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Michele Andreolli and Aidar Abdychev
This paper analyses a large public investment in a construction of a hydropower plant in Lesotho and its implications on the growth and debt sustainability. The paper employs an open economy dynamic general equilibrium model to assess the benefits of a large public investment through growth-enhancing increase in domestic energy supply and receipts from selling electricity abroad to ease the fiscal burden, which is often associated with big investment projects. During the transition (construction stage), various financing options are explored: increase in the public debt, increase in domestic revenue (fiscal adjustment), and combination. The calibration matches Lesotho's data and it captures the project's main challenges regarding the project costs. Moreover,the key remaining issue is the agreement with South Africa to purchase sufficient amount of electricity to allow the potential plant to run at a high capacity. We find that, the project can lead to sizable macroeconomic benefits as long as costs are relatively low and demand from South Africa is sufficiently high. However, the risks for the viability of the project are high, if these assumptions are violated.
International Monetary Fund. Asia and Pacific Dept

KEY ISSUESContext. Macroeconomic performance has generally exceeded expectations. Real GDP grew 7.3 percent for 2013, up from 6.3 percent in 2012. Inflation declined to below5 percent, and the external current account balance has improved. Private credit growth has been slow, however, a number of financial sector indicators have deteriorated.Outlook and Risks. Growth is expected to remain robust at 7 percent and inflation to remain in the mid-single digits. The external current account should improve marginally, allowing for further accumulation of foreign exchange reserves. Near-term risks appear moderate, although there may be some bumps in the road from market turbulence and climatic events. Medium-term risks relate to the potential for tighter external liquidity, the challenge of further fiscal and debt consolidation while maintaining high levels of investment in infrastructure and human capital, maintaining a balanced monetary policy, and staying competitive in a shifting economic landscape.Key Policy Recommendations.• Fiscal consolidation and debt reduction need to continue, but the burden of adjustment needs to shift decisively to revenue generation. Debt targets could potentially be recast to achieve deeper reduction over a longer period.• Monetary policy needs to maintain a balance between supporting growth and containing inflation. A continued forward-looking approach is needed given long lags in monetary transmission.• Financial sector consolidation could lead to economies of scale, greater resilience, and more effective supervision, but corporate governance needs to continue to improve, and careful supervision in the post-consolidation period will be key.• Maintaining competitiveness and achieving a more sustainable external position will require a mix of continued innovation, sustained investment in infrastructure and human capital, a predictable business environment, and ideally a heavier emphasis on direct investment and equity portfolio flows than debt.

Peter H. Gleick

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International Monetary Fund. Asia and Pacific Dept

The Sixth Five Year Plan, as outlined in Bangladesh's Poverty Reduction Strategy Paper, targets strategic growth and employment. The medium-term macroeconomic framework plan entails the involvement of both the private and public sectors. Human resources development strategy programs reaching out to the poor and the vulnerable population, as well as environment, climate change, and disaster risk management, have been included in the plan. Managing regional disparities for shared growth and strategy for raising farm productivity and agricultural growth have been outlined. Diversifying exports and developing a dynamic manufacturing sector are all inclusive in the proposed plan.

International Monetary Fund

Nepal is a post-conflict state seeking to formalize democracy in a challenging environment. Significant headway toward a new state has been made since the 2006 peace accord. Progress on a range of technical issues (including public financial management, monetary policy, and financial sector supervision) has also been achieved. However, the failure of the constituent assembly to meet an end-May 2012 deadline to ratify a new constitution is a serious setback, and a major impediment to macroeconomic management and prospects for growth. The subsequent dismissal of the constituent assembly in June 2012 has left day-to-day operations in the hands of a caretaker government. New elections are notionally slated for April 2013, but will require fractured political parties to agree on an interim consensus government. In the meantime, key articles of legislation (such as the government budget) have been delayed. More broadly, the lack of a consensus government and functioning parliament appear to be dampening investment (foreign and domestic), keeping potential donor support at bay, and undermining prospects for sensitive financial sector and state enterprise reforms.