NEPAL’S ECONOMY IN CAPSULE

This article was first printed in New Business age...This is an excellent article to read to know the present economics senario of the country ..


By Madhukar SJB Rana

Since Fiscal Year 2001/02 Nepal’s economic performance has been very disappointing as compared to 1991/92-2000/01. During this period GDP growth rate dropped from an annual average of 4.8 percent to 2.8 percent, which is just a little above the annual population growth of around 2.3 percent. Such decline by 58.3 percent is significant because all the gains from the donor-driven structural adjustment programmes, started in 1982, have possibly reversed. This implies that future reforms to liberalize the economy would have to be even more radical should the government wish to jumpstart economic growth to catch up with lost opportunities. The stagnancy in average per capita income has, undoubtedly, added to the chronic economic hardships faced by households of the common person, especially the urban poor.

The Gini coefficient, which measures income inequality, is 0.41 in Nepal and is one of the highest in the world. This indicator does not inform on the prevalent regional, ethnic and caste inequalities. It appears that inequalities grew even more so between regions, castes and ethnicities, since 2001, as most growth was centred in and around a few urban areas like Kathmandu, Pokhara, Birgunj and Biratanagar. There are indications that in the last decade Kathmandu witnessed comparable growth rates to China’s at over 10 per cent per annum.

Most of the fall in GDP is accounted for by the miserable performance of the non-agricultural sector. To say the least, sector perspective planning in agriculture can be described as a ‘national disaster’ due mainly to the deteriorating investment climate on account of the heightened civil war, on the one hand and persistent political instability following Jana Andolan II, on the other.

Nepal is yet to be blessed by a ‘peace dividend’. On the contrary, the political and social instability, symbolised by the territorial bandhs in Terai and elsewhere and frequent labour strikes resulted in the disruption to the free flow of goods and services causing cost push inflation. These factors also led to poor performance of exports and decline in the capital expenditure of the government. Ironically, the opportunity cost of the ‘peace dividend’ might be more than the civil war as more GDP setbacks have occurred after the peace.

Total exports during 2001/02 to 2006/07 increased by 9.9 percent per annum compared to the growth of 24.3 percent in the 1990s. Similarly, import growth is estimated to be about 15.9 percent in the review period, compared to 19.9 percent in the 1990s. Increasing imports and decreasing exports have resulted in higher trade deficit. Export-import ratio as a percentage of GDP declined from 43.7 percent in 2002 to 32.4 percent in 2007.

Negative annual average growth of export and import underscores the underlying weakness in the national economy with declining comparative advantages and capacity to import. This also indicates that the aggregate output is lying well below the capacity or production frontier. Unemployment is bound to shoot up in such a scenario.

Nevertheless, it is remarkable that the fiscal deficit was managed at 3.5 percent of GDP in 2005. However, the deficit has started increasing after 2005, chiefly because of increase in non-budgetary expenses related to subsidies on petroleum products, rehabilitation of the Maoists and election expenses, which kept on being postponed three times.

Resource gap, measured by saving-investment differences, increased from 11 percent in 2002 to 18 percent in 2006. The average annual inflation measured by the national consumer price index recorded a rise of 5.1 percent during 2001/02-2006/07. However, it increased to eight percent in 2005/06 and remained close to seven percent in 2006/07 mainly because of rise in petroleum product prices. Further rise in inflation will cause a real strain on the body politic in this critical period of transition. More inflation is to be expected since rising food prices, commodity and energy prices has been a global phenomena.

However, the current accounts and balance of payments positions remain strong. Current account surplus which stood at NRs. 18.2 billion in 2001/02 is estimated to be at NRs 8.2 billion in 2006/07. The surplus in the current account has been observed primarily due to the high growth in the inflow of remittances which is over $ 1.5 billion as per official statistics but could be nearly double of that if one can gauge the inflows through the hundi market and individuals.

