Outlook for 2011-12

Nepal has undergone a transformation since its decade-long civil war ended in 2006, but complex and seemingly intractable issues relating to the structure of the state are unresolved, and political effectiveness will remain very poor. The election (after a delay of seven months) of a new prime minister and the formation of a new coalition government is more likely to be a temporary reprieve than a harbinger of greater political stability to come in the months ahead. Nepal is likely to face a period of continued instability, characterised by disputes over constitutional and factional issues. Economic performance will be strongly influenced by political developments. The Economist Intelligence Unit forecasts real GDP growth (by expenditure) at an average annual rate of 4.5% in fiscal years 2010/11-2011/12 (July 16th-July 15th), following estimated growth of 5% in 2009/10.

The political scene

More than two months after his election, the prime minister, Jhala Nath Khanal, has yet to finalise his cabinet. Relations between the Communist Party of Nepal (Unified Marxist-Leninist), or CPN (UML), and its main coalition partner, the Unified Communist Party of Nepal (Maoist), or UCPN (M), have broken down. The Chinese government has pledged aid totalling NRs1.4bn (US$20m) to the Nepalese Army to finance infrastructure development.

Economic policy

A proposal by the finance minister, Bharat Mohan Adhikari, to present a full budget for 2011/12 to the constituent assembly in early May has been criticised by the UCPN (M). On March 14th the Nepal Oil Corporation decided to increase the wholesale price of a litre of petrol by NRs9 (13 US cents), to NRs97.

The domestic economy

The Asian Development Bank has presented a downbeat assessment of Nepal's economic prospects. Consumer prices fell by 0.4% month on month in mid-February, yet prices still rose by 10.2% year on year, according to the Nepal Rastra Bank (NRB, the central bank). The amount of credit extended by Nepal's commercial banks to the private sector has slowed, partly as a result of the tighter monetary policy pursued by the NRB.

Foreign trade and payments

Nepal recorded a balance-of-payments deficit (before official financing) of NRs12.5bn in the first seven months of 2010/11, compared with a shortfall of NRs22bn in the year-earlier period. Workers' remittances rose by 11.7% year on year in the period, to NRs138.9bn.