2015-09-03

Nepal Macroeconomic Update

August 2015, Vol.3, No.2

Chandan Sapkota
Asian Development Bank
Nepal Resident Mission

Press briefing at Nepal Resident Mission, 03 September 2015

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.

2015-09-03

Presentation Outline
1.

Macroeconomic overview

2.

Performance in FY2015

Real sector

Fiscal sector

Monetary sector

External sector

3.

FY2016 growth outlook

4.

FY2016 inflation outlook

5.

Fiscal sustainability and reconstruction

2015-09-03

Macroeconomic overview

The April 25 Gorkha earthquake and subsequent aftershocks affected

GDP growth & per capita income
Absolute poverty level
Progress on achieving some of the MDGs
Expenditure performance
Revenue mobilization
Financial sector
Migration & remittance inflows
Exports
Imports
Balance of payments

2015-09-03

Real Sector

2015-09-03

GDP growth slowed down

6

GDP growth (basic prices)

5.1

4.6

4.6

4.3
3.8

3.8

3.0

0
FY2010

FY2011

FY2012

FY2013

FY2014R

Post-quake

Pre-quake
FY2015P

Agriculture

Manufacturing

Construction

Other industry

Wholesale & retail trade

Real estate & renting

Other services

GDP growth (basic prices)

Total gross value added loss of $371 million in FY2015

2015-09-03

Services sector was hit the hardest

Sub-sectoral growth in FY2015
Real estate, renting & business activities

Mining & quarrying

FY2015 post-quake growth

Electricty, gas & water

Decline in growth due to the April

earthquake

Financial intermediation
Agriculture & forestry
Manufacturing
Wholesale & retail trade

Construction
Hotels & restaurants
Education
Transport, storage & communications
Community, social & personal services
Public administration & defence
Fishing
Health & social work

-1

11

62% of total gross value added loss accounted for by services sector
2015-09-03

Domestic investment commitment went down

350

80

Domestic Investment commitment (NRs billion)

70

289

300

FDI commitment & actual inflows (NRS billion)

60

250
50
200
40
150

133
120
90

100

30

84

20
50

39
27

10

0
FY2009

FY2010

FY2011

FY2012

FY2013

Energy

Manufacturing

Service

Tourism

Agriculture

Mineral

Construction

Total

Commitment (% of GDP):

FY2014

FY2015: 6.3% of GDP

FY2014: 14.9% of GDP

2015-09-03

FY2015

FY2010

FY2011

FY2012

Energy
Manufacturing
Agriculture
Construction
Actual FDI inflows

FY2013

FY2014

FY2015

Service
Tourism
Mineral
Total FDI commitment

Commitment in FY2015: 3.2% of GDP

Actual inflows in FY2015: 0.21 % of GDP

8

Fiscal Sector

2015-09-03

Public expenditure performance remained sluggish

120

Expenditure growth

100

120

Absorption capacity

100

82.6

80

78.4

80

60

71.8

71.6

70.8

FY2009

FY2010

FY2012

69.9

60

40
40

20
20

0
0

Recurrent

Capital

Total expenditure

Recurrent (% of allocation)

FY2013

FY2014

FY2015R

Capex (% of allocation)

Actual capital spending was about 70% of planned capital spending

2015-09-03

10

Capital spending is too slow and too low

Capital budget (% of GDP)
Furniture and
fittings

Public expenditure (% of GDP)

30
FY2014
25

FY2015R
Vehicles

20.0
20
Land
15.4

15.9
14.6

15

Plant and
machinery
Capital
contingencies

10

Research and
consultancy

15.6

15.9

8.6

3.5

3.4

3.2

3.4

3.8

Building
0

Civil works
0.0

1.0

2.0

3.0

4.0
Total

2015-09-03

Recurrent

Capital

11

High bunching of spending

140

120

100

80

60

40

20

0
Aug-14

Sep

Oct

SAARC Summit
preparation/Dashain/Tihar

Nov
SAARC
Summit
Recurrent

Dec

Jan-14

Feb

Mar

Apr

Normal budget execution

Capital

Financing

May

Jun

Jul-15

Post April 25 earthquake

Total expenditure

One-fourth of total spending done in last month; 45% in last three months
44% of actual capex in the last month; 63% in last three months
2015-09-03

12

Revenue mobilization slowed, but remains robust

Revenue growth

25

Tax and nontax revenue (% of GDP)

50
20
2.3

40

2.3
2.2
2.1

15
1.5

30

2.1
2.1

1.5

1.8

10

20

15.3
13.4
11.9

10

9.8

13.0

16.1

16.8

13.9

10.5

0
Value
Income tax Customs
added tax

Excise

FY2014R

2015-09-03

Land
Vechile tax Educational
registration
service tax
fee

FY2015P

Tax revenue

Non-tax revenue

13

Primary surplus and a marginal fiscal deficit

Fiscal indicators (% of GDP)

25

20

15

10

Primary and fiscal balance (% of GDP)

