Economic revival hinges largely on the political situation, as Nepal's poor security and extreme political instability limit the state's capacity to spend money and boost rural incomes. However, given the large share of GDP contributed by the agricultural sector (at an estimated 31% in 2009/10) and the fact that the farm sector employs the majority of the population, crop-growing conditions will remain the most important determinant of the country's overall rate of economic growth in 2010/11-2011/12.

The political environment is unlikely to prove conducive to much greater economic stability in 2010/11-2011/12. We therefore forecast that real GDP will grow (by expenditure) at an average annual rate of 4.5% in the two-year period, down from an estimated 5% in 2009/10. Growth in private consumption, the largest component of the economy, will be supported by slightly lower inflation than in 2009/10, but government consumption growth will be curtailed by the problematic political situation, which has resulted in significant budgetary underspending. Growth will also be supported by a continued improvement in the global economic environment-and in particular, persistent strong GDP growth in India, Nepal's largest trading partner.