Remittance has helped tremendously to keep the balance of payments favourable. We learn from the Finance Minister’s mid-term review of the economy (March 5, 2008) that it has kept growing to the tune of 18.5 percent from the same period last year. Thus, the balance of payments position has been in surplus since 2002/03 after a deficit of NRs 3.3 billion in 2001/02.

In 2006/07, the balance of payments surplus is estimated to be NRs 9.0 billion. However, the rising value of NRs against US dollar is leading to increasing trade deficits and such an artificial forex rate with respect to the dollar could have an adverse impact on remittance earnings as NRNs choose to keep their savings abroad.

If remittance flows should slow down, such a scenario will adversely affect the foreign exchange reserves causing pressures on the NRS-IRS parity since it was the reserves in dollars that helped keep that forex rate fixed in terms of Indian rupees. Should pressures on forex appear, the long standing macroeconomic stability, since mid-1980s, would be under severe test.

Immediate Future Scenario

The immediate future economic scenario is pretty bleak as law and order situation continues to deteriorate. It is expected that a new constitution defining and demarcating the nature and scope of the polity of the new Nepal is not likely to be in place before the end of 2010 or early 2011. Given the weak government at the centre and the continual erosion of its power while the existing bureaucratic institutions remaining in limbo one could reasonably expect the investment climate to deteriorate further.

It looks even bleaker with the power outage for eight-hour a day and the queues for kerosene, petrol and diesel that could absorb four to six hours of productive time. One could expect further curtailment of non-agricultural output, especially in manufacturing industries.

The inability for successive governments to respond to market-driven forces in pricing petroleum products has meant that the government has to pick up the tab of around Rs. 9 billion to meet the expenses of the Nepal Oil Corporation causing further fiscal imbalances. With oil prices now hovering above $ 100 per barrel— some expect it to rise further, say up to $ 149 per barrel — the government will be forced to bring forth a supplementary budget sooner than later as the treasury has no extra resources to draw on.

The government is also expected to float bonds at seven percent to meet its fiscal deficit, which means that there will be a liquidity crunch in the economy as bank deposits will switch to bonds and treasury bills thus leading to rise in interest rate and fall in investment by the private sector.

In the immediate future, one does not see performance in the agriculture sector improving with the virtual absence of government agencies in the rural areas. Without massive rural electrification, rural irrigation, rural road building and the spread of improved seeds, the desired transformation in agriculture looks unlikely.

The scale of the challenge requires mass mobilization of the people in all nooks and corners of Nepal to actively participate in local development which, alas, has been a development phenomenon in deep void since 2002. No political representation to boot exists in the local bodies. Furthermore, there are no signs of this void being filled— ideally through local elections.

The sad reality is that expenditure in agriculture declined from annual two percent of GDP in the ninth Plan period to 1.4 percent in the 10th Plan period. Budget allocation in irrigation is declining in real terms and the performance of extension service is not satisfactory.

One will not expect to see a spurt in budgetary expenditures for the agriculture sector given the fact that the Ministry of Finance has a severe liquidity crisis faced with unprecedented rise in regular expenditure that is growing by 40 percent compared with revenue growth of around 26 percent! More demands are likely to be set upon it post-CA elections as populist policies scale new heights amidst the newly found national legislature that has risen from 205-member to over 601-member.

Tourists arrivals increased by 6.5 percent per annum in the 1990s only to decline by 1.1 percent per annum between 2000 and 2006. It has started to pick up since 2006 especially after the peace agreement was signed between the Maoist rebels and the government of Nepal. There are high hopes that it will gain further momentum. However, the reality is that tourism is a very volatile service industry which can take a new downturn if there is a global economic recession or regional wars or breakdown to the peace process in Nepal.

