1. Global and National Macro Economic Performance Global Economy at a Glance 1.1 Global economy, which had suffered slowdown as a result of crisis of confidence created by non-economic events of the past, steadily recovered and grew by 3.0 percent in 2002. This was possible with the expansion in the trade of goods and services and efficient macroeconomic management during this period. Similarly, the global economy in 2003, as compared to 2002, further grew by 1 percentage point and reaching 4.0 percent. This growth is attributable to the adoption and thereby effective implementation of expansionary fiscal and monetary policies by the United States and the East Asian countries. 1.2 Unpredictable and resistant facets such as geopolitical risks, terrorist attacks and price of petroleum products continue to remain potent questions in the global prospects. Risk bearing capacity of industrial and developing countries, however, has improved in comparison to the past by the continued increase in industrial output, rising confidence of consumers, substantial increase in world trade, as well as structural improvement in macro economic policy especially in the monetary sector. Furthermore, open and liberal economic policy, increasing external shocks bearing capacity of the financial sector, and decreasing sensitiveness of emerging market economies toward the risk of external sector have been other major contributors to such enhanced risk bearing capacity of the countries. The global economy is estimated to have grown by 5.1 percent in 2004, the highest in the past one decade, because of the strong economic growth of USA, China, India, emerging market economies, and other developing countries. During the same period, economic growth rate of Europe and Japan remained discouraging due to the weak export trading and internal demand, and the review of National Accounting System respectively. 1 1.3 Ever widening current account deficit of USA, depreciating US dollar, and increase in the price of petroleum products helped widening the already unbalanced world current account. At the same time, surpluses in the current accounts of newly emerging Asian countries, Japan, petroleum producing countries, and to some extent European Countries helped in remarkably raising their foreign exchange reserves especially US dollars. The risk, including other things, of relatively less developed countries, some emerging markets with high debt burden, and almost all poor countries, increased due to the high rise of petroleum product prices. Similarly, it is expected to have minor effect on the economic growth of tsunami affected countries, due to the substantially unfavorable impact on finance and balance of payment of these countries because of tsunami of 2004. However, the share of production of tsunami-affected area in comparison to global product is very low and reconstruction activities on these areas may offset this unfavorable impact in this area. The world economy, according to IMF, will grow by 4.3 percent in 2005 for reasons like adaptability of macroeconomic policy, improved profit scenario of the organized institutional sector, cooperative financial market, continuous rise in employment, and continued higher economic growth in emerging countries like China. In the same way IMF forecast of global economic growth rate of 4.4 percent for the year 2006 is based on the assumption of the consistency of economic activities. In this context, following problems, which would impinge the world economy in the medium-term, could equally have their short-term impact on the global economy. 1.3.1. Global Imbalance: In order to reduce the global imbalances it is necessary that internal demand of USA increases at a lower rate than its GDP where current account deficit is substantially rising while boosting internal demand in those countries whose current account balances are in surplus. Similarly, for an extensive strategy to reduce the global economic imbalance, it is necessary to have medium-term fiscal consolidation and exchange rate flexibility in USA. At the same time, it is necessary to providing continuity to the financial sector reform, 2 consolidating the supply side through structural reform in emerging Asian countries, increasing investment capacity of South American countries, and improving the economic growth rate of Europe sector and Japan. 1.3.2. Structural Reform: Improving labor and products market of the European sector, carrying out organized institutional and financial sector reform in emerging Asian countries and Japan, reinforcing the investment environment in South American Countries, improving monitoring of banking sector in central and eastern Europe, and the developing the non-petroleum sector in middle-east could contribute to the enhanced economic growth and reduced external shocks by eliminating the structural and institutional weaknesses of global market. 