FY2010

FY2011

FY2012

FY2013

FY2014

FY2015R

-1

0
FY'2009 FY'2010 FY'2011 FY'2012 FY'2013 FY2014 FY2015R

-2

Domestic revenue

Grants

-3

Capital expenditure

Fiscal balance

-5

2015-09-03

Recurrent expenditure

Primary balance

Fiscal balance

14

Outstanding public debt is declining

60

4.0

Public debt (% of GDP)

51.9

Principal and interest payment (% of GDP)

3.5

50
44.0

3.0
40.5

40

2.5
32.5

32.2

30
25.6

2.0

1.5

20

1.0
10
0.5
0

0.0
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015

Internal

2015-09-03

External

Outstanding debt

Internal principal repayment

External principal repayment

Internal interest payment

External interest payment

15

Monetary Sector

2015-09-03

16

Inflation moderated to 7.2%

16

14

Food inflation

14

12

12

10

10

Non-food inflation

Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
FY2013

14.0

FY2014

FY2013

FY2015

FY2014

FY2015

Inflation (Y-o-Y)

Overall inflation

12.0

Year

Average

Food

Non-food

FY2010

9.6

15.1

4.9

FY2011

9.6

14.6

5.3

FY2012

8.3

7.7

9.0

2.0

FY2013

9.9

9.7

10.1

0.0

FY2014

9.1

11.6

6.8

FY2015

7.2

9.6

5.2

10.0
8.0
6.0
4.0

Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
FY2013
FY2014
FY2015

2015-09-03

Jul

Jul

17

Money supply and deposit growth up

Monetary sector (% change)

40

Growth rate of deposit

30
35
25
30
20

25

15

20

10

15
10

5
0
M2

Net foreign Net domestic Credit to Net claims on

assets
assets
private sector Government

0
FY2011

-5

FY2012

FY2013

FY2014

FY2015

-5
-10

-10

-15

-20

2015-09-03

-15

FY2013

FY2014

FY2015

Commerical banks

Development banks

Finance companies

Total deposit

18

Credit growth picked up (mostly to services sector)

Growth rate of credit

30

40

Annual change in credit (NRs billion)

35

25

30

20

25

15

20

10

15
5
10
0
FY2011

FY2012

FY2013

FY2014

FY2015

-5

0
FY2007FY2008 FY2009FY2010 FY2011FY2012 FY2013FY2014 FY2015

-10
-5
-15
-10

Commerical banks

Development banks

Finance companies

Total credit

2015-09-03

-15

Construction

Real estate

19

Low short-term interest rates & stable policy rates

2.50

Interbank rate

91-day treasury bills rate

2.00

1.50

1.00

0.50

0.00

Jul

Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Interbank rate

91-day treasury bills rate

FY2015

8
6
4
2
Jun-13
Jul
Aug
Sep
Oct
Nov
Dec
Jan-14
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan-15
Feb
Mar
Apr
May
Jun
Jul

CRR-Commerical banks
CRR-Development banks
CRR-Finance companies
Bank rate and Standing Liquidity Facility rate

2015-09-03

CAR (Total capital fund / Total risk

weighted exposures)

Policy rates (%)

14

CAR and NPL

12
10
8
6
4
2
0

Capital adequacy ratio

4.5
4
3.5
3
2.5
2
1.5
1
0.5
0

NPL (Non performing loan/Total

loan)

FY2014

10

Jul

Aug-11
Nov
Feb
May
Aug-12
Nov
Feb
May
Aug-13
Nov
Feb
May
Aug-14
Nov
Feb
May

Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Min CAR + buffer

Non-performing loan

20

Stock market volatility persists

90

Turnover (NRs billion)

70

Stock market performance

Trading

77.3

80

1200

65.3

Preferred Stock

1000

Manufacturing &
Processing
Mutual Fund

800

60
Others
50

Hotel

40

Finance
Companies
Promoter Share
Development
Banks
Hydropower

30
22.0

20

Insurance
Companies
Commercial Banks

10.3

600

400

200

0
FY2011

FY2012

FY2013

FY2014

FY2015

10
Total
0
FY2012

2015-09-03

FY2013

FY2014

FY2015

Market capitalization (NRs billion)

Number of listed companies
NEPSE index (closing)

21

External Sector

2015-09-03

22

Trade deficit marginally up: Growth of imports > exports

Share of GDP

2015-09-03

FY2013

FY2014

FY2015

TOTAL EXPORTS

4.5

4.7

4.0

To India

3.0

3.1

2.6

To China

0.1

0.1

0.1

To Other Countries

1.4

1.5

1.3

TOTAL IMPORTS

32.8

36.8

36.5

From India

21.7

24.6

23.1

From China

3.7

3.8

4.7

From Other Countries

7.5

8.4

8.6

TOTAL TRADE BALANCE

-28.3

-32.1

-32.4

With India

-18.6

-21.5

-20.5

With China

-3.6

-3.6

-4.6

With Other Countries

-6.1

-6.9

-7.3

23

Overseas migration slowed down, but remittance accelerated

600,000

Malaysia

Migrants & destination

600,000

Migration & remittances

35

Qatar

527,814

453,543

Saudi
Arabia
UAE

384,665

400,000
354,716

300,000

294,094

Others
Kuwait
South
Korea
Bahrain
Oman

200,000

Japan

30

500,000

25
400,000
20
300,000
15
200,000
10

100,000

Workers' remittances (% of GDP)

