Economic Analysis - Vision 2030 Implementation To Prove Difficult - MAY 2017

BMI View: The laying out of Nepal ' s Vision 2030 is a positive step as it provides policymakers with a roadmap for the landlocked country's economic development. However, we expect implementation to be slow due to considerable challenges including an underdeveloped agriculture sector and political gridlock. We therefore maintain our forecast for Nepal's long-term growth to average 3.0% over the next decade (slightly slower than the long-term historical average of 3.6%).

We view Nepal's Vision 2030 development plan as overly ambitious and it is considerably light on implementation details. We believe that plans to develop the underdeveloped agriculture sector are unlikely to gain much traction due to the extremely backward nature of the sector. Furthermore, while the plan will provide policymakers with a roadmap for the landlocked country's economic development, we do not believe that it will be able to achieve its objectives due to Nepal's fragmented political system that hinders policymaking and implementation. As such, we maintain our forecast for Nepal's long-term growth to average 3.0% over the next decade (a rate which is slightly slower than the long-term historical average of 3.6%).

Vision 2030 Aims To Lift Nepal From LDC Status

Vision 2030 is part of a longer term plan which aims to ensure that every Nepali household has its basic needs fulfilled and feels secure and cared for by the state by 2030. To achieve this, Nepal has set targets for achieving Social Development Goals (SDGs) by 2030 as well as strategies to graduate from the Less Developed Country (LDC) status by 2022. While the government is hopeful that the country can graduate from the LDC status earlier, we do not believe that this is likely as the country continues to struggle to achieve its SDGs amid slow reconstruction from the devastating earthquakes and aftershocks in 2015. Indeed, the government noted that the earthquake had pushed about 3-4% of the population into poverty. With poverty rates at approximately 23% of the population and the economy facing structural headwinds, it is unlikely that the government will be able to achieve its ambitious goal of reducing poverty to 5% by 2030.

The government highlighted the five D's as drivers that would enable the country to achieve Vision 2030. These include: distance as an advantage, demographics, democracy, digitisation and diaspora. In addition, the stability of institutions (including the civil service) and personalisation of economic relationships would lend support to these drivers to enable the country to achieve its goals.

Results To Fall Short Due To Overly Ambitious Nature Of Plans

We believe that the ambitious nature of the project is likely to present considerable challenges. The government has identified two factors as critical to achieving high growth and transformation. These are Key Growth Drivers (KGDs) and Major Transformation Initiatives (MTIs). KGDs focus on sectors or industries where growth will be focused - Agriculture & Forestry, Energy, Tourism, Education, Health, Transport, Industry (including SMEs), and Urban Development.

In particular, the government noted there is a huge untapped potential in agriculture and forestry. As agriculture is still a less productive sector, there is a need to transform the labour force away from traditional to modern agriculture. The contribution of forestry to growth could also be improved through the sustainable harvesting of the resources.

Lastly, the government has noted that it wants growth to be redistributive, noting that social inclusion that is transformative could create a more just society. This would be positive for demand-side factors, and could support long-term growth. However, it failed to provide concrete plans as to how this would be achieved.

Agricultural Sector In Need Of An Overhaul

Given the importance of Nepal's agriculture sector, we believe that the plans to improve agriculture in the country are positive but will face considerable challenges. According to the International Labour Organisation (ILO), 68% of Nepal's population is employed in the agriculture and forestry sector, accounting for 34% of the GDP. Nevertheless, Nepal struggles to produce an adequate supply of food for its citizens. Farmers have limited access to improved seeds, new technologies, and market opportunities. Declining agricultural production has depressed the rural economy and increased widespread hunger and urban migration. The prevalence of undernourishment in Nepal is 13%.

Agriculture in Nepal has long been based on subsistence farming, particularly in the hilly regions where peasants derive their living from fragmented plots of land cultivated in difficult conditions. Government programmes to introduce irrigation facilities and fertilisers have proved inadequate, as their delivery is hampered by the mountainous terrain. Population increases and environmental degradation have ensured that the minimal gains in agricultural production (owing more to the extension of arable land than to improvements in farming practices), have been cancelled out. In addition, the seasonal nature of farming leads to widespread underemployment, but programmes to grow cash crops and encourage cottage industries have had some success over the years.

As such, the government's plans to move away from traditional agricultural methods to modern ones and into other sectors d are likely to be positive for productivity in the agricultural sector. Further plans include the commercialisation of agriculture and vertical integration initiatives into high value-added products important drivers of growth.

Political Instability To Hinder Implementation

Any efforts to improve Nepal's economy are likely to be hindered by the country's fractious political system, with political instability being endemic to the country since it dissolved its monarchy in 2008. The country's political system has resulted in constant changes to the Prime Minister and governing coalitions (see 'New PM Will Not Improve Poor Political Outlook', August 23, 2016). Given that embarking on Vision 2030 would require a considerable degree of political coordination, the lack of consensus in parliament will present headwinds to the project. In addition, Nepal's weak bureaucracy will stymie the implementation of government plans. This weakness is reflected in Nepal's long-term and short-term political risk ratings, where the country scores a paltry 49.5 and 43.1 (out of 100), respectively. This is in contrast to the regional averages of 54.6 and 57.6.