1.3.3. Fiscal Situation: Fiscal situation of many countries is posing a challenge by obstructing the macroeconomic stability in medium term. The reform process in large industrial countries, facing higher levels of fiscal deficit, has not been carried out as vigorously as expected because of their inability to adopt reliable and effective measures. Although improvements were seen in the financial indicators of South American countries, in many other countries, it may take long time to contain the government debt/GDP ratio at the desired (25 to 50 percent) level. It is clear that USA, China, European countries and Japan play a key role in the global economic growth. Hence, there is a need for the concerned policy makers to make a collaborative effort in a reliable manner for finding the solution for reducing global economic instability while giving continuity to the reform process. Developed and developing economies need to design economic policies that facilitate implementation of structural reforms and should also be flexible enough to achieving sustainable and broader economic growth. 1.4 The economic growth rate of Asian countries, which was 8.2 percent in 2004, according to IMF estimates, will grow by 7.4 percent in 2005 and 7.1 percent in 2006. On the regional level, the economic growth rate of emerging Asian countries has been highest during all years in review. 3 The growth rate of that region was 7.8 percent in 2004 and the projection for 2005 and 2006 is 7.0 percent and 6.9 percent respectively. It has been estimated that the annual average growth rate of 5 percent will prevail between 2004 and 2006 in all the regions discussed above. The South Asian economy, which grew at a constant rate of 7.1 percent in 2003 and 2004, is estimated to grow by 6.5 percent and 6.3 percent respectively in 2005 and 2006. In India and China, the neighboring countries of Nepal, economic growth rate was 7.3 percent and 9.5 percent respectively in 2004. The economy of India in 2005 and 2006 is projected to grow at 6.7 percent and 6.4 percent respectively, whereas for China the growth rate is projected to hover around 8.5 percent and 8.0 percent respectively during the same period. Similarly, the International Monetary Fund has estimated that the growth of Nepalese economy will be by 3.5 percent in 2005 and 5 percent in 2006. Table 1 (a) World Economic Growth Rates (in percent) 2002 2003 2004 Projection 2005 2006 World Production 3.0 4.0 5.1 4.3 4.4 Developed Economies 1.7 2.0 3.4 2.6 3.0 Major Developed Economies* 1.4 1.5 2.8 2.1 2.5 Other Developed Economies 2.8 2.5 4.4 3.4 3.9 Developing economies 4.6 6.4 7.2 6.3 6.0 Developing Asia 6.4 8.1 8.2 7.4 7.1 Emerging European Countries 4.4 4.6 6.2 4.5 4.5 African Countries 3.5 4.6 5.1 5.0 5.4 Middle East Countries 4.2 5.8 5.5 5.0 4.9 Petroleum Product Exporting Countries** 4.6 6.5 5.7 5.2 5.0 Emerging Asia*** 6.2 7.4 7.8 7.0 6.9 New Industrial Asian Economics**** 5.1 3.1 3.5 4.0 4.8 Asian-4***** 4.3 5.4 5.8 5.4 5.8 China 8.0 9.3 9.5 8.5 8.0 South Asia****** 4.6 7.1 7.1 6.5 6.3 Bangladesh 4.9 5.4 5.4 5.5 5.9 India 4.7 7.5 7.3 6.7 6.4 Nepal -0.6 3.1 3.5 3.5 5.0 Pakistan 4.4 5.6 6.5 6.7 6.3 4 *USA, Japan, Germany, France, UK, and Canada **Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Syria, and Yemen *** Developing Asia, New Industrialized Asian Countries and Mongolia **** Korea, Taiwan, Hong Kong and Singapore ***** Indonesia, Malaysia, the Philippines, and Thailand ****** Bangladesh, India, Maldives, Nepal, Pakistan, and Sri Lanka Source: World Economic Outlook, IMF, Washington, D.C, April 2005, pp. 3, 33, 40, 46 and 52 1.5 The volume of the world trade in terms goods and services increased by 3.1 percent and 4.9 percent in 2002 and 2003 respectively. With continued encouraging trend of improvement observed in economic activities and growth rate as compared to the previous year, it is estimated to rise by 5 percentage points and reaching 9.9 percent in 2004. The volume of trading of the developed countries in terms of both export and import has narrowed in comparison to their developing counterparts. The world trade, according to IMF, will grow by 7.4 and 7.6 percent in 2005 and 2006 respectively. Table 1 (b) World Trade (Annual change in percent) 2002 2003 2004 Projection 2005 2006 World Trade Volume (Goods and Services) 3.1 4.9 9.9 7.4 7.6 Imports Developed countries 2.3 3.6 8.5 6.5 6.3 6.2 8.9 15.5 12.0 11.0 Developing countries Exports Developed Countries 1.9 2.8 8.1 5.9 6.8 6.5 10.7 13.8 9.9 9.7 Developing Countries Source: World Economic Outlook, IMF, Washington, DC.