Economic crisis

Policy makers these days in Kathmandu are busy to find a solution to whether the upcoming economic storm -dual combination of capital flight followed by deficit BOP and inflation. Ministry of Finance and NRB have come up with different polices, and many more are in pipe line, most outrageous and unviable recommendation was by the Government of Nepal to the NOC to reduce import of oil. Capping the auto & housing loan, revising the gold import procedure or even asking people to consume less fuel is a short term solution. Unless we have a political and economic reform in a policy level, these kinds of erratic crises will continue to linger.
With majority of the imports coming from India, and Nepal sharing an open border with India. You don’t have to be a PHD in economics to figure out why we are having a huge capital flight to India or why we have a ballooning trade deficit with India.
Till the third quarter of the last fiscal year remittances flow to Nepal was decent. With inflow of remittances having a money multiplying effect on the economy channeling through the financial institutions, everybody was enjoying the “free ride”, from the people of the bottom of the pyramid to luxury car driving CEO .Suddenly, the impact of global financial crisis and its aftermath symptoms started propping up in the Nepalese economy . Slow growth rate of the remittances catalyzed by the never ending political impasse have made the situation worse. With deteriorating economic situation at home, investor confidence took a hit; people started pulling out money from the equity market and other form of investment and were waiting on the side line to find new investment avenues. When Nepal just started to feel the impact of global financial crisis and its consequences, its neighboring country India had already start recovering. With the stimulus package introduced by the Government of India and high flow of foreign investment (especially investors borrowing money at a near to zero interest rate from United States and Europe and investing in emerging markets), India is experience rapid economic growth. With growing Indian economy, Nepali here at pulling out money and investing in India, be it buying apartments or asking a family friend to invest in India’s equity markets. Unless we have a stable investment friendly here at home and an investment platform other than realeastes , stock market or simply parking money in some financial insutation ,capital flight will continuous to “takeoff”.
As of for now the real immediate problem is the raising trade deficit and food inflation. In India output of many agricultural commodities has dropped following the lowest monsoon season rainfall in 37 years. Agricultural output situation in Nepal is also grim, Department of Hydrology and Metrology confirmed that the monsoon was weaker and there was 60 percent less rainfall. Production of paddy and maize declined by 11 percent and 4 percent. Paddy and maize contribute 10 percent in Nepal’s GDP and 27.5 percent in total agriculture output. With India already facing a supply constraint, it is very unlikely for India to export its agricultural product to Nepal. Even if the Government of Nepal tries to knock the door of other large agricultural producing nation to import food, the main problem here is the rasing trade deficit. Addition import will further widen the trade gap .I believe in the coming days food security will be the biggest economic challenges the already volatile country of our will be facing .
Shabda Gyawali