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Economic Development: Issues of Nepal (Macroeconomics 2016)

Presentation · July 2017

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Presented By: Pradeep Panthi
Graduate School of International Development
Department of International Development, Nagoya University
Date: July 20, 2017 (Thursday)
Venue: Lecture-3, GSID
Thursday, July 20, 2017 Pradeep Panthi 1
 Outline :
• Background Information of Nepal
• Scenarios of Macro Economic Indicators
• Development Issues
• Policy Recomendation

Thursday, July 20, 2017 Pradeep Panthi 2

 Background Information of Nepal
• Landlocked country. China in north and India in south, east and west.
– North: Full of Mountains. Low population density, poor transport and lack of infrastructure.
– Middle: Hills of Green Forest and semi-urban cities. (Capital city, high cost of infrastructure,
migration is increasing.)
– South: Fertile land with major cities, industrial states, high population density.
• Country of cultural and natural diversity , temples and high altitude mountains.
• 10 world heritages are in Nepal and out of them 7 are in Kathmandu (Capital city of Nepal)
• Former political system: Kingdom of Nepal. (From 1768 to 2008, 240 years)
• Now, Federal Democratic Republic of Nepal after 2008.
• Around 80% people of Nepal are Hindu.
• Non colonized throughout the history.
• Politically unstable but religious harmony.
• Very small in size but more than 120 ethnical groups are in Nepal.
• More than 80 languages. The most common languages are Nepalese, Hindi and English.

Data Source: UNESCO and National Population Census 2011, CBS, Nepal
Thursday, July 20, 2017 Pradeep Panthi 3
 Summary of Macro Economic
Indicators
Nepal population: 28.17 Million (2014)
GDP (Nominal): $ 24.067 Billion (2016) (0.025% of World GDP)
GDP (PPP): $ 74.020 Billion (2016)
GNI per Capita: $862 (2016)
People below poverty line: 25.2 % (2010)
Gini (2010) 32.8 (Medium)
HDI (2016) 0.558 (Medium) 144th
Contribution of Agriculture: 70% of livelihood / 2/3rd of total Economy (Formal and Informal Economy)
(Decreasing due to overseas work)
Remittance Ratio : 29.6% of total GDP (2015/16)
• As per world bank report, Nepal stand second among the countries receiving the highest ratio of remittance to
GDP
• The growth rate of remittance inflow averaged 21.8 percent during last five years.
• Increasing due to overseas work and migration
Ave. GDP Growth: 3.55% (Since 2001 to 2015)
Ave. Inflation at CP : 7.51% (Since 2001 to 2015)
• Price control is always a major challenge in Nepal

Thursday, July 20, 2017 Pradeep Panthi 4

 Population Structure

Thursday, July 20, 2017 Pradeep Panthi 5

Source: www.populationpyramid.net
 Expected Population Structure of Nepal by2060

Source: www.populationpyramid.net
Thursday, July 20, 2017 Pradeep Panthi 6
 GDP Structure-1
Agriculture sector and Non Agriculture Sector
Agriculture Sector:36.6% (F/Y2000/01) to 33.1% (F/Y 2014/15) (Contribution to GDP is decreasing)
Non Agriculture Sector: 63.4 % (FY 2000/01) to 66.9% (F/Y 2014/15)
§ Industrial Sector (Contribution to GDP is decreasing)
§ Service Sector (Contribution to GDP is increasing)

F/Y 2000/01 F/Y 2014/15

37% Agriculture 33% Agriculture

Sector Sector
Non agriculture Non agriculture
63% 67%
Sector Sector

Analysis: The structure of Nepalese economy is slightly changed in last 15 years.

Data Source: Economic Survey, MoF, 20001/02 to 2015/16
Thursday, July 20, 2017 Pradeep Panthi 7
 GDP Structure-2
• Primary Sector and Secondary Sector to GDP
• Primary sector: 37.0% (F/Y 2000/01) to 32.3% (F/Y 2014/15)
• Secondary sector: 17.9% (F/Y 2000/01) to 14.5% (F/Y 2014/15)
• Tertiary sector: 45.1% (F/Y 2000/01) to 53.2% (F/Y 2014/15)

60
Primary Sector
50
Secondary Sector
40 Tertiary Sector
% in Unit

30

20

10

0
F/Y2000/01 F/Y2014/15
Fiscal Years

Ø Primary Sector: 1. Agriculture, 2. Forestry and 3. Fishery.

