Nepal's political developmentscontinue to overshadow and impede its economic development.Over the short term, whether the scheduled elections areheld and, if so, whether they achieve a modicum of consensuswill be a major test. Political instability clouded theoutlook in FY2013 and remains the principal source ofvulnerability going forward. While Nepal'smacroeconomic fundamentals remain stable, sources ofvulnerability have not disappeared. Although the financialsector has rebuilt strength, it remains an important sourceof weakness. Important initiatives to improve the governanceenvironment have been taken, but these initiatives can beamplified further. For FY2014, the baseline scenario is agradual return to trend, with higher growth and sustainablefiscal expansion. While important psychologically and forsome sectors of the economy, the recent depreciation of theNepal rupee is not expected to hold back growth or tothreaten macroeconomic stability. While a revision of thepeg with India may eventually be warranted, the reportagrees with Nepali policy makers that this is not the timewhen markets are unstable to move impulsively. Instead, sucha major policy shift should be based on clear policyobjectives and in-depth analysis of likely economicoutcomes, including the long-term impact on Nepal'strade competitiveness. The report is structured as follows:chapter one gives summary; chapter two gives recent economicdevelopments; chapter three gives policies and short- tomedium-term development challenges; chapter four presentsshort and medium-term economic projections; chapter fivefocuses on bank support and activities; and chapter sixpresents special focus.
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