Economic Growth
The process of structural change
is taking place
in the Nepalese economy, although very slowly. The pressure on price has remained high in recent years due to the slow growth in agriculture production caused by the adverse
weather conditions, the increase in the price of petroleum
products, and the consequent rise in transport cost. The annual average inflation based on national
consumer price
index, recorded a rise of 8,6 percent during 2007 (CIA-The world fact book, 2008). The instability of prices has continued over the
years because of several
reasons: First, agricultural production which is critical
factor for ensuring
smooth supply of food grains is vulnerable to weather
condition; and cyclical
nature. Agricultural production growth has also created cyclical pressure on the prices of
agricultural produces. A rise in the prices of non- food and services which carries a weight
of 46.8% has contributed more to an increase
in the annual average inflation
rate. Second, due to open border with India and free flow of goods
across the border facilitated by the free and unlimited convertibility of the Nepalese
rupee into Indian rupee, prices in Nepal remain deeply influenced by Indian prices. Third, gradual deregulation of the administered
prices leading to price rise in critical areas like electricity, fertilizer, and petroleum
products has escalated
the cost of production leading
to inflationary pressure
in the Nepalese economy. In recent years, the price of petroleum products
has increased and in all
probability the trend will continue in future as well. In addition, the increase of economic activities in the country will create additional demand for POL products
that will have to
be met by an increase in total import, thus putting pressure on the price level of the
economy. Fourthly, Nepalese market suffers
from fragmentation, asymmetric information,
lack of competition, and inadequate
regulatory mechanism
which often results in price
distortions and inflation. Finally, the disturbances
in the economy
because of strikes, forced closures of the industrial establishments, the imposition
of curfews and hindrances
in the smooth transportation of good
and vehicles and so on also affected the
price level.
The structure of the economy is such that the share of the agriculture sector in GDP at
factor cost in 2001/02 is estimated to be around 39.4 percent
and that of the non-agriculture sector is 60.6 percent, but in 2005/06, the share of the agriculture sector in GDP at factor cost declined marginally
to 38.8 percent with the share of non-agricultural increased slightly to 61.2 percent.
But, macro-economic stability
continued to remain a major challenge during the first four years of the Current Tenth Plan/PRSP,
2002-2007 (Ministry of Finance,
2008).
Nepal's rates of economic growth during the past four years have been unsatisfactory when compared to the Tenth Plan/PRSP target. The growth has been erratic, from a negative of 0.3 percent in FY01/02 to 2.4 percent
in 05/06, with lot of fluctuations in between. 