Macroeconomic Update February 2015

Chandan Sapkota

Asian Development Bank

Nepal Resident Mission

Press briefing, 27 February 2015

The views expressed in this document are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank, or its Board of Governors, or the governments they represent.

Macroeconomic Update

Mid-year Overview

Real Sector

Fiscal Sector

Monetary Sector

External Sector

Issue Focus: Quarterly National Accounts of Nepal

Presentation Outline

Macroeconomic Update

Mid-year FY2015 Overview 1

Late and subnormal monsoon

Political uncertainty

Reported deceleration of remittance inflows

Large gap between investment commitment &

actual inflows

Real sector scenario

Budget utilization lower than mid-year FY2014

12.6% capital budget utilization rate, lower

than last years 13.5%

High bunching of capital spending expected

Robust revenue performance

Increasing budget surplus

Fiscal sector scenario

Mid-year FY2015 Overview 2

Moderating food prices but still at high level

Lower fuel prices lowering pressures on

overall inflation

Lower deposit growth and higher credit growth

Negative real deposit interest rate

Lower excess liquidity

Volatile short-term interest rates

External sector scenario

Merchandise exports dropped by 1.4%

Oil import bill decreased

Non-oil import bill increased

Overall merchandise imports increased

Recorded workers remittance inflows

decelerated, despite increase in migrant

workers

Current account and balance of payments

surplus dropped

Monetary sector scenario

Real Sector

4.3 3.8

4.6

3.5

5.2

0

1

2

3

4

5

6

FY2010 FY2011 FY2012 FY2013R FY2014P

Contributions to GDP growth (percentage points)

Agriculture Manufacturing

Construction Other industry

Wholesale and retail trade Real estate renting and business activities

Other services GDP growth (basic prices)

8.8

7.5

7.1

6.0

5.7

5.5

4.9

4.8

4.7

4.7

3.7

3.0

2.9

1.9

1.8

0 2 4 6 8 10

Wholesale and retail trade

Transport, storage and

Hotels and restaurants

Education

Public administration and defence

Health and social work

Fishing

Electricty, gas and water

Agriculture and forestry

Community, social and personal

Mining and quarrying

Real estate, renting and business

Construction

Manufacturing

Financial intermediation

Sub-sectoral growth (% change)

39

90 84

120

254

38

183

65

0

50

100

150

200

250

300

FY2010 FY2011 FY2012 FY2013 FY2014 Mid-yearFY2013

Mid-yearFY2014

Mid-yearFY2015

Domestic capital investment commitment (NRs

billion)

Energy Manufacturing Service

Tourism Agriculture Mineral

Total

20.1

9.7

14.6

39.4

0

5

10

15

20

25

30

35

40

45

FY2011 FY2012 FY2013 FY2014 Mid-yearFY2013

Mid-yearFY2014

Mid-yearFY2015

FDI commitment and actual inflows (NRs billion)

Service EnergyManufacturing TourismAgriculture MineralTotal FDI commitment Actual FDI inflows

FY2015 Growth Outlook

4.6

3.5

5.2

4.0

5.0

0

1

2

3

4

5

6

FY2012 FY2013R FY2014P FY2015f_s1 FY2015f_s2

NRM forecast as of Feb 2015

Agriculture Industry Services GDP growth (basic prices)

GDP growth estimated between 4.0% and

5.0% for FY2015

Fiscal Sector

156.1

130.1

11.5 14.5

161.9

123.5

14.7 23.7

-20

20

60

100

140

180

Total Recurrent Capital Financing

Mid-year expenditure (NRs billion)

Mid-year FY2014 Mid-year FY2015

30.2

36.8

13.5

18.5

26.2

30.9

12.6

23.2

0

5

10

15

20

25

30

35

40

Total Recurrent Capital Financing

Mid-year budget utilization (% of total allocation)

Mid-year FY2014 Mid-year FY2015

3.3

5.4

4.3 4.0

0

1

2

3

4

5

6

FY2011 FY2012 FY2013R FY2014P FY2015BE FY2015f

Capital expenditure (% of GDP) Assuming 80% and 75% capital budget

utilization,

0

50

100

150

200

250

300

350

400

450

Customs VAT Excise Income Total taxRevenue

Totalrevenue

FY2014 revenue target and mid-year mobilization (NRs billion)

Mid-year FY2015 actual FY2015 target

Need for Higher Capital Investment

Suppressed economic growth requires a boost to aggregate demand

Initially, private investment continent upon public capital investment

Higher quantity and quality of capital investment Boosts economic performance by accelerating recovery & establishing more

sustainable growth patterns Generates aggregate demand quickly Enhances productivity growth Encourages technological innovation Spurs private-sector investment by increasing returns

Higher quantity: Close the infrastructure deficit Higher quality: Productivity-enhancing investment (infrastructure +

human capital)

Monetary policy: Relatively less effective Fiscal policy: More effective; transmission mechanism direct and less

lags; Stabilization measures (short-term) & structural changes (long-term)

(Michael Spence. 20 Feb 2014. Why Public Investment?. Project Syndicate)

