Madan Kumar Dahal
Senior Economist, Nepal
General Setting: Nepalese economy is passing through the downswing phase circumscribed by poverty and stagnation with a diminutive growth rate confined to 3.5 percent, which is entirely attributed to foreign assistance as high as 65 percent of total capital expenditures envisaged in the budget for FY 2011/12 (Budget Speech, 2011/12). The economy is conspicuously trailing behind other member countries of the SAARC region with respect to selected macroeconomic indicators in recent years and, most unfortunately, listed as one of the poorest countries in the world. Nepalese economy is predominantly a high-cost economy disadvantageously placed for expanding international trade with no direct access to sea and limited transit facilities. The ultra-poor and poor have no access to resources to buy two meals for sustenance and lack capacity to manage for shelter and clothes to live in dignity. The prices of daily consumption goods, medicines, textiles, fertilizer, petroleum products and tariff on electricity, telecommunications, and transport services have increased exorbitantly over the years. The economy is characterized by growing dependence especially with India with alarmingly widening trade deficits, which is estimated to be around 25 percent of GDP. Although agriculture is the biggest sector with its contribution to GDP as high as 32 percent, it is still a subsistence sector encapsulated by low labor productivity. The manufacturing sector is fragile with declining share below 6 percent of GDP due to poor industrial relations, limited export potential, and poor infrastructure with high extent of load shedding resulting to closure of several manufacturing units located at industrial corridors in terai (Dahal, 2011). This is further engulfed by prolonged transition, unclaimed status of constitution making and peace process, lack of investment-friendly environment especially to attract FDI, sinking public enterprises, dwindling financial sector with relatively low M2/GDP ratio, and volatile stock exchange with rapidly falling NEPSE Index. Despite several economic potentials instrumental in sustaining a big push to the economy, growing inefficiency, decelerating competitiveness, rampant corruption, and poor governance have remained detrimental factors to make a quantum jump in the economic front.
Current Status of the Economy: The latest data exhibit that inflation is still hovering around at a moderately higher rate primarily due to continuous price rise in India. The recently published WTO Report envisaged that Nepal’s GDP leveled at Rs. 1,346 billion; GNI per capita remained conspicuously low to US$ 642; extent of total consumption surpassed by 94 percent of GDP with negligible extent of national savings/GDP ratio; Tax Effort Ratio (TER) marked 15. 3 percent of GDP; and trade deficit swelled-up to Rs. 330 billion during FY 2010/11 (WTO, 2011). The ratio of exports to total trade declined to 14 percent, while the share of imports went up as high as 86 percent (NRB, 2012); contribution of remittances through foreign employment considerably increased to 23 percent of GDP; share of foreign exchange earnings from tourism sector declined to 2.4 percent of GDP in FY 2010/11; quantum of cumulative FDI stagnated at Rs. 58 billion as of mid-March 2010 (Economic Survey, 2011). Around 74 percent of total population still derives their livelihood directly from agriculture and population below poverty line perceptibly declined to 25.16 percent (NLSS, 2010). However, the studies of Oxford University Research Team sponsored by UNDP employing Multidimensional Poverty Index (MPI) has revealed that extent of poverty is as high as 65 percent in Nepal (OPHI/UNDP, 2011). This is a grim reality that majority of the people are living in abject poverty under wretched economic condition with barter system especially in remote hills and mountains of the Western and Far Western regions of Nepal.
Critical Constraints: IMF recently warned that global economy would likely to witness a more severe and dangerous economic meltdown in 2012 and afterwards as compared to 2008 and that of 1930s and the forecast also refer to the rise of Asian economies during the period (IMF, 2011). Amidst two sharply contrast scenarios Nepal’s economic status is extremely vulnerable and unpredictable, and development is conditioned to peace and stability in the country. The respective governments in the past and to-day absolutely failed to generate trickle-down effects and maximize the benefits from neighborhood economies with phenomenal economic success of China and incredible growth sustained by India in recent years.
Investment is not a critical constraint to growth in Nepal, for investment/GDP ratio is found to be as high as 30 percent of GDP in FY 2010/11, unfortunately, with sluggish growth rate conditioned to foreign aid (ADB, 2009; Economic Survey, 2010/11). This is indicative of extremely poor efficiency of investment to growth, the ICOR being as high as 8:1. The most notorious critical constraints to growth are comprised of:
(a) poor infrastructure with terribly high extent of load shedding as high as 14 hours in a day that plunged the entire nation into darkness for the last few years;
(b) empty water-tape with no single drop supplied to a majority households in capital and elsewhere for a long period;
(c) frequent disruption in the supply and critical shortage of petroleum products including cooking gas attributed to non-payment of huge outstanding due to Indian Oil Corporation (IOC);
(d) unhealthy industrial relations between the trade unions and private sector leading to closure of several manufacturing units both indigenous and foreign located at industrial corridors in;
(e) misappropriation of huge fund to the tune of Rs. 92 billion by most of the state-owned enterprises (SOEs) such as Nepal Oil corporation (NOC), Nepal Electricity Authority (NEA), Nepal Airlines (NA) and National Trading Ltd (NTL) to name a few received through transfer payments, subsidies and loans from treasury. These SOEs with monopoly market have incurred into heavy losses and suffers from over-manning and political entrenchment;
(f) declining volume of traditional exports such as carpet, garments, handicrafts and pashmina with comparative advantages and competitive edges to India and overseas;
(f) poor segment of society is hard hit by stagflation due to rising ‘imported’ inflation and lack of employment opportunities at home; and
(g) both private and government investments in agriculture are extremely low estimated to be less than 5 percent of GDP (Budget Speech, FY 2011/12).