Thus, well designed innovations are needed to attract more tourists from the region. Much would depend on whether Nepal allows FDI in the real estate, civil aviation, hotel, and trekking sub sectors. Similarly, a new policy of ‘resident tourists’ may be tried to attract people to come and make Nepal their second home as is the case in Malaysia, Thailand, Sri Lanka, Mexico etc. Much more than simply a paltry three percent of GDP should be obtained from this sector with such immense potential. Nepal’s per capita tourist earning is the lowest in South Asia.

Experiences of other countries show that the economic and social costs of political transition and transformation can be very high in the post-conflict situation, particularly with low probability of strong, visionary leadership to be seen in the horizon. Thus, adverse impact on investment and growth is expected as political instability will compound in a polity of full proportional representation. In such an unstable environment, transaction costs of doing business will soar.

Nepal is now in the vortex of the democracy-growth dilemma. Without economic growth no democracy can be strong, stable and sustained. Possibilities abound for regression where good governance is not grounded on accountability, transparency and competition. These three acid tests of good governance are meeting tough times with the political parties in dire need to find new space and meaning in the emergent federal Nepal not to mention finances to keep party workers happy.

The tendency has been, so far, to weal and deal and resort to cartelization of the political and economic spaces to maximize the spoils of power with no checks and balance from the judiciary, bureaucracy and the civil society.

Unity-in-diversity, henceforth, has to be redefined with the rejection of the traditional institutions in the quest for inclusion and social justice. Unguided pluralism in the wake of a fragile, non-visionary leadership, driven by dynastic party politics, will add to the tension in society as all castes and creeds, and races and regions, clamour for what is called ‘horizontal equity’. That too is beginning to take root just when the macro economy is glaringly vulnerable to shocks from outside that are beyond the control of the government. .

Silver Lining

Every cloud has a silver lining. So the incidence of poverty declined from 42 percent in 1996 to 31 percent in 2004. Net enrolment of girls in primary school increased from 57 percent to 87 and under five mortality declined from 139 to 61 during the same period. These are solid achievements despite the civil war

Urban poverty stands at only 9.5 percent which can be completely eradicated with sound municipal governments empowered with sound devolution of development responsibility to work in tandem with new NGOs like Rotary Nepal, Lions Club Nepal as well as other NGOs and INGOs to be given the chance to enter the process of social mobilization of the urban poor.

Steady flow of remittances, wide ranging devolution activities and community ownership and management in a number of areas including small scale rural development activities, school management, health system, drinking water and increased motivation to educational achievements have provided strong stimulus to the socio-economic activities of the rural areas. These have been the reasons for whatever success achieved since 2001. Nepal must build on them with maximum devolution of authority and responsibility to local communities.

The above positive scenario reveals that an increased level of devolution, delegation, decentralization and social mobilization of the poor are critical. Increased resources are required by the rural areas. A vital need is this: stronger people’s ownership and participation in development activities. Local communities at the village levels must take leadership of the development process pursuing models that befit their own capacities and cultures and not blindly pursue models made in donor capitals or Singha Durbar. Re-discovery and revival of the traditional voluntary organization (TVOs) must be at the core of local community development.

Now is the time to strengthen critical central bureaucratic institution to make them function as technocracies even as the shape and form of federal Nepal are being worked through. We should introduce the concept of a ‘managerial civil service’. In doing so we can learn much from the experiences of Malaysia as to how they modernized their bureaucracy so rapidly in the 1980s.

Finally, as remittances will continue to be the salvation for our economy it is necessary for Nepal to be engaged in skill development for global markets. More qualified can obtain jobs overseas. Higher quality of vocational and technical skill help meet both national and international manpower demands.

This necessitates that we give top most priority to manpower planning to meet the most difficult of all national planning challenges; namely, how to create employment for the 300,000 youth entering the job market each year?

Having youth endowed with the right skills is one positive approach to meeting the challenge. Youth unemployment, alienation and angst are at the core of the conflict and violence in Nepal. A National Youth Policy and Action Plan is needed to allow for the fostering of national pride and patriotism and for leadership mobilization and development in new Nepal.

(The author is former finance minister)