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Nepal - Economy (Notes)

ECONOMY Nepal ranks among the world's poorest countries, with a per capita income of around $322. Based on national calorie/GNP criteria, an estimated 31% of the population is below the poverty line. An isolated, agrarian society until the mid-20th century, Nepal entered the modern era in 1951 without schools, hospitals, roads, telecommunications, electric power, industry, or a civil service. The country has, however, made progress toward sustainable economic growth since the 1950s and is committed to a program of economic liberalization. Nepal launched its tenth five-year economic development plan in 2002; its currency has been made convertible; and fourteen state enterprises have been privatized, seven liquidated and two dissolved. Foreign aid accounts for more than half the development budget. The Government of Nepal has shown an increasing commitment to fiscal transparency, good governance, and accountability. Also in 2002, the government began to prioritize development projects and eliminate wasteful spending. In consultation with civil society and donors, the government cut 160 development projects that were driven by political patronage. Agriculture remains Nepal's principal economic activity, employing over 71% of the population and providing 38% of GDP. Only about 25% of the total area is cultivable; another 33% is forested; most of the rest is mountainous. Rice and wheat are the main food crops. The lowland Terai region produces an agricultural surplus, part of which supplies the food-deficient hill areas. Because of Nepal's dependence on agriculture, the annual monsoon rain, or lack of it, strongly influences economic growth. Nepal's exports increased 2.8% in FY 2005/2006 compared to an increase of 8.3% in FY 2004/2005. Imports grew by 9.8% in FY 2005/2006 compared with 9.2% in FY 2004/2005. Exports were constrained by a prolonged phase of general strikes, industrial closures, and political turmoil during the second half of FY 2005/2006 and also by a significant drop in Nepal's main export, ready-made textile products. The trade deficit for FY 2004/2005 was $1.2 billion, which widened to $1.4 billion in FY 2005/2006. Real GDP growth during 1996-2002 averaged less than 5%. Real growth experienced a one-time jump in 1999, rising to 6%, before slipping back below 5%. In 2002, GDP recorded a negative growth rate of 0.33%, largely because of the Maoist insurgency. GDP grew 3.1% in FY 2002/2003 and 3.6% in FY 2003/2004, and again slipped to 2.4% in 2004/2005 and to 2.4% in FY 2005/2006, according to the Central Bureau of Statistics. Despite its growing trade deficit, Nepal traditionally has a balance of payments (BOP) surplus due to remittances from Nepalese working abroad. In FY 2005/2006, Nepal recorded a balance of payments surplus of $355 million, as compared to $79 million in FY 2004/2005. The lower BOP surplus in FY 2004/2005 was mainly attributed to the lower inflow of net government loans, and the higher surplus in FY 2005/2006 was due to resumption of foreign loans and assistance after the April 2006 People's Movement. Both the current account and the capital account registered significant growth in FY 2005/2006. Nepal receives substantial amounts of external assistance from India, the United Kingdom, the United States, Japan, Germany, and the Scandinavian countries. Several multilateral organizations--including the World Bank, the Asian Development Bank, and the UN Development Program--also provide assistance. Such assistance decreased substantially in FY 2004/2005 after the royal takeover of February 1, 2005 and also because of the Maoist conflict, which undermined development activities throughout most of Nepal. On April 23, 2004, Nepal became the 147th member of the World Trade Organization (WTO). With eight of the world's ten highest mountain peaks--including Mt. Everest at 8,848 m (29,000 ft)--Nepal is a tourist destination for hikers and mountain climbers. However, the decade-long insurgency and a global economic slowdown threatened the tourism industry. Figures from the Department of Immigration showed a 4% increase in arrivals in 2006, but these remained well below numbers during 1999, the peak tourism year. Recent tourist arrivals have given relief to the tourism-based hotel, trekking, mountaineering, and aviation industries. Since the political parties and Maoists brokered a comprehensive peace agreement in November 2006, the tourism industry hoped that guest arrivals in Nepal would bounce quickly back to 1999 levels and higher. Swift rivers flowing south through the Himalayas have massive hydroelectric potential to service domestic power needs and growing demand from India. Only about 1% of Nepal's hydroelectric potential is currently tapped. Several hydroelectric projects, at Kulekhani and Marsyangdi, were completed in the early to late 1980s. In the early 1990s, one large public-sector project, the Kali Gandaki A (144 megawatts--MW), and a number of private projects were planned; some have been completed. Kali Gandaki A started commercial operation in August 2002. The most significant privately financed hydroelectric projects currently in operation are the Khimti Khola (60 MW) and Bhote Koshi (36 MW) projects. The environmental impact of Nepal's hydroelectric projects has been limited by the fact that most are 'run-of-river,' with only one storage project undertaken to date. The planned private-sector West Seti (750 MW) storage project is dedicated to electricity exports. An Australian company signed a power purchase agreement with the Indian Power Trading Corporation in September 2002 and has the lead on the project. Negotiations with India for a power purchase agreement have been underway for several years, but agreement on pricing and capital financing remains a problem. The Government of Nepal has taken up the issue of project financing for the West Seti project with the EXIM Bank of China. The Department of Electricity Development recently obtained proposals from 14 foreign companies for survey licenses of three projects--600 MW Budhi Gandaki, 402 MW Arun III, and 300 MW Upper Karnali. The Ministry of Water Resources is currently evaluating the proposals and has not awarded the survey licenses. Currently, domestic demand for electricity is increasing at 8%-10% a year. Population pressure on natural resources is increasing. Overpopulation is already straining the 'carrying capacity' of the middle hill areas, particularly the Kathmandu Valley, resulting in the depletion of forest cover for crops, fuel and fodder, and contributing to erosion and flooding. Additionally, water supplies within the Kathmandu Valley are not considered safe for consumption, and disease outbreaks are not uncommon. Although steep mountain terrain makes exploitation difficult, mineral surveys have found small deposits of limestone, magnesite, zinc, copper, iron, mica, lead, and cobalt. Progress has been achieved in education, health, and infrastructure. A countrywide primary education system is under development, and Tribhuvan University has several campuses. Although eradication efforts continue, malaria has been controlled in the fertile but previously uninhabitable Terai region in the south. Kathmandu is linked to India and nearby hill regions by an expanding highway network.