9/25/22, 12:25 AM Nepal / Economic Studies - Coface

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POPULATION

NEPAL 28.8 MILLION

GDP PER CAPITA
C B
1,178 US$ COUNTRY RISK BUSINESS
ASSESSMENT CLIMATE

SYNTHESIS

MAJOR MACRO ECONOMIC INDICATORS

  2019 2020 2021 (e) 2022 (f)

GDP growth (%) 7.5 -1.9 2.7 3.9

Inflation (yearly average, %) 4.6 6.1 4.9 5.1

Budget balance (% GDP)* -4.6 -5.2 -6.9 -7.7

Current account balance (% GDP) -7.7 -0.9 -1.2 -3.2

Public debt (% GDP) 32.6 36.4 41.9 46.7

(e): Estimate (f): Forecast *Fiscal year 2021: July 2020 - June 2021

STRENGTHS WEAKNESSES

Expatriate remittance flows (23% of GDP) Landlocked, poor accessibility, dependence on

support household consumption, the main driver Indian ports
of growth Lack of infrastructure, electricity and fuel
Strong agricultural sector (26% of GDP in 2021 shortages, undiversified export basket (clothing
and 80% of employment) and agriculture)
Financial and technical support from India and Heavy dependence on the Indian economy
China through imports (65% of total imports), exports
Recipient of vast sums of regional aid (in (57% of total exports) and a currency peg
particular from the Asian Development Bank) and
international aid

RISK ASSESSMENT

A slow and fragile recovery 

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devastating wave in July 2021. This economic rebound is expected to continue into 2022.
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9/25/22, 12:25 AM Nepal / Economic Studies - Coface
Wholesale and retail trade, transport and financial services initially drove the recovery, while favourable monsoons boosted
agricultural production. In 2021, tourism (10% of GDP) was at a standstill. In 2022, growth should be driven particularly by services
(60% of GDP), thanks to a recovery in the hotel and tourism industries, by agriculture, which will be boosted by government
investment programmes in irrigation, and by industrial activity, in areas including textiles, carpets, cigarettes and cement.
 
On the demand side, private consumption (80% of GDP) will remain the main driver of the recovery, thanks to improved household
confidence (strengthened by continued employment aid measures), the ongoing vaccination campaign (by September 2021, 19.5%
of the population had been fully vaccinated) and the resumption of expatriate remittance flows, which are expected to pick up
notably due to an upturn in employment in Qatar and Malaysia, where the majority of Nepalese expatriates work. Private investment
(23% of GDP) began a rebound in 2021 that should continue, thanks to government support programmes, especially for the sectors
hardest hit by the crisis, and to relatively low (subsidised) interest rates. However, the rebound is threatened by the health and
political uncertainty of the coming months. Public investment should also pick up, as it is a priority for the Nepalese government. In
this regard, a national project bank has been created to improve the management and implementation of public investments. All
projects above NPR 500 million (USD 4 million) will now have to be evaluated before being funded, in order to target those needed
by the country.
 
Deficits widen with the recovery
The current account deficit widened in 2021 and is expected to continue on this trend in 2022 as imports recover faster than exports
and remittance flows. Imports will be driven by firmer domestic demand, particularly in the construction sector, and by the rise in
prices of commodities such as oil (+40% between January and September 2021), Nepal's main import. Exports will also pick up, to
a lesser extent, in response to the recovery in global demand, particularly for agricultural products, which account for 30% of
Nepal's exports (palm oil, soybean oil, cardamom, etc.). Exports will remain below pre-crisis levels until international tourism
recovers fully. The current account deficit is financed in part by international financing, which has increased because of COVID-19,
and by the central bank’s foreign exchange reserves, which remain high (over ten months of imports), allowing the currency to
remain pegged to the Indian rupee.
 

The budget deficit is expected to persist. Government revenues will remain insufficient, while spending will continue to be necessary
to maintain support for the economy, including measures to facilitate market access for smaller companies, fund vaccination
campaigns and finance numerous public investments. As a result, public debt will increase in 2022, but will remain manageable.
 
A country on the brink of political crisis
Political uncertainty has increased since December 2020, when the then Marxist-Leninist prime minister, K.P. Sharma Oli, who had
been in office since 2018, dissolved parliament in response to tensions within his majority, an alliance of Marxist-Leninists and
Maoists. Tens of thousands of the prime minister’s supporters took to the streets to express their support for him. The Supreme
Court overturned the dissolution decision and reinstated parliament in February 2021, precipitating a split in the two-party majority
coalition. In May, after trying for a second time to dissolve parliament, Oli lost a confidence vote. After a final attempt by the prime
minister in July 2021, the Supreme Court finally removed him from office and appointed the main opposition leader, Sher Bahadur
Deuba, a member of the Nepali Congress (NC) party, in his place. The new prime minister-designate, who will be taking up the post
for the fourth time, faces many challenges, which include strengthening agreement within his party and between the different
parties, and, most importantly of all, ensuring that the next local, provincial and federal elections, scheduled for November 2022, are
duly held. If the elections are delayed, Nepal may face a political and constitutional crisis.
 

Geopolitically, the new prime minister is reversing the trend of his predecessor to pursue a gradual realignment towards India and
away from China. The country remains a disputed zone of influence between the region’s two giants: it is the third-largest recipient
of Indian aid and is also part of China's Belt and Road initiative.
 
Last updated: February 2022

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