October 2021 Analysis: Economy and Development

Posted by : Shraddha Ghimire


Date : 2021-11-16

The Minister of Foreign Affairs appealed his Chinese counterpart to re-open Nepal-China trade and transit points. In terms of domestic events, increment of industrial income, opening up of cross-border tourism for overland Indian tourist across Birjung-Raxaul border point and the collaboration between Investment Board of Nepal (IBN) and the Federation of Nepalese Chamber of Commerce and Industry (FNCCI) to attract more domestic and foreign investments were heartily welcomed. Externalities including fall in rupee value (depreciation against US dollar), loss as experienced by Nepal Oil Corporation (NOC) and the devastating destruction on agro-produce due to the late monsoon were also recorded.

Timeline of major events

Date Event
01 October Nepal opened its borders with India, allowing overland Indian tourists to enter Nepal via Raxaul-Birjung border over one and a half years.
02 October Department of Industry (DoI) reported increment in industrial income by 8 percent, with 64.8 percent of total industries fully operational across the country in the last quarter of fiscal year (FY) 2020/21.
03 October Nepal Oil Corporation (NOC) reported a possible loss of Nrs. 1.5 billion (USD 12.55 million) as per the new revised list for the month of October.
07 October World Bank Group (WBG) predicted Nepal’s economy to grow by 3.9 percent in the current fiscal year (FY) 2021/22.
12 October Nepali rupee recorded a six-month low depreciated value against US dollar at Nrs. 120.28.
18 October Nepal Rastra Bank (NRB) auctioned off treasury bills worth Nrs. 11.20 billion (USD 93.76 million) to mobilize short term loans for the government.
19 October Foreign Minister Dr. Narayan Khadka urged his Chinese counterpart Wang Yi to re-open regular border transactions at Tatopani-Khasa and Rasuwagadhi-Kerung border points.
23 October Ministry of Agriculture and Livestock Department (MoALD) reported destruction of paddy crops worth over Nrs. 8.26 billion (USD 68.80 million) across the country.

World Bank projects a new growth projection

In contrast to the government’s growth projection of 7 percent for the fiscal year ending on June 2022, the World Bank’s ‘South Asia Economic Focus’ released on 07 October predicted a growth rate of 3.9 percent for Nepal. While there is an increment in domestic and international consumption of the region’s goods and services, economic growth is still weak and fragile for most parts. As most economies are operating below pre-pandemic growth averages, they have been left vulnerable, more so due to the uneven vaccination drive, fear of a possible third wave/new virus outbreak and possible economic shutdowns.

Nevertheless, the new projection expects the South Asian region to grow by 7.1 percent during 2021, with major growth ushered in by digitization and service-led development. For Nepal, the new growth model definitely seems encouraging. The country had recently adopted the ‘Kathmandu Declaration’ as a joint commitment of the government and development partners towards the country’s Green Resilient and Inclusive Development (GRID). Moreover, with new advancements in production and technology, the country has been making a gradual shift from its traditional manufacturing sector to a more modern industrial sector; capitalizing on profits and gains along the way. Similarly, acceleration of digital services, in particular the use of digital payment/transactions in sectors including bank and investment, transportation, recreation, communication, education and so on is also anticipated to further the growth drive.

Overall, while the growth projection looks small, it’s focus looks promising, particularly for Nepal. With over 21.43 percent of the total population fully vaccinated, industrial income increasing by a hopeful 8 percent, and travel and tourism businesses opening up, the year-on-year growth appears strong provided the country can mobilize the private sector, utilize on digital services, identify goods of comparative advantage and reform policies and regulations with regards to business and investments.

Late monsoon destroys agricultural crops

Post-monsoon rains across Nepal destroyed agricultural crops worth billions of rupees during the third week of October. According to statistics and reports from the Ministry of Agriculture and Livestock Development (MoALD), the recent landslides and floods has induced damage to paddy worth Nrs. 8.26 billion (USD 68.80 million) across provinces including Sudurpashchim, Lumbini and Province 1. In terms of districts, Bardiya, Kapilvastu, Banke, Rupandehi, Kailali, Kanchanpur, Jhapa, Sunsari, Morang and so on have been badly affected. A total of 85,580 hectares of ready-to-harvest land has been swept away or submerged by floodwaters. In terms of tonnes, around 325,258 tonnes has been destroyed. The loss inflicted upon livestock and food stored by farmers remains unaccounted/uncounted for. While President Bidya Devi Bhandari has summoned officials at the agriculture ministry to take account of the situation and prepare for relief distribution and measures, the victims are least hopeful of getting compensated or relieved.

Being an agrarian country where agriculture contributes around 36 percent to the gross domestic product (GDP) and employs around 66 percent of the total population, the unusual rainfall very accurately has shown the fault lines in the government’s policies and practices with regards to the sector. Even with warnings and cautions from the Department of Hydrology and Meteorology (DHM), concerned authorities seemed lax in their approach and preparation regarding the weather change and the heavy rainfall. Moreover, with the Covid-19 pandemic and its repercussions already adding to the woes of farmers, the current situation has further exposed their risks, with little hopes of bouncing back.

Considering this, the government this time must focus on concentrated efforts rather than simply allocating token relief materials. For instance, ensuring relief coverage to all farmers specially at rural and highly effected areas and establishment of storage and transportation facilities as immediate relief measures in the short-run and better access to seeds, fertilizers and other plant nutrients, provision of soft loan facility to farmers, access to irrigation and promotion of modern and commercial agricultural tools as intermediate relief measures in the long-run could help the disaster-stricken farmers and sector in gaining back their foothold.

Favorable environment for FDI inflows

Department of Industry (DoI) reported that the country received investment pledges of Nrs. 146 billion (USD 1.21 billion) during the first quarter of the current fiscal year (FY) 2021/22. A total of 194 companies, 107 foreign companies and 87 domestic companies have pledged amounts worth Nrs. 24 billion (USD 199 million) and Nrs. 122 billion (USD 1.01 billion), respectively. Similarly, foreign companies have also pledged to provide job and employment opportunities to 7,195 individuals across the country.

While a stable and favorable environment for investment has been credited for these investment pledges, collaboration between the Investment Board of Nepal (IBN) and the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) has also played a major role in attracting investment (both foreign and domestic) into the country. Both the government and the private sector were vying to fulfill the country’s investment requirements and ambitions.

Nepal is in need of diversified investment across various economic sectors to transform the country’s economy from a traditional model to a more modern one. Moreover, coordination and communication between the government and private entities was also long overdue. Nevertheless, the gap between the FDI pledged and realization needs proper addressing. Lengthy and cumbersome legal procedures might result in investments not reaching targeted economic sectors. Thus, both IBN and FNCCI need stronger lobbying to bring in changes in this matter; only then would their collaborative effort result in fruitful outcomes.