Ø Secondary Sector (Industry Group): 1. Industries of Mining, 2. Quarrying, 3. Processing Industries, 4. Electricity, 5. Gas
and Water Supply and 6. Construction.
Ø Tertiary Sector (Service Sector): 1. Trade and Commerce, 2. Hotel Industries, 3. Transport, 4. Storage and Communication,
5. Financial Intermediation, 6.Real Estate, 7. Public Administration and Defense, 8. Education, 9. Health and Other
Community, Social and Personal Services.

Data Source: Economic Survey, MoF, 20001/02 to 2015/16

8
Thursday, July 20, 2017 Pradeep Panthi
 Annual GDP Growth and Inflation
14
Nepal Mega Progress on
Earthquake and Reconstruction and
Change on political system
Economic Blockage Normalization of
12 from ‘Kingdom of Nepal’
from India International Trade
to ‘Federal Democratic
with/ through India
Republic of Nepal’

10

Year of peoples
8 movement and
peace agreement.
End of the civil war.

0
2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Real GDP (At Basic Price) Inflation Rate (CPI)

Thursday, July 20, 2017 Pradeep Panthi 9

100%

90%

80%
44.97 45.96 48.16 47.84 46.26 47.99
49.35 49.94 49.59 49.19 50.43
70%

60%

50%
17.86 17.7 15.45
17.2 15.63 15.52 15.71
17.09 17.33 16.37 15.23
40%

30%

20% 37.17 38.3

36.35 34.64 33.56 34.03 36.53 36.49 35.1 34.35
32.73
10%

0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Agriculture Industry Services

Data Source :World Bank,2015

Thursday, July 20, 2017 Pradeep Panthi 10
Comparing Nepal’s GDP Per Capita with
Some of the Asian Economic Giants
50000
GDP per capita (constant 2010 US$)

45000

40000

35000

30000

25000

20000

15000

10000

5000

0
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
India China Japan Korea Nepal

Source: World Bank (2017)

Thursday, July 20, 2017 Pradeep Panthi 11
 Nepal and South Asia

Thursday, July 20, 2017 Pradeep Panthi 12

 Recent economic progress is
remarkable

Thursday, July 20, 2017 Pradeep Panthi 13

 International Trade
Major Trade Partner: India (60% of total trade and 85% of total import enter through India.)
Major Imports: Petroleum, machinery and equipment, electric goods and medicine
Major Export: Clothing, pulses, carpets, textiles, juice, pashmina, agro products.
Balance of Trade Deficit (always negative) (83:17) (2014/15)
BOP Surplus-Balanced by remittance income, foreign aid and tourism
income.
Composition of Export and Import
• The top exports:
Flavored Water (9.1), Knotted Carpets (8.2), Nutmeg (5), Fruit Juice (4), Yarn Febric (3.9), Plastic
Products (3.3), Textile Footwear (2.7), Jute Fabric (2.6), Scarves (2.6) Coated Flat-Rolled Iron
(2.5), Packing Bags (2.4), Iron Pipes (2.3), Iron Wire (1.8) Tea (1.6) etc.
• The top imports:
Refined Petroleum (8.7), Silver (4.3), Planes, Helicopters, and Spacecrafts (3.4), Semi-Finished
Iron (3.2), Rice (3), Gold (2,6), Medicine (2.2), Petroleum Gas (2.1), Broadcasting Equipment (2),
Hot-rolled Iron (1.8), Vehicle Chassis and Delivery Trucks (1.9), Soybean oil (1.4), Motorcycles
(1.4), Cars (1.2) etc.

Data Source: Economic Surveys, MoF, 2015/16

Thursday, July 20, 2017 Pradeep Panthi 14

 Trade Partners
EXPORTS Destinations % of Share IMPORTS Origins % of Share
India 62 India 58
USA 10 China 14
Germany 4.1 UAE 4.1
UK 3.2 Germany 2.2
China 2.3 Switzerland 2.1
France 1.8 Indonesia 1.7
Turkey 1.7 Turkey 1.3
Japan 1.6 Thailand 1.3
Others 13.3 Others 15.3

Thursday, July 20, 2017 Pradeep Panthi 15

 Nepal’s International Trade
(Exports (X), Imports (I) of Goods and Services
Trade Balance(I-X)
10

4
Current US$ Billion)

2 Exports(X)
Imports (I)
0 Trade Balance (I-X)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-2

-4

-6

-8

Data source: World Development Index 2016, World Bank Report and Authors Calculation
Thursday, July 20, 2017 Pradeep Panthi 16
 Nepalese Labor Market and Remittance Income
• Growth on employment opportunities is only at 2.9%
• Annual entry of labor force to labor market is estimated more than 450,000 per year.
• Nepal receives worker remittance worth Rs. 1.5 billion (About USD 15.08 million) every day.

