Nepal: Need for Economic Andolan?

Sandeep Basnyat

Yonsei University, South Korea

It is extremely important for Nepal to have a unified approach of all political parties similar to the one seen during Jana Andolan II for restoration of political freedom and development. Every sector of economy should be carefully studied and a unified approach of development plan should be prepared which will embrace both short and long term economic planning.

The recently published figures of Nepal in Asian Development Outlook 2007 by The Asian Development Bank epitomizes what former US president Mr. Herbert Hoover once said, “please find me a one-armed economist so we will not always hear—on the other hand”. Almost eight decades have elapsed since then but the economic disparities among nations remain unchanged-save multi-fold rises in numbers calibrating strengthened economic powers. A careful study of the figures published in the report indicates that outlook for Nepal, with its tremendously deteriorated essential macro-economic infrastructures, remains challenging for the new government regardless of whether they represent interim or elected cabinet.

In one part of the globe, the world’s largest and the eleventh largest economies, the US and South Korea, with their Gross Domestic Products (GDP) over thirteen and one trillion US dollars respectively in market value sealed a FTA deal on April 2, 2007 which is expected to generate some US$20 billion in new trade between the countries in coming years. The pact concluded between Seoul and Washington, the biggest trade accord ever for Korea and the largest for the United States since the North American Free Trade Agreement (NAFTA) took effect in 1994, is predicted to create a $14.1 trillion economy, the third largest economic clout after the European Union representing $15.3 trillion and NAFTA at $15.1 trillion.

On the other part of the globe, the politically drenched Nepal with its GDP reaching barely US$39 billion is struggling harder to hit the growth rate of 2.3 percent. Not to mention that the amount is based on Purchasing Power Parity (PPP) which is an indication of price equalisation of an identical good in two countries when the prices are expressed in the same currency-ie, the amount of goods that can be purchased in the US and Nepal, for instance, in one US Dollar. GDP of Nepal in terms of official exchange rate is merely $7.15 billion.

Economic growth rate is an ultimate calibrator of the overall economic performance of a country. It is highly intertwined with the existing level of macroeconomic infrastructures such as employment, productivity, technology, prudent financial system and so forth. Sustained development of such infrastructures is essential in pursuing and accelerating the growth rate; however, it needs considerable amount of time, patience and energy coupled with the strongest unified determination of all concerned sectors including governing and opposition political parties, executing government and private industries.

Feeble macro-economic indicators

Macroeconomic indicators of Nepal have been limping for years amid sustained political instability, long-running insurgency and unfavourable weather conditions. In the past five years, the average 2.14 percent GDP growth rate of Nepal has been well below 70 percent of South Asian average of 7.26 percent - the lowest among other South Asian countries. The highest GDP growth rate of 14.86 was secured by Afghanistan even during the conflict years. Another country which has been hit by insurgency-Sri Lanka, has also maintained its average GDP growth rate of 5.7 percent.

GDP is used to measure total economic activity in a country and considered as a yardstick for measuring economic achievements. The indicator is highly related with the productivity outcome which, apart from other technical factors, is affected by social attitudes towards works, work ethics, unionization and perhaps most importantly, trainings.

It is important to remember that Nepal’s labour force, in most cases, not only lacks well qualified technical training but also is highly influenced by politics. This is not to argue that labour unions should refrain from ideological inclination; but, should rather be seriously considering the extraordinarily declined output of industrial performances due to series of protests, bandhs, chakka jams, strikes, extortions, abductions and so forth. Industrial performance guarantees job sustainability and employment growth. For an agrarian economy like Nepal where agriculture provides employment to about 76 percent of the 32 million population and accounts for more than 40 percent of the GDP, ADB figures say that agriculture growth in Nepal came down from about 3 percent the previous year to 1.7 percent in FY 2006. It was one of the lowest in South Asian countries. That said, in 2006 the agriculture merely contributed 0.7 percentage point to the total GDP growth. The data reveals that value added in agriculture has not been able to exceed more than 3 percent in the past 5 years except in 2004 when it was 3.9 percent. Figures for other South Asian countries show that the highest level of agricultural growth was recorded by Sri Lanka with 5.9 percent followed by Bangladesh with 4.5 percent during the period.

