 2.7 3.5
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