Nepal, a small Himalayan State in South Asia, is among the poorest and least developed countries in the world, with about one-quarter of its population living below the poverty line.

Agriculture is the mainstay of the economy, providing a livelihood for almost two-thirds of the population but accounting for only one-third of GDP.

Industrial activity mainly involves the processing of agricultural products. It is heavily dependent on remittances, which amount to as much as 30 per cent of GDP.

Nepal hydropower potential is massive with an estimated 42,000 megawatts of commercially feasible capacity. So far, Nepal has realised less than two per cent of its commercially viable hydropower capacity.

The country has considerable scope for exploiting its potential in hydropower and the International Monetary Fund (IMF) is of the view that hydropower development could be a game changer for Nepal. By generating more power from its rivers, the country could not only meet its own energy needs, but also export electricity to India and China.

After rebounding in 2017, economic growth 2018 is expected to revert somewhat to the trend growth rate. The Asian Development Board (ADB) has projected Nepal’s economy to grow at a slower pace of 4.9pc in FY2018 from seven per cent in 2017 in the wake of severe floods and landslides which affected one third of the country.

The agriculture sector is likely to expand by just 2.4pc in FY2018, compared to 5.3pc in FY2017. Industrial growth is set to be lowering in 2018 from the high rate in 2017 due to low investment in the manufacturing sub-sector for years owing to political instability and structural bottlenecks.

The services sector, meanwhile, is projected to grow by 5.5pc in FY2018. At the same time, slow recovery of exports, increase in lending rates, continued decline in departures of migrant workers going abroad and a fluid political environment continue to pose challenges.

Decline in remittance growth, sluggish export performance and skyrocketing imports have caused depletion in foreign exchange reserves as well. According to the World Bank, revenue collection is expected to grow at a slower rate while spending needs are high. Public expenditure will rise by 32.4pc in the current fiscal-year which is expected to widen the fiscal deficit in FY2018.

The World Bank Group has warned that widening fiscal and current account deficit has intertwined risk in the financial sector. The fiscal deficit could reach 5.9pc of GDP in 2018 compared to just 1.1pc in 2015.

The deficit to GDP ratio is expected to widen further to 6.2pc in 2019 and 2020.

Economists see increased foreign borrowing in the coming years. The pace of increase in debt-to-GDP ratio has been high in recent years. Debt-to-GDP ratio is expected to increase to 37.6pc by 2020 from 27pc of last fiscal.

According to the World Bank’s estimation, the debt-to-GDP ratio will hover around 30.7pc in this fiscal-year, 34.4pc in fiscal 2019 and 37.6pc in fiscal 2020, up from 25.6pc in 2015. Increased foreign borrowing has diminished the ability of banks to lend.

Bhutan

Bhutan is a land-locked country in the Himalayas which lies between the two most populous countries in the world — India and China. This makes Bhutan a strategically important nation.

The country maintains strong economic and strategic relationships with India, particularly as the major trading partner, as a source of foreign aid and as a financier and buyer of hydropower.

Hydroelectric power is its largest resource and is sustainable, renewable and environmentally friendly. Its potential hydropower output is estimated at 30,000MW but only about five per cent of that is developed. It has unlocked its hydropower potential to sustain growth.

It is the only country in South Asia with surplus energy available for export. The sale of hydropower makes up about one-fifth of its GDP. The export of hydroelectric power provides 25pc of government revenue.

The biggest impetus to economic growth is still provided by foreign aid and large-scale hydropower projects.

Bhutan is predicted to be the fastest growing economy in the world by 2018 when the economy is expected to shoot up to 9.9pc, according to the ADB. The World Bank‘s estimates are even higher with annual growth averaging 11.6pc between FY17 and FY19.

As China and India are experiencing economic slowdown, Bhutan, sandwiched between the two-heavyweights, is expected to grow more quickly than both of them during the coming years.

The country’s economy has strong links with India, but increasing hostility between India and China is creating new tensions in the region.

Bhutan has raised serious concerns with the Indian government about the impact the implementation of the goods and services tax will have on its industry and economy. The trade between two the countries has shifted to slow lane after India introduces its biggest tax in July.

Nevertheless, structural challenges remain, including large current account deficits, high public debt, an underdeveloped private sector and a high youth unemployment rate.

A delay in hydropower construction of one or two years could also cloud macroeconomic prospects in the coming years. The state of public finance is also a matter of serious concern as public expenditure has been rising faster than revenue and external resources are bridging the gap.

Bhutan’s external debt is estimated to be about 99pc of GDP by end of 2017-18. Of the total external debt, 81pc of GDP is on account of hydropower projects.

The Finance Minister has revised fiscal deficit estimates for the current financial year upwards to 3.5pc of GDP and also projected 3.3pc for FY19.

Published in Dawn, The Business and Finance Weekly, May 21st, 2018