Manufacturing slack, low FDI inflow likely to crimp Nepal’s economic growth

KATHMANDU (The Kathmandu Post/ANN) – Foreign investment is key, but the country needs to increase exports and focus on agriculture, tourism and IT to sustain growth, analysts said.

Last week, Nigeria’s Dangote Cement said it was planning to exit Nepal, as it failed to get a suitable mine from the government six years after it got the foreign direct investment approval from Investment Board Nepal.

Dangote, which was among the first of the companies to apply for foreign direct investment in 2013, stands at a crossroads.

At a time when the global economy is showing clear signs of slowing down, Nepal would be struggling to meet its gross domestic product growth rate target in the current fiscal year and thereon if the government cannot retain the investors, experts said.

“Nepal, in fact, has failed to build confidence among the investors,” said Chandan Sapkota, an economist. Buoyed by three successive years of high GDP growth, the government has set an ambitious economic growth target of 8.5 per cent for the current fiscal year. In addition, it has targetted an average growth rate of 9.6 per cent for the next five years.

To achieve an average economic growth of 9.6 per cent over the period, Nepal’s gross fixed capital formation (investment) should be Rs9.22 trillion, according to the Approach Paper of 15th Periodic Plan (2019/20-2023/24). But the national account, produced by the Central Bureau of Statistics in April this year, said such investment in the economy in the current fiscal year stood at just Rs1.27 trillion, leaving a huge gap of resources to be filled in the next five years.

Nepal’s economy grew by 6.8 per cent in 2018/19, which the government dubbed the base year for economic transformation. According to the Nepal Rastra Bank, the country’s economy grew 6.3 per cent in 2017/18 and 7.7 per cent in 2016/17.

“The growth in the last fiscal year was an outcome of post-earthquake reconstruction, electricity supply, an uptick in the tourism sector and good weather conditions that helped agriculture,” Shankar Sharma, former vice-chairman of the National Planning Commission, told the Post. Though the country’s current economic status is not in the doldrums, “sustainability of high growth is questionable because year-round irrigation system has reached just 25 per cent of farmland, industrialisation is weak and there is no sector which can drive the economy”, according to Sharma. Despite robust growth in the previous years, other key sectors of the economy, however, are staring down the barrel.

According to analysts, while foreign investment is key, the country needs to boost the manufacturing sector and industries, increase exports and focus on areas like agriculture, tourism and information technology to sustain high economic growth.

What is concerning is, said Sharma, the manufacturing sector has slowed down and the capital expenditure has not been up to the mark. Despite an increased growth in the overall economy, the growth in the manufacturing sector slowed to 5.78 per cent last fiscal year from 9.17 per cent the previous year, latest figures show. The decreased growth rate in the manufacturing sector comes in the backdrop of the declining number of new industry registrations and a decrease in domestic and foreign investment commitments in industries.

According to the Department of Industry, industry registrations fell to 436 last fiscal year from 498, total committed investment dropped to Rs282 billion from Rs350 billion the previous year and foreign direct investment pledges also nosevided to Rs24 billion from Rs56 billion during the same period.

The actual inflow of foreign direct investments into Nepal also decreased to Rs13 billion from Rs17.5 billion year-on-year in the financial year that ended in July, according to data from the Nepal Rastra Bank.

“Cost of doing business in Nepal is relatively high. So far, we have not been able to improve on this situation,” said Senior Vice-President of the Federation of Nepalese Chambers of Commerce and Industry Shekhar Golchha, the apex private sector body.

Reduced foreign direct investments along with widening trade deficit resulted in a negative balance of payment of Rs67 billion last fiscal for the first time in 10 years, according to Nepal Rastra Bank. Likewise, the foreign exchange reserves had decreased by Rs64 billion and the trade deficit had widened by 13 per cent to Rs1.32 trillion.