Monetary Sector 1

0

2

4

6

8

10

12

14 Y-o-Y inflation

FY2013 FY2014 FY2015

0

2

4

6

8

10

12

14

16 Y-o-Y food inflation

FY2013 FY2014 FY2015

0

2

4

6

8

10

12

14Y-o-Y non-food inflation

FY2013 FY2014 FY2015

9.6 9.6

8.3

9.9 9.1

7.0

8.0

0

2

4

6

8

10

12

FY2010 FY2011 FY2012 FY2013 FY2014 FY2015f_s1 FY2015f_s2

NRM forecast as of Feb 2015

Contribution to Inflation (percentage points)

Food and beverage Non-food and services Nepal-CPI

Inflation estimated between 7.0% and

8.0% for FY2015

Monetary Sector 2

-10

0

10

20

30

40

FY2014 Mid-yearFY2014

Mid-yearFY2015

Growth of deposits (% change)

Commerical banks Development banks

Finance companies Total deposit

0

10

20

30

FY2014 Mid-yearFY2014

Mid-yearFY2015

Growth of credit (% change)

Commerical banks Development banks

Finance companies Total credit

-15

-10

-5

0

5

10

15

20

25

30

FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 Mid-yearFY2014

Mid-yearFY2015

Change in lending to construction and real estate (NRs billion)

Construction Real estate

Monetary Sector 3

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Interbank rate 91-day treasury bills rate

Interbank and 91-day Treasury bill rate (%)

FY2015 FY2014

0

2

4

6

8

10

12

14

Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Weighted average rates of commercial banks

FY2015 Deposit FY2015 Lending

0

200

400

600

800

1000

1200

FY2012 FY2013 FY2014 Mid-yearFY2014

Mid-yearFY2015

Mid-year stock market performance

NEPSE index (closing) Market capitalization (NRs. billion)

External Sector

0

1

2

3

4

5

6

0

100

200

300

400

500

600

FY2010 FY2011 FY2012 FY2013 FY2014 Mid-yearFY2014

Mid-yearFY2015

Re

mit

tan

ce i

nfl

ow

s ($

bil

lio

n)

Nu

mb

er

of

mig

ran

t w

ork

ers

(000)

Labor migration and remittance inflows

Number of migrants workers Workers' remittances

6065707580859095

100105110

1-J

an-1

11

1-M

ar-1

11

9-M

ay-1

12

7-J

ul-

11

4-O

ct-1

11

2-D

ec-1

11

9-F

eb-1

22

8-A

pr-

12

6-J

ul-

12

13

-Sep

-12

21

-No

v-1

22

9-J

an-1

38

-Ap

r-1

31

6-J

un

-13

23

-Au

g-1

33

1-O

ct-1

38

-Jan

-14

18

-Mar

-14

26

-May

-14

3-A

ug-

14

11

-Oct

-14

19

-Dec

-14

Daily nominal exchange rate (NRs per $) Growth rate of workers' remittances dropped to

5.0% from 17.9% in

mid-Jan 2015. But, the

number of migrant

workers increased by

20.4%, up from 12.5%

over the same period.

-8

-6

-4

-2

0

2

4

6

8

Export (fob) Import (cif) Merchandisetrade

balance

Servicesbalance

Incomebalance

Transferbalance

Currentaccountbalance

Capitalaccountbalance

Financialaccountbalance

Balance ofpayments

Oil import Workers'remittances

Balance of payments ($ billion)

FY2014 Mid-year FY2014 Mid-year FY2015

Oil import bill decreased

by 4.6%

Growth rate of workers' remittances

dropped to 5.0% from 17.9% in mid-

Jan 2014 Current account surplus

dropped to $139.1 million Exports growth dropped marginally by

1.4%

Merchandise trade deficit further widened

despite lower oil import bill

Imports increased despite a fall in oil import bill

Issue Focus: Quarterly National Accounts of Nepal

Quarterly National Accounts 1

-20

-15

-10

-5

0

5

10

15

20

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

FY2011 FY2012 FY2013 FY2014

Growth rate of seasonally adjusted and seasonally unadjusted QGDP

Seasonally adjusted Seasonally unadjusted

Short-term fluctuation monitoring and analysis Timelier picture of the economy Essential for immediate corrective policy actions

Quarterly National Accounts 2

ADB assisted CBS in Quarterization of past GDP data series Benchmarking Seasonality analysis

CBS published QGDP compilation methodology and QGDP of key

sectors for the first time in 2012.

QGDP should be Timely Coherent Accurate Comprehensive Reasonably detailed

Available QGDP data: Q1FY2011 to Q2FY2014

Publication of QGDP data should be continued to facilitate better policy

analysis, dialogues and decision making.

THANK YOU!

http://www.adb.org/documents/macroeconomic-update-nepal-february-2015

www.facebook.com/adbnrm

http://www.adb.org/documents/macroeconomic-update-nepal-february-2015http://www.adb.org/documents/macroeconomic-update-nepal-february-2015http://www.adb.org/documents/macroeconomic-update-nepal-february-2015http://www.adb.org/documents/macroeconomic-update-nepal-february-2015http://www.adb.org/documents/macroeconomic-update-nepal-february-2015http://www.adb.org/documents/macroeconomic-update-nepal-february-2015http://www.adb.org/documents/macroeconomic-update-nepal-february-2015http://www.adb.org/documents/macroeconomic-update-nepal-february-2015http://www.adb.org/documents/macroeconomic-update-nepal-february-2015http://www.adb.org/documents/macroeconomic-update-nepal-february-2015http://www.facebook.com/adbnrm