This blog post is adapted from Macroeconomic Update, August 2014, Vol.2, No.2. Here is an earlier blog post on FY2015 GDP growth and inflation forecasts.
Gross domestic product (GDP) grew by an estimated 5.2% in FY2014, up from 3.5% in FY2013, as a result of the bumper agricultural harvest, moderate recovery in construction, and robust services activities backed by high remittance income (Figure 1). The services sector contributed about six-tenths of the GDP growth, largely coming from wholesale and retail trade; and transport, storage and communication activities. The agriculture sector’s contribution to the GDP growth stood at three-tenths and the industry sector contributed about one-tenth.
In the agriculture sector, which comprises almost 35% of GDP and provides livelihood to about 76% of households, growth rebounded to an estimated 4.7%, the highest in the last six years. The timely and favorable rainfall, and the adequate supply of agricultural inputs, including chemical fertilizers, boosted production of both summer and winter crops. According to the Ministry of Agriculture Development, paddy production is projected to increase by 12%, up from a 11.2% decrease in FY2013. Similarly, maize production is estimated to increase by 9.9%, up from an 8.3% decrease in FY2013. Wheat production is projected to increase by 6.1%, up from 2.0% in FY2013. Paddy, maize and wheat accounted for 52.5%, 23.3% and 20.1%, respectively, of total cereal production in FY2013 (Figure 2).
The industry sector, which comprises a mere 15% of GDP, grew by an estimated 2.7%, marginally up from its 2.5% growth rate in FY2013, as construction, and electricity, gas and water grew modestly despite a slowdown in manufacturing. The timely budget and modest acceleration in actual capital expenditure (though still low compared to the planned expenditure) propelled construction activities growth to 2.9%, up from 1.9% in FY2013. Manufacturing activities grew by 1.9%, the lowest rate in the last five years, primarily due to the impact of long hours of power cuts, persistent supply-side constraints, and the rise in cost of production due to the increased prices of imported raw materials. Concrete, sugar, aluminum materials, vanaspati ghee, paper, biscuits and beer production fell by over 30% in the first two quarters of FY2014. The average capacity utilization of key industries remained at 49.9% in the first half of FY2014, slightly higher than the 44.7% capacity utilization recorded in the first half of FY2013.
The remittance-induced consumption demand propelled services sector growth to an estimated 6.1%, the highest growth rate in the last six years. The services sector, which comprises about 51% of GDP, grew by 5.2% in FY2013. Within the services sector, wholesale and retail trade— whose share in GDP was 14.9% in FY2014, higher than the share of the industry sector— grew by an estimated 8.8%, two percentage points higher than in FY2013 (Table 1). Wholesale and retail trade’s contribution to GDP stood at 1.32% in FY2014, up from 0.98% in FY2013, reflecting the strong growth of remittance inflows, which boosted consumption demand of imported goods. The increase in the number of tourist arrivals and its positive impact on spending boosted hotel and restaurant activities by an estimated 7.1%, up from 5.5% in FY2013. Driven largely by the robust increase in communication related activities, the transport, storage and communication sub-sector grew by 7.5%, marginally up from 7.4% growth in FY013. The slow recovery of real estate, renting and business sub-sector, which grew by 3.0% from 2.7% in FY2013, reflected the tight sectoral credit policy imposed by the central bank on banks and financial institutions.
Table 1: Sub-sectoral growth and share of GDP
|Growth||Share of GDP|
|Agriculture and forestry||1.1||4.7||33.5||32.6|
|Mining and quarrying||3.3||3.7||0.6||0.6|
|Electricity, gas and water||0.3||4.8||1.3||1.2|
|Wholesale and retail trade||6.8||8.8||14.5||14.9|
|Hotels and restaurants||5.5||7.1||1.9||2.0|
|Transport, storage and communications||7.4||7.5||8.9||8.7|
|Real estate, renting and business activities||2.7||3.0||8.8||8.4|
|Public administration and defense||5.5||5.7||2.0||2.4|
|Health and social work||5.6||5.5||1.4||1.5|
|Community, social and personal services||4.6||4.7||3.7||4.1|
Source: Central Bureau of Statistics
On the expenditure side, consumption accounted for an estimated 91.1% of GDP, up from 89.9% of GDP in FY2013 (Figure 3), indicating the increasing consumption demand stimulated by growing remittance income. Gross capital formation stood at an estimated 37.1% of GDP, contributed mostly by the increase in gross fixed capital formation (GFCF) from 22.6% of GDP in FY2013 to 23.1% of GDP in FY2014 despite a decrease in stocks from 14.3% of GDP in FY2013 to 13.9% of GDP in FY2014. Public and private GFCF were an estimated 4.7% and 18.5% of GDP, respectively. Despite these high investment figures, the impact on growth and employment is pretty nominal, most probably due to the inefficiency of investment management arising from the lack of efficiency-enhancing prerequisites related to physical and social infrastructures, and the inability to unwind expenditures in underperforming and unfeasible projects.