500,000

Number of overseas migrant workers

512,887

Afghanist
an
100,000

Lebanon

Israel
Total

FY2010 FY2011 FY2012 FY2013 FY2014 FY2015

Overseas migrant workers

Workers' remittances (% of GDP)

Remittance inflows reached a record 29.1% of GDP in FY2015

2015-09-03

24

High remittance inflows buoyed external stability

50

Balance of payments (% of GDP)

40
30
20
10
0

FY2010

FY2011

FY2012

FY2013

FY2014

FY2015

-10
-20

-30
-40
Export (fob)

Oil import

Non-oil import (cif)

Net services balance

Net income balance

Grants

Workers remittances

Net transfers excl grants & remittances

Capital account

Financial account

Current account balance

Balance of payments

CAB: 5.1% of GDP and BOP 6.8% of GDP

Gross forex: $8.3 billion (import cover of 11.2 months)
2015-09-03

25

60

1-Jan-11
4-Feb-11
10-Mar-
13-Apr-11
17-May-
20-Jun-11
24-Jul-11
27-Aug-
30-Sep-11
3-Nov-11
7-Dec-11
10-Jan-12
13-Feb-12
18-Mar-
21-Apr-12
25-May-
28-Jun-12
1-Aug-12
4-Sep-12
8-Oct-12
11-Nov-
15-Dec-12
18-Jan-13
21-Feb-13
27-Mar-
30-Apr-13
3-Jun-13
7-Jul-13
9-Aug-13
12-Sep-13
16-Oct-13
19-Nov-
23-Dec-13
26-Jan-14
1-Mar-14
4-Apr-14
8-May-14
11-Jun-14
15-Jul-14
18-Aug-
21-Sep-14
25-Oct-14
28-Nov-
1-Jan-15
4-Feb-15
10-Mar-
13-Apr-15
17-May-
20-Jun-15
24-Jul-15
27-Aug-

Exchange rate remains weak

Exchange rate (NRs/USD)

110
108.4
106.4

105

100

95

90

85

80

75

70

65
70.2

Depreciation of Nepalese rupee

2015-09-03

15 July 2011-15 July 2012: 19.9%

15 July 2012- 15 July 2013: 6.7%
15 July 2013- 15 July 2014: 0.9%
15 July 2014- 15 July 2015: 5.4%
26

FY2016 Growth and Inflation Forecast

2015-09-03

27

Cautiously optimistic on growth outlook

Supply-side contributions to growth

5.5

5.1

4.6

4.5

3.8

3.0

0
FY2012

FY2013

FY2014R

FY2015P

CBS
Agriculture

Industry

FY2016_s1

FY2016_s2

NRM forecast as of Aug 2015

Services

GDP growth (basic prices)

Late and subnormal monsoon

Scope and pace of post-earthquake reconstruction
Political uncertainties and supply disruptions
Net migration, remittances inflows and services sector growth

2015-09-03

28

Inflation to be elevated levels

12

Contributions to inflation

10

9.6

9.9

9.6

9.5
9.1
8.5

7.2

8.3

0
FY2010

FY2011

FY2012

FY2013

FY2014

FY2015

FY2016_s1

FY2016_s2

NRM forecast as of Aug 2015

Food and beverage

Non-food and services

Nepal-CPI

India-CPI

Expected low agricultural harvest

Higher demand for reconstruction materials and workers
Supply disruptions, including distribution networks
Political strikes
Depreciation of Nepalese rupee

2015-09-03

29

Fiscal Sustainability and Reconstruction

2015-09-03

30

Dearth of capacity but not funds!

Funds for
reconstruction is not an
issue
Pledged amount > public
sector needs

Capacity to accelerate
reconstruction projects
within the given
timeframe is an issue
2015-09-03

Adequate fiscal space to

finance (through
borrowing) postearthquake reconstruction
Debt stabilizing primary balance
Initial debt to GDP level

25.6%

Weighted real interest rate

-0.1%

GDP growth rate

Required primary balance

5.0%
-1.2%

31

Fiscal sustainability even with a primary deficit

Public debt and primary balance estimate (% of GDP)

45%
40%
35%
30%
25%

20%
15%
10%
5%
0%
-5%
2016

2015-09-03

2017

2018

2019

2020

2021

2022

2023

2024

Public debt_s1

Public debt_s2

Public debt_s3

Primary balance_s1

Primary balance_s2

Primary balance_s3

2025

32

ADBs commitment for reconstruction

2015-09-03

33

Thank You!

2015-09-03

34

2015-09-03

35