Table of Contents 1. Global and National Macro Economic Performance 1 2. Public finance 11 3. Price and Supply Situation 23 4. Money and Banking 35 5. Capital and Money Market 58 6. International Trade and Balance of Payments 63 7. Poverty Alleviation and Employment 72 8. Agriculture, Industry and Tourism 87 9. Public Enterprises and Privatization 115 10. Energy and Forestry 126 11. Transports and Communication 135 12. Social Service 147 1. Global and National Macro Economic Performance Global economy at a glance 1.1 The economic growth of the world was encouraging in 2005 particularly due to favorable financial market and structural macro economic policies though the world economy experienced escalating petroleum prices and natural havocs in various parts of the world. The world economy is also likely to be favorable in 2006 due to high growth in industrial production, strengthening of service sector, increase in world trade, and increase in the consumer confidence coupled with strong labor market. However, increasing global imbalances and the possibility of further increase in petroleum prices due to political instability in the Middle-east Asian countries and ever- rising demand continue to pose a challenge. 1.2 The world production increased by 5.3 percent in 2004 and in 2005 it has been estimated to have increased by 4.8 percent in spite of dampening effect of rise in petroleum prices and natural calamities like cyclones. For maintaining a high growth rate despite the natural disasters, the growth of the largest economy i.e. that of United States of America has played a key role. Similarly, the expanding Japan economy, improving economies of the Europe, and the high economic growth rates achieved by newly emerging countries like China, India and Russia have also contributed to this growth performance. 1.3 The IMF has estimated that favorable world financial market, significant increase in the investment in major industrial economies and many Asian economies, low inflation rate, and other favorable situation will lead to 4.9 percent growth in the world economy for 2006. It has made a forecast of the highest growth rate of 8.2 percent for the developing Asian countries. It has similarly forecast a growth rate of 3.0 percent for the developed economies. Similarly, South Asia is expected to grow by 7.1 percent. 1 Table 1 (A): Growth Rates for World Economy (Annual percentage change) Forecasts 2003 2004 2005 2006 2007 World output 4.1 5..3 4.8 4.9 4.7 Developed economies 2.0 3.3 2.7 3.0 2.8 Major developed economies* 1.9 3.1 2.6 2.8 2.6 Other developed economies 2.5 4.6 3.7 4.1 3.7 Developing economies 6.7 7.6 7.2 6.9 6.6 Developing Asian economies 8.4 8..8 8.6 8.2 8.0 Emerging European economies 4.6 6.6 5.4 5.3 4.8 African economies 4.6 5.5 5.2 5.7 5.5 Mid east economies 6.6 5.4 5.9 5.7 5.4 Petroleum products exporting 6.9 5.7 6.2 5.8 5.5 economies** Emerging Asian economies*** 7.5 8.4 8.2 7.9 7.6 Emerging industrial Asian 3.2 5.8 4.6 5.2 4.5 economies**** ASEAN-4***** 5.4 5.8 5.2 5.1 5.7 China 10.0 10.1 9.9 9.5 9.0 South Asia****** 7.1 7.7 7.9 7.1 6.9 Bangladesh 5.8 5.9 5.8 6.0 6.3 India 7.2 8.1 8.3 7.3 7.0 Nepal 3.3 3.8 2.7 3.0 3.0 Pakistan 5.7 7.1 7.0 6.4 6.3 *USA, Japan, Germany, France, United Kingdom, Italy and Canada. **Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Syria and Yemen ***Developing Asian countries, emerging industrial Asian countries and Mongolia ****Korea, Taiwan, Hong Kong and Singapore *****Indonesia, Malaysia, Philippines, and Thailand. ******Bangladesh, India, Maldives, Nepal, Pakistan and Sri Lanka Source: World Economic Outlook, IMF, Washington D.C., Sept. 2005 and April 2006, Page Nos. 2, 16, 35, 43, 52, 177 and 186. 