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Nepalese economy: Plummeting by poly-tricks

Bhuwan Thapaliya - 2/28/2008

Investors and analysts worldwide have been inquiring after the Maoists truce and their inclusion in the government: When will Nepal bottom out? Is it away or just around the corner? After the Maoists stake in the government, the platform was set but then came the uproar in Terai and the popular indicators suggests that the investors have to wait further.

The problem, of course, is that though Nepal is moving fast ahead politically, it is just staying in the same place economically with an average growth rate of 2.1% percent in the last five years. There is no indication that there will be a change in the existing situation as the condition in Nepal is too volatile and it will remain to be so till the Constituent Assembly election scheduled to be held in April 10 of this year.

The economy may change the direction modestly after the scheduled completion of CA election. But that too is just a hypothetical probability as the recent political indicators suggests otherwise.

Surrounded by booming neighbors, Nepal’s sluggish growth rate has been an embarrassment. Nepal ’s population growth (2.13% according to 2007 CIA estimates) is going neck to neck with its GDP growth (2.5% according to 2007 CIA estimates). What an irony this has been.

On the other hand, India and China, two neighboring countries of Nepal , have managed to attain the highest growth rate in gross domestic product in the world with rates of 8.5 percent and 11.4 percent in the year 2007 respectively.

Nepal should have reaped the benefit but such a golden opportunity was not utilized. Given the rising demand in these populous countries (40% of the world’s population), this would have helped the Nepalese entrepreneurs to increase the export trade in these countries thereby boosting the growth and employment in the domestic economy. But this reality has presumably, not even noticed by the politicians who are always engaged in one political battle or another.

Analysts say Nepalese leaders are focusing too much on political issues and not enough on economic issues. Yet it remains true that most political issues leave people baffled. This is unfortunate. That perception leads to a more concerned response to poor opinion polls: that Nepalese leaders need to address Nepal ’s grave economic problems and implement solutions. According to this school of thought, it is not the politics that is at fault, but the failure to back it up with economic incentives effectively.

That leads to a suggestion for improving the Nepal ’s Economic image: to change the rhetoric of the masses. The biggest priority, however, is the need to win (or win back) the confidence of Nepalese. This will be difficult: Nepal Rastra Bank’s report on the economic performances of the economy in the first five months of the current fiscal year showed that our financial resources are straining and as a consequence our economy is heading towards a major crisis.

Nepal’s budget deficit is mounting and this has stirred a panic in the heart of the policy makers. Our budget has gone from surplus to deficit. Last year Nepal had a budget surplus of Rs.4.95 billion but this year it has plummeted into the budget deficit of Rs 9.81 billon and it is getting wider as some indicators suggests that our budget deficit has already crossed Rs.10.5.

This mammoth rise in deficit is due to increase in government expenditure, which on a cash basis increased by 44.3 percent to Rs 47.26 billion and the recurrent expenditure rose by 27.7 percent to Rs 30.95 in the first five months of 2007/08. But a budget deficit also means that the Government’s debt is rising and the concern over the level of government debt thus focuses on the level of government spending and revenues.

These are massive increases and even the healthy revenue mobilization of the government which grew by 21.0 percent to Rs 32.36 billion will not be able to finance the government’s spending. There is a huge gap between revenue generation and the government expenditure.

Nonetheless, rise in government expenditures often doesn’t present the real scenario of the economy. Rise in government expenditures at times are not sordid and gloomy because fearing recession government times and again accelerates the velocity of the money circulation by raising government expenditures. The latest example being that of the Bush administration’s tax rebate policy and its economic stimulation package of $ 178 billion to accelerate the economic activities and push the paws of recession.

But unfortunately for Nepal, the increase in government expenditure was on account of rise in all forms of government expenditures i.e. recurrent, capital and principal repayments. “The higher growth of recurrent expenditure was on account of increased expenditure on relief-related activities, the salary hike of government employees, the rise in peace-related expenditure and additional expenditure relating to the preparation of constituent assembly elections,” according to the Rastra Bank.

