Nepalese Economy: Development vs. Underdevelopment

Prof. Dr. Madan Kumar Dahal

Chairman, Mega Bank Nepal Ltd., Kathmandu

Introduction: 

Nepal’s geo-physical setting and time-zone location assume strategic significance