Another important sector of the Nepalese economy - services, including tourism and financial services, accounts for about 40 percent of the GDP and provides employment approximately to 18 percent of the total population. The ADB figures shows the average growth rate of value added in services in the past five years has been 2.3 percent in Nepal which is far below the South Asian average that stood at 8.36 percent in the same period. The highest growth rate of value added in services was experienced by Bhutan with 10.02 percent followed by India with 9.3 percent. Performance of the industrial sector has also been sluggish in Nepal with the growth rate of 1.3 percent on average from 2002.

Further challenges

Nepal has historically been poor in equitable development of physical infrastructures including transportation and telecommunications that are essential for economy to grow rapidly; and, on top of that the decade long insurgency has virtually damaged a significant proportion of the existing ones. Sustained political instability has, time and again, shaken the business confidence of local businessmen and foreign investors are found reluctant to invest in Nepal. As a result, unemployment rate in Nepal still stands at 42 percent. However, the bigger trouble is the consumer price inflation which has risen to more than 8 percent in 2006, mainly imported from Indian wholesale price index. The pace with which the Indian economy is growing at present, indicates higher chances of increased wholesale price index which will in turn reflect back to Nepal with increased consumer price inflation. Neither the Nepalese economy is mature enough to contain sustained inflation rate nor the GDP per capita high enough to offset additional burden on Nepalese household. One obvious example is rising petroleum prices which has ignited barrage of protests in the past few years.

Remittances, the money sent back home by the Nepalese abroad, contributing about 70 percent of their total earnings, is the primary source for most of the households. Increased earnings and bank savings have raised the liquidity in banks; however, domestic investment problems for the banks remain intact. This has resulted in the lending rates to rise to about 11.6 percent whereas the deposit rates declined to 2.3 percent. In other words, consumers receive less than 2.5 percent interest rate in their bank savings while banks will charge more than 11 percent on their lending. The widespread gap caused mainly by lack of investment opportunities for banks, has invited tons of criticism creating suspicion at prudential regulation in financial system.

A small hope for economic recovery would be an apparent increase in export (which is traditionally almost 40 percent to India); however, extensively decreased production level and crisis in transportation has tremendously brought down the export sector resulting in a widened trade deficit of $1.5 billion. The automatic effect of reduced export has been reflected in terms of limited foreign reserves that are essential for a country to buy imports.

The re-establishment or foundation of macro-economic infrastructure for economic growth is one that can be achieved overnight; neither is the one that can be underestimated by politically overwhelming manifestation. At present, it is extremely important for Nepal to have a unified approach of all political parties similar to the one seen during Jana Andolan II for restoration of political freedom and development. Every sector of economy should be carefully studied and a unified approach of development plan should be prepared which will embrace both short and long term economic planning. There is no one and immediate solution for overall economic growth and development, but, if the process is not started right now, then there will be no start at all.

Political parties in Nepal, for most part, are fundamentally pre-occupied with Constituent Assembly Election, which, by far is the most crucial aspect of Nepalese identity at present time. On top of that, people are struggling hard to identify a way to give a clear-cut way out to the monarchy even as Maoists express determination of establishing republic prior to the CA election. The overwhelming political aspiration has overshadowed entire Nepal with the confidence that everything will be settled after the CA election and republican set-up. However, it is hard to find in any of the political party’s manifestation what would be their economic roadmap to lead the country after such changes. The germination of Maoist problem was in part related with high unemployment, unbalanced economic development efforts, high income disparities and the lack of accessibility to resources. Regardless of which party (s) rule(s) Nepal before or after the CA election or republican set up, unless the economic infrastructures are given immediate priority for reconstruction, the political establishment will not be able to fulfill people’s wishes. Therefore, a mere political hullabaloo without prior emphasis on economy otherwise might invite an “Economic Andolan Part I” from the streets as well.

[The author can be reached at: sandeep_basnyat@yahoo.com; Mr Basnyat is a Phd candiate at the Yonsei University in South Korea]

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