In a recent report, the World Bank's Nepal Development Update shed light on the country's economic dynamics in Fiscal Year 2023. Notably, Nepal experienced a substantial increase in hydroelectric generation for the second consecutive year, contributing nearly 500 MW to the national grid. However, despite this positive trend, the nation faced economic challenges, with a marked decline in real Gross Domestic Product (GDP) growth, registering at an estimated 1.9% in FY23. This figure represents the lowest growth rate since FY20 and stands significantly below the 10-year average.
Economic activity in Nepal faced headwinds, particularly in the industry and services sectors, while the agricultural sector exhibited more resilience. Despite the impressive growth in hydroelectric generation, Nepal continues to be a net energy importer. Additionally, the Nepali stock market's market capitalization relative to GDP experienced a second consecutive year of contraction during FY23, ending at 57.3% of GDP. This marks a 0.9 pp decrease from the end of FY22 and a substantial 34.9 pp drop compared to the end of FY21. Interestingly, this trend raises questions about the correlation between economic growth and equity market expansion.
The top three sectors in terms of market capitalization at the end of FY23 were commercial banks (30.9%), insurance companies (15.4%), and hydropower companies (13.2%). The lower growth rate (1.9%), a wide fiscal deficit (6.1% of GDP), and high inflation (7.8% average) in FY23 pose significant challenges to Nepal's short and medium-term macroeconomic outlook, according to the report. While there are reasons for optimism in FY24, such as robust remittances, tourist inflows, and continued growth in hydroelectric production, the authorities are grappling with difficult trade-offs in a slowing economy with high inflation.
The outlook suggests that growth will rebound to 3.9% in FY24 and reach 5% in FY25, driven by the lagged impact of lifting import restrictions and gradual monetary policy adjustments. Furthermore, the expansion of hydroelectric production through the commissioning of new projects is expected to stimulate growth in the industrial sector. Projections indicate a growth rate of 3.2% and 6.3% in the industrial sector for FY24 and FY25, respectively. The electricity sub-sector is set to continue its robust growth, with the commissioning of significant new hydroelectric capacity in the pipeline.