Though , the overall balance of payments (BOP), which was at deficit, returned to a surplus of Rs. 24.1 million there are every changes of it being deficit again because of the depreciating dollar, rising crude oil price and Nepal’s soaring import of foodstuffs and machineries.

Rising oil cost has taken a heaven toll on the Nepalese government and given the political sensitivity of inflation, the government seems to have decided that it can cope with a deficit budget but just can't afford any increase in prices at least before the much coveted Constituent Assembly election.

But whether Nepal can afford to do that is debatable on the economic ground. For example, the government has the gross foreign exchange reserves of only Rs.165.37 billion. In other words, this means that on the basis of the import figures for the first five months of 2007/08, the current reserves level is only sufficient for financing merchandise imports of 10.3 months and merchandise and service imports of 8.0 months according to the NRB. This reckons that Nepal is on the verge of foreign exchange reserves crisis too.

Nepal’s financial situation has been deteriorating at a rapid rate, but this has nothing to do with the global economic downturn. Nepalese are their own worst culprit. If China and India can grow at such an alarming rate even in the midst of the global financial crisis and amidst the fear of possible recession in America, why cannot Nepal.

Nepal cannot because of its poor economic management and due to the lackluster vision of the government in the developing field. Nepal hasn’t realized what our competitive advantages are nor has it realized its absolute advantages. But the list of difficulties does not end here. It is nice irony that one of the biggest hurdles to the accession of economic activities in Nepal is its own psyche. Nepalese think they cannot move forward in the time of crisis. True, but not always the fact.

Yes, countries can get stuck in conflict, political uncertainties, and economic stagnation for years. Countries have been known to be in the same place of anger and denial phases for years but time has come for Nepal to march ahead.

Nepal cannot be in the denial phase for long. With its dependence on foreign funding, and it’s multiple other core economic problems, Nepal needs to forget its politics and move into the economic road.

The government’s liberalization program has opened important sectors of the economy to new investment but the prospects of rise in economic activities, revenue and foreign grants are not promising as the Investors and donors are implementing the policy of 'wait and see.’ Nepal need investors to spend in Nepal and give its economy a new direction but it can go easy with donor and their funds. Does Nepal really need their funds? This in itself is debatable. Look, what Nepal has done with their funds? Nepal has completely misused it: exploitation of the resources by few on the expense of many.

Time has come for Nepal to develop on its own without the foreign aid through foreign investment before the donor fatigue lurks in. At this critical juncture of its socio-political reckoning, Nepal needs trade and not aid. If Nepal has enough money to patch up the damages caused by the barbaric ethnic rivalries in Terai and the YCL’s atrocities in other parts of Nepal , then it doesn’t need any economic aid from the world.

Is it worthwhile for Nepal to spend so much money per day on these so called social transformations? Is it worthwhile for the Nepalese to indulge in a communal war and spend their hard earned money just for nothing? Aren’t they betraying their brothers and sisters who sweat their heart out in the foreign land and inject its economy with a mammoth remittance? Aren’t they betraying their donor nations and the people of these nations, whose tax they are consuming? Serious pondering on these issues is the cry of this hour.

The political wrangles have hit Nepal ’s economy and its image abroad. To avoid a bigger crisis, the Nation’s political leaders will have to keep cool heads and pull back from the brink. Nepal must use the channel of the U. N to brain all these people to the negotiation table or find other channels to quietly tell the conflicting parties to come back and sit on the negotiation.

Furthermore, Nepal should now be determined to set up a system of liberal democratic pluralism with an atmosphere of non- violence. This should be the basis not only for the coming C.A election but for the future of Nepal . And in crisis such as the ongoing ones in Nepal , it is unwise to leave the economy in one corner because the crisis may take some time to resolve. The mantra is to wagon wheel the cycle of economy even in the conflict. If Sri Lanka can do that, then why cannot Nepal .