A latest report published by the United Nations says the continuing conflict and economic slowdown has been pushing the Nepali economy into a difficult situation in recent years.

The Economic and Social Survey of Asia and the Pacific (ESCAP) 2006 has estimated 2.6 percent GDP growth rate in the fiscal year 2005.

“With higher petroleum prices, expiration of the WTO agreement in textiles and clothing and intensified civil strife, GDP growth in Nepal could fall short of the 4.5 percent rate projected for 2006.”

The GDP growth rate declined to 2.6 percent in 2005 from 3.7 percent in 2004 thanks to poor performance of agriculture sector that accounts for 40 percent of country’s GDP.

The report further said that the GDP growth in Nepal decelerated in 2005 owing to poor performance in both the agricultural and non-agricultural sectors. Inclement weather was the primarily responsible for the slower growth rate in agriculture and the country’s internal conflict caused a slowdown in the broader economy.

“If the improved weather conditions remain steady, growth in 2006 is expected to revert to its recent trend.”

“Export to India are expected to rise, but production for the domestic market may remain suppressed, owing to disruption of domestic transport and commerce. Electricity, gas and water are projected to grow with the completion of new small power projects and better capacity utilization,” the report added.

The report said, “Despite the political instability, stock market turnover, share prices and market capitalization roes and market capitalization of listed companies grew from 8.4 percent of GDP to 11.6 percent during 2005.”

The report also said that the inflation rate would be 5.0 percent in the fiscal year 2006.

The report, which is the analysis of the economic situation of the fiscal year 2005 and projection of 2006 said, “With the upward adjustment of petroleum prices and pressure on prices in India, the inflation is projected to rise 5 percent.”

“Despite the growth in government revenue, the fiscal budget was adversely affected in 2005 by increased current expenditure and low capital spending.”

The report further said, “The country’s outstanding debt declined from 47.0 percent of GDP to 44.5 percent during 2005. Because of the concessional nature of its debt, Nepal dies not qualify for debt relief under the Heavily Indebted Poor Countries initiative and was unlikely to benefit from the G-8 debt relief package.”

The report said that the economic growth rates of India and Pakistan, two largest economies of South Asia, are projected to maintain their current growth momentum in 2006 and beyond. “All three main sectors, namely, agriculture, industry and services are expected to contribute to the healthy growth of these two countries,” the report adds.

“Despite recent progress, poverty remains pervasive in most of the least developed countries in the region. Therefore, governments need to give priority to promoting rapid and sustained economic growth,” the report recommended.

Least developed countries such as Nepal face significant vulnerabilities as a result of rising oil prices. Those countries have little access to alternative sources of financing to cushion a temporary increase in the balance of payment deficit caused by the high oil prices, the report further said.

The report said that unemployment and underemployment are among the major reasons for the high incidences of poverty in South Asia as official figures show that open unemployment in South Asia is 8 percent, though it varies across countries.

“Although fertility rates are declining in all countries in South Asia, population pressure continues to be a serious problem. It is clear therefore, that a comprehensive package of population policies and programmes is needed to tackle the problem of unemployment and poverty,” the report adds.

The widening imbalances in the external accounts of major economies in the world pose a major economic risk for ESCAP region in 2006, the report adds.

The report also stated that the cost of dealing with avian influenza, a viral infection primarily affecting birds but sometimes also mammals including humans would be around 0.1 percent of GDP.

Since the least developed countries in the region are in general relatively small and narrowly based economies, their economic growth is easily affected by sub regional, regional and external developments.

The report also said that the global economic growth slowed to 3.2 percent in 2005, down from record growth of 4.0 percent in 2004 due to high and volatile oil prices and a softening of global trade.