Nepal’s economy is expected to grow 5.5 percent in the current fiscal year 2018-19, down from 5.9 percent a year earlier, according to the Asian Development Bank (ADB) Nepal Macroeconomic Update released on Wednesday.

The ADB’s estimate is way below the 8 percent growth that the government has projected for this fiscal year.

“The growth forecast represents a continued trend reversal but is substantially higher than the average rate of 4.3 percent in the last 10 years from fiscal 2009 to 2018,” said Sharad Bhandari, ADB’s principal economist for Nepal. “Growth will be supported by expectations of greater political stability following the 2017 elections, normal monsoon and efforts to accelerate implementation of mega infrastructure projects.”

The limited capacity at sub-national levels and challenges to smooth implementation of federalism may pose risks to growth.

According to the update, some of the major issues affecting smooth implementation of fiscal federalism are slow progress in requisite legislation and deployment of staff, the need for further clarification of mandates and responsibilities of the three tiers of government, and inconsistencies in revenue mobilization regarding fees and taxes at the local level, the ADB said.

The agriculture sector is expected to grow at a rate of 3.5 percent in 2019, up from 2.8 percent in 2018 on the back of an anticipated bumper harvest supported by a good monsoon. The monsoon season that usually lasts from June to September has so far been normal this fiscal year. The paddy acreage is reported to be above 95 percent because of timely and well-distributed rainfall.

The industrial sector is expected to expand by 7.2 percent in the fiscal year 2018-19, buoyed by improved electricity supply. The ADB said that the government was also making efforts to closely monitor and expedite the implementation of development projects.

The 456 MW Upper Tamakoshi Hydropower Project is expected to be completed within this fiscal year. The addition of electricity produced by the plant to the national grid will relieve Nepal from relying on power imports from India during the wet season.

The manufacturing subsector is expected to do well with the end of load-shedding since May 2018, the ADB said. And the services sector will likely grow by 6.1 percent with the expansion of wholesale and retail trade, financial intermediation and travel and tourism subsectors.

According to the ADB, inflation is projected to rise to 6.0 percent in the current fiscal year from 4.2 percent, partly reflecting higher inflation expected in India, a modest rise in oil prices, and higher government expenditure under the new federal structure.

The expansionary budget for this fiscal year, an increase of 25.7 percent, and higher government expenditure under the new federal structure will raise inflationary pressure, it said.

Though revenue collection of Rs731.4 billion amounting to 24.3 percent of the Gross Domestic Product (GDP) slightly exceeded the budget target in the last fiscal year, the fiscal deficit widened to 6.7 percent of GDP with the rise in government expenditure compared to the previous year.

While capital expenditure increased by 28 percent in the last fiscal year with the execution rate reaching 79.7 percent, the hasty nature of spending has continued, undermining the quality of capital projects, the ADB said.

Nepal increasingly faces the risk of external sector instability due to a rising trade and current account deficit. The current account deficit of $2.4 billion (8.2 percent of GDP) in fiscal year 2017-18 is significantly higher than the deficit of $95.7 million, or 0.4 percent of GDP, a year earlier.

The merchandise trade deficit increased on higher imports of construction materials and capital goods in the last fiscal year.

While remittance has shown a healthy growth, a substantial rise in the near future is unlikely to offset the rise in the trade deficit, leading to further widening of the current account gap, it said. There is also a need for more resources to facilitate the functions of the new governments and ensure greater coordination among them for effective delivery of development programmes.