Effect of Remittance Income and Forex Reserve

World (% of Nominal GDP)
Financial
50 Crises 2008 to Simple correlation
45 2010 (Pxy) between
40 Remittance Income (X)
35 with Forex Reserve (Y):
% in Unit

30 0.736
25
20
15
Remittance Income
10
5 (X)
0 Foreign Exchange
Reserve (Y)

• Data of first eight months of current fiscal year. Simple Correlation: Authors' calculation.

Source: Author’s calculation based on data of Economic Surveys, MoF, 2001/02 to 2015/16
17
Thursday, July 20, 2017 Pradeep Panthi
 Exchange Rate of Nepali Rupee and Indian Rupee with USD ($)

Effect of Global
Financial Crises
2008 to 2010 in
120 Indian Economy is
subsequent to Nepal
100

80
Value in Rupee

60

40 Simple Correlation (Pxy)

between Exchange rate of
Nepalese Rs. to USD (X)
20 with Indian Rs to USDY) =
0.987

Fiscal Years
+. Per Unit of $ (Y) ₹ Per Unit of $ (X)
Sources of Data: MOF, Economic Survey 2001 to 2016 and Handbook of Statistics on Indian Economy, RBI, 2014/15
Note: Nepali Rupee is denoted by (Rs. +. / रूपैयाँ) 18
Indian Rupee is denoted by ((Rs./₹ /रुपया) Pradeep Panthi Thursday, July 20, 2017
 Development Issues of Nepal
Domestic Economic Issues:
Political uncertainty and poor business climate, persistent power shortage, landlocked geography, lack of
infrastructure, labor strikes and natural disaster etc.
Bilateral and Multilateral Economic Issues:
Debate on involvement of India, China and regional alliance over FDI on Hydropower, Mines and other Mega
Projects of Nepal.
Recent Development Issues:
1. Earthquake of 7.8 Magnitude (April 25, 2015)
Death of more than 8000 people and 18,000 injured.
Estimated the value of losses at USD 7.1 billion
1. Physical damage of USD 5.2 billion and economic losses)
2. Spanning several years, of USD 1.9 billion ( GoN, PDNA reports)
The international community has pledged nearly $4.23 billion in assistance, but the government estimates that it
will cost around $7 billion for reconstruction.
2. Official/ Unofficial Economic Blockage from India around six months (September 20, 2015 to Mid-
February 2016)
Result:
1. GDP growth rate of 2015 is downsized to 0.77% due to earthquake and economic blockage.
2. GDP growth rate of 2016 stood as 7.5% due to progress on reconstruction activities, improvement on
power supplies and business environment and the trade between India and Nepal is normalized.
Thursday, July 20, 2017 Pradeep Panthi 19
 Policy Recommendation:
• Commercialization of Hydropower (Hydropower 42000 MW )
• Agriculture sector must be promoted for sustainable development.
• Migration is to be controlled.
• The money received from remittance should be utilized in productive sector, for example:
Agro-based industries or small, medium size cottage industries.
• Trade linkage between India and China should be developed in an efficient manner.
• Government should try to attract more FDI balancing geopolitical interest of international
communities especially India and China.
• Given its diverse geographic, economic, and social features, Nepal’s development efforts
should be a region-based development approach.

Thursday, July 20, 2017 Pradeep Panthi 20

Reference:
• Economic surveys, MoF, 2001/02 to 20015/16 Ministry of Finance, Kathmandu.
• Handbook of Statistics on Indian Economy, 2014/15. Reserve Bank of India, New Delhi.
• Maddison Project. (2014). Retrieved May 28, 2016, from
http://www.ggdc.net/maddison/maddison-project/home.htm
• National population census 2011. Central Bureau of Statistics, Nepal.
• Nepal Development Updates 2015 and 2016, World Bank Report.
• The World Bank. (2015). Retrieved May 25, 2016, from http://data.worldbank.org/:
http://data.worldbank.org/country/nepal
• Trading Economics. (2016). Retrieved May 28, 2016, from
http://www.tradingeconomics.com: http://www.tradingeconomics.com/nepal/gdp-growth-
annual
• World Development Index 2016, World Bank report.

Thursday, July 20, 2017 Pradeep Panthi 21

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