Although investment is not a constraint to growth, unfortunately, FDI and indigenous investments in potential areas such as hydropower and tourism are trapped into vagaries of prolonged transition and lack of security to investment. Nepalese economy is, therefore, likely to capsize with rapidly deteriorating political situations resulting to collapse of Constituent Assembly (CA) with great failure in constitution making and accomplishing peace process within given timeframe set by the Supreme Court that will expire on May 28, 2012. In addition, the latest report of International Anti-corruption Watchdog, Transparency International 2011, Failed State Index 2011, and the report of the Auditor General of Nepal provide adequate evidence that Nepal is not only the most corrupt country in South Asia but also moving towards a failure State due to alarmingly increased lawlessness and impunity over the years.
The current economic situation is more vulnerable than what is expected to create adverse impact by global economic meltdown likely to occur in 2012 and afterwards. This is most unfortunate that Nepalese governments in the past and to-day are terribly engaged in managing the crisis with little emphasis and priority to resolving existing economic crisis. It is growing inefficiency and decelerating competitiveness, mounting corruption, and extremely poor governance are three crucial factors detrimental to economic progress in Nepal. The existing dismal situation is attributed more to political and less economic factors comprising prolonged transition, non-existence of elected representatives at local levels, extremely politicized bureaucracy, under-spending of capital expenditures, lack of corporate governance in financial institutions, and poor governance at both government and the private sector to effectively provide services to the people.
Ten Commandments: A Fast-track Approach to Sustaining the Economy
Nepal’s economic development is an intractable proposition tantamount to traveling on the Silk Road and, therefore, economy urgently requires to introducing fire-brigade approach to deal with sustaining macro-economic stability and improving fiscal discipline and governance (Dahal, 2012). When the house is set ablaze, the priority would be to urgently call fire-brigade to extinguish fire. The plan to build a ‘fire and earthquake proof’ house with modern comfort and better quality could be considered at a later stage. Assuming limitations of existing coalition government particularly of its short-lived nature with a series of ugly reputations, it is imperative to reordering of priorities and, accordingly, formulating plans, programs and strategy to bring back the economy at normalcy and move towards a take-off. This requires scrapping of all existing policies, plans and programs to be substituted by emergency plan and budget and, subsequently, implementing an action plan designed for a short span with strong commitments to ensuring substantial results to each household hard hit by stagflation and deprivation. A long term strategy, thereafter, could be devised through developing consensus among political parties with the emergence of a national government likely to originate soon. Since the fast-track approach is pre-requisite to bring back the economy at normalcy, the following Ten Commandments have been recommended for implementation to forthcoming national government likely to be in existence soon.
Conclusion: The story of economic development is often very poignant and decelerating in Nepal. Democracy or any other system where corruption is protected, honesty penalized, and scholars and intellectuals are humiliated, and where founding father of the nation is atrociously disgraced will not endure for long. With the emergence of forthcoming national government and soon after its existence it is essential to constitute a high level but powerful “Economic Commission” at par with the Cabinet rank to be assigned primarily to undertake specific twin objectives. These are: firstly, to formulate the “White Paper” on the current status and master-bottlenecks facing Nepalese economy and immediately apprise the common people within a month and, secondly, devise a “Road Map” within a year employing the doctrine of “interdependence” in conformity with the spirit of globalization and liberalization to attain double digit growth with substantial poverty reduction ensuring tremendous affluence in society at par with middle economies by 2025. The Commission should also explore strategic option to heighten economic ties with both India and China and also with development partners at large to especially expedite mutually beneficial mega projects to create win-win effects to both sides. Nepal’s trade with India is as high as 67 percent and dependency is growing alarmingly and, therefore, it also necessary to workout as to how trade deficits with India would be drastically reduced by promoting exports through reviewing existing Nepal-India Trade Treaty in favor of Nepal and determine the exchange rate of Nepali currency at par with the value of Indian currency. In addition, it is also important to urgently start with “meritocracy” in all spheres of life comprising social, cultural, economic and political as well and also develop and implement reservation policy for all weaker sections of the society. This would certainly help improving efficiency and governance and reducing the state of corruption.