World Bank Nepal Update Forecasts Economic Growth and Inflation Trends

World Bank’s Nepal Development Update outlines growth projections, inflation expectations, and fiscal challenges for the nation.
World Bank
World Bank

According to the World Bank's Nepal Development Update, consumer price inflation in Nepal is predicted to remain at 6.7% in fiscal year 2024, close to the central bank's 6.5% target. This estimate is based on a number of factors, including the loss of VAT exemptions, India's food export limitations, and increasing paddy minimum support prices.

Inflation is expected to fall by 6% in FY25 and 5.5 percent in FY26, owing to global commodity price reduction and domestic price management through monetary policy measures. Furthermore, decreasing inflation in India may help to reduce domestic inflation through the currency peg, thereby lessening imported inflation.

The report also predicts that Nepal's economic growth will rebound from 1.9% in FY23 to an anticipated 3.3% in FY24, with an average acceleration to 5% in FY25-26. This rebound is projected to be supported by monetary policy relaxation and business-friendly measures, which might attract more private investment and boost medium-term development prospects.

While the services sector is likely to be the key engine of growth, thanks to an increase in tourist arrivals and government policies that encourage real estate lending, the industrial sector is expected to profit from considerable increases in electricity generation capacity. However, agricultural growth may stall due to a variety of issues, including an epidemic of lumpy skin disease in animals and a decline in paddy output growth.

The report also notes the expected improvement in the current account balance, which will return to surplus in FY24 due to strong remittance growth and a shrinking trade deficit. Subsequent years may see a diminishing surplus as remittances decline and the trade deficit grows. On the budgetary front, Nepal's fiscal deficit is forecast to fall significantly from its peak in FY23, stabilizing around 3% of GDP in the medium term, thanks to increasing revenue and better execution of public investment.

Geopolitical uncertainty, a recession in partner nations that affects remittances and tourism, persisting inflation expectations, and natural disasters are all ongoing challenges. The research emphasizes the importance of improving capital expenditure execution and efficiency, implementing sound monetary policy, and addressing the growing amount of non-performing loans in the financial sector to promote economic growth and stability. Furthermore, initiatives to diversify external revenue streams beyond remittances, such as tourism and foreign direct investment, are critical to Nepal's economic resilience and sustainability.

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