2 1.4 The volume of world trade that grew by 5.4 percent in 2003 grew by even higher rate of 10.4 percent in 2004. The growth in 2005 has been estimated at 7.3 percent. The growth rate of both import and export is significantly high for developing countries as compared to that for developed countries. IMF has estimated the world trade to grow by 8.0 and 7.5 percent in 2006 and 2007 respectively. Table 1 (B): World Trade (Annual percentage change) Forecasts 2003 2004 2005 2006 2007 World trade volume (goods and 5.4 10.4 7.3 8.0 7.5 services) Import Developed economies 4.1 8.9 5.8 6.2 5.6 Developing economies 10.3 15.8 12.4 12.9 11.9 Export Developed economies 3.3 8.5 5.3 6.6 6.1 Developing economies 10.6 14.6 11.5 10.9 10.3 Source: World Economic Outlook, IMF, Washington D.C., April, 2006, Pp.205 1.5 Prices of petroleum products increased by 15.8 percent in 2003 and continued rising even further by 30.7 percent in 2004. They were even higher for 2005. Due to the increase in the demand for petroleum products, instability in some of the petroleum exporting countries and supply disruption due to Katrina, petroleum prices in 2005 increased by 41.3 percent. Expecting gradual improvement in the situation in 2006 and 2007, IMF has estimated price increase for these years at 14.8 and 2.9 percent respectively. 1.6 The consumer price increased by 2.3 percent in developed countries as against 5.4 percent for developing countries in 2005. Though price increase is significantly higher for developing countries as compared to those for developed countries, consumer price index is comparatively stable for the last three years. According to IMF forecasts, the increase in consumer prices for 2006 and 2007 in both developing and developed countries will remain more or less at the level of 2005. For South Asia, the price increase is forecasted at 5.3 and 5.2 percent respectively in 2006 and 2007. It was 5.0 percent in 2005. 3 Table 1 (C): World Price Situation (Annual percentage change) Forecasts 2003 2004 2005 2006 2007 15.8 30.7 41.3 14.8 2.9 Petroleum products (oil) * Non-fuel products 6.9 18.5 10.3 10.2 -5.5 Consumer price Developed economies 1.8 2.0 2.3 2.3 2.1 Developing economies 5.8 5.7 5.4 5.4 4.8 Developing Asia 2.5 4.2 3.6 3.9 3.5 Emerging European countries 9.5 6.2 4.9 4.2 3.4 African countries 10.8 8.1 8.5 9.1 7.3 Middle East countries 7.1 8.4 8.4 8.7 8.5 Petroleum products exporting 8.8 8.2 8.1 9.8 9.6 countries** 2.4 4.0 3.5 3.8 3.4 Emerging Asia** Newly industrialized Asian 1.4 2.4 2.2 2.2 2.3 countries** 4.1 4.6 7.5 8.8 4.6 ASEAN-4** China 1.2 3.9 1.8 2.0 2.2 3.9 4.3 5.0 5.3 5.2 South Asia** Bangladesh 5.4 6.1 7.0 6.1 5.6 India 3.8 3.8 4.2 4.8 4.9 Nepal 4.0 4.5 9.1 5.3 5.5 Pakistan 2.9 7.4 9.1 8.4 6.9 * Average prices of Brent crude and of Dubai and West Texas. **as per the listings in the Table 1 (A). Source: World Economic Outlook, IMF, Washington D.C., September 2005 (for italics figures) and April 2006. Pp. 2, 16, 43, 52, 189, 191, 194 and 205. 4 1.7 In 2005, there was a high price rise for the petroleum products, and it is expected to improve in coming days. Considering this improvement and the price rise expected at less than 5 percent for India in 2006 and 2007, consumer prices in Nepal is expected to rise by 5.3 and 5.5 percent in 2006 and 2007 respectively. National Economic Activities 1.8 FY 2005/06 could not be a satisfactory year from the standpoint of national economic performance. Drought at the time of rice plantation and also at the time of wheat and barley, and rainfall at the time of harvesting led to less than satisfactory performance of agriculture. Non- agriculture sector also could not perform well due to frequent transport blockade and poor security situation in the country posing difficulties in the operation of industries and trading activities. 1.9 Gross Domestic Product at producers’ prices increased by 2.7 percent in FY 2004/05 and it is expected to increase by only 1.9 percent in FY 2005/06. Agriculture GDP at factor cost and in constant price grew by 3.0 percent and similarly non-agriculture GDP increased by 2.1 percent with overall GDP before deducting banking service charges growing by 2.4 percent in FY 2004/05. Agriculture, non-agriculture GDP and total GDP before deducting banking service charges at factor cost and in constant prices are expected to grow by 1.7 percent, 2.8 percent and 2.4 percent respectively.