Despite an increase in exports, the high import demand— backed by high remittance income in the absence of domestically produced alternatives—further widened net exports, reaching an estimated negative 28.2% of GDP in FY2014 from 26.8% of GDP in FY2013. The increase in price competitiveness as a result of the weak currency pushed exports of goods and non-factor services to an estimated 12.1% of GDP, up from 10.7% of GDP in FY2013. Meanwhile, imports of goods and non-factor services increased to 40.3% of GDP in FY2014 from 37.5% of GDP in FY2013. The major factors affecting supply capacity and cost competitiveness of exports sectors are: (i) lack of adequate and quality infrastructure; (ii) political instability and strikes; (iii) recurring labor disputes and low productivity; (iv) lack of skilled human resources; (v) deficient research and development investment and innovation in the private sector; and (vi) policy inconsistencies and implementation paralysis.
Gross domestic savings declined to an estimated 8.9% of GDP from 10.1% of GDP in FY2013 and 14% of GDP in FY2011. It indicates that a majority of the residents’ income is spent on consumption, which is mostly fulfilled by imported goods. Meanwhile, the substantial increase in gross national savings— from 40.3% of GDP in FY2013 to an estimated 46.4% of GDP in FY2014— reflects the record high remittance inflows, which reached 28.2% of GDP in FY2014. It has also contributed to a positive savings-investment gap (an estimated 9.4% of GDP in FY2014) in the last three consecutive years. Though per captia GDP increased to an estimated $713.8 in FY2014 from $709.5 in FY2013, it is still lower than $715.8 in FY2012 (Figure 4). The fluctuation in per capita GDP is partly attributed to the depreciation of Nepalese rupee against the US dollar. Reflecting the high per capita remittance inflows, nominal per capita gross national disposable income reached an estimated $981.6 from $923.7 in FY2013. Per capita GNI stood at $727.9 in FY2014. The size of Nepal’s economy expanded to an estimated $19.7 billion in FY2014, marginally up from $19.3 billion in FY2013.
Domestic investment commitment: Total domestic capital investment (fixed capital plus working capital) commitment increased remarkably by 142% in FY2014, up from a rate of 42% in FY2013. As a share of GDP, it reached 15% in FY2014, up from 5.5% in FY2012, largely due to an astounding 158% increase in investment commitment in the energy sector. Overall, of the total investment commitment of NRs289 billion in FY2014, 77.3% was in the energy sector, followed by construction (12.1%), manufacturing (6.3%), and tourism (2%) (Figure 5). As a share of GDP, investment commitment in the energy sector went up from 5.1% in FY2013 to 11.6% in FY2014, indicating the rising investor confidence emanating from the strong commitment by the new coalition government to introduce investor-friendly reforms in a range of sectors, including energy. Energy sector development is the top priority of the new government.
Foreign direct investment (FDI) commitment: FDI commitment, approved by the Department of Industry, reached NRs20.1 billion in FY2014, marginally up from NRs19.8 billion in FY2013 (Figure 6). It translates into a growth of just 1.5% compared to 115% in the previous year. Consequently, as a share of GDP, it stood at a mere 1.04%, lower than 1.2% of GDP in FY2013. That said, while the FDI commitment in manufacturing, mineral, service and tourism sectors decreased, the energy sector saw an impressive 306% growth, mostly coming from India and China—which together accounted for 91% of the total energy FDI commitment. Country-wise FDI commitment shows that the People’s Republic of China (PRC) surpassed India as the top FDI source country with a 36.4% share of total FDI commitment in FY2014. The other top FDI source countries are South Korea, Cook Islands, USA, Japan, British Virgin Islands, and Singapore— together accounting for about 20% of total FDI commitment. It may be noted that despite the increase in FDI commitment, actual FDI inflow, as per the balance of payments, significantly decreased from NRs9.1 billion in FY2013 (0.5% of GDP) to NRs3.2 billion in FY2014 (0.2% of GDP).
 R and P denote revised estimate and provisional estimate, respectively. Any reference to GDP for FY2013 and FY2014 in this Macroeconomic Update refers to revised and provisional estimate, respectively.
 Major winter crops are wheat, barley, potato, winter tomato, cauliflower and cabbage. Major summer crops are paddy, maize, millet, buckwheat and summer potato.
 Capacity utilization of key industries in FY2013 was 57.8%, the same as in FY2012.
 Responding to the busting of real estate and housing bubble, triggered by a decline in the growth of remittances in FY2011, and a build-up of non-performing loans, the central bank imposed a lending cap of 25% to this sector in FY2012. It contributed to the cooling down of prices in this sector.
 The GDP by expenditure data are prone to measurement errors as change in stocks is computed residually, which also includes statistical discrepancy/errors. Change in stocks was estimated to be 13.9% of GDP in FY2014. A large residual indicates that a significant portion of the GDP is either unexplained or could not be directly attributed to its components, i.e. consumption, capital formation and net exports.
 It may be noted that even though final consumption with respect to GDP is very high, the actual domestic consumption expenditure made up an estimated 62.9% of GDP in FY2014, down from 63.1% of GDP in FY2013 and 65.5% of GDP in FY2012. This is due to the surge in net exports (or export minus import) in FY2014, , i.e. the consumption expenditure on imports of goods and non-factor services.
 For more on Nepal’s export competitiveness, see the issue focus section of Macroeconomic Update, Vol.2, No.1, February 2014.
 Computed as the difference between gross national savings and gross capital formation.
 US$1=NRs98 in FY2014 and US$1=NRs87.7 in FY2013.