Nepal Development Update

Nepal Development Update - October 2024

Executive Summary

Recent Economic Developments

• Real GDP Growth: Nepal's real GDP growth accelerated to 3.9% in FY24, up from 2% in FY23. The services sector was the primary driver, fueled by a 30.7% surge in tourist arrivals, which boosted transportation, accommodation, and food services.

• Tourism and Hydropower: Increased hydropower production by over 450 MW and a 4.3% rise in paddy production also contributed to growth.

• Private Consumption: Private consumption, accounting for over 80% of GDP, grew by 1.1% in FY24, up from a record low of 0.7% in FY23. However, private investment slowed, with high-frequency indicators like lower private investment commitments and reduced imports of intermediate and capital goods indicating a downturn.

• Current Account Balance: Reduced imports and robust remittance inflows bolstered the current account balance, resulting in a surplus of 3.9% of GDP—the first in eight years.

• Trade: Merchandise imports decreased, particularly intermediate goods, due to various factors including tariff cuts and export restrictions. Electricity exports reached a record high, and service exports grew due to increased tourist arrivals.

• Foreign Exchange Reserves: Official foreign exchange reserves grew, covering 13 months of imports by the end of FY24.

• Fiscal Deficit: Despite stagnant revenues, the fiscal deficit narrowed to a seven-year low of 2.6% of GDP in FY24. This was largely due to a 2.2 percentage point reduction in recurrent spending, driven by lower fiscal transfers to subnational governments and austerity measures targeting recurrent expenditures.

• Revenue: Government revenue remained stable at around 19% of GDP in FY24, the lowest level of revenues in eight years.

• Budget Execution: Budget execution rates fell below 80% in both FY23 and FY24, reflecting deteriorating budget execution since FY18. Poor revenue collection and chronically low capital expenditure execution have been major issues.

• Public Debt: The lower fiscal deficit led to a slight reduction in public debt to 42.7% of GDP in FY24 from 42.9% at the end of FY23. Public debt remains sustainable, with a high share of concessional external debt, and domestic debt comprising 49% of the total.

• Inflation: Average headline inflation moderated to 5.4% in FY24, down from 7.7% in FY23, below the Nepal Rastra Bank’s target of 6.5%.

Special Focus: International Migration and Well-being in Nepal: Maximizing Benefits and Leveraging Long-Term Growth

• The State of Migration: Nepal has seen a significant increase in migration, driven by both internal and international movements.
• Migration Trends: There has been a notable increase in migration to Gulf countries and other destinations, with remittances reaching a nine-year high.
• Making the Most of Migration: Policies need to focus on leveraging migration benefits, including improving skills, enhancing social safety nets, and promoting entrepreneurship among migrant workers.

This summary provides an overview of Nepal’s economic performance and key trends, highlighting the role of tourism, remittances, and fiscal policies in driving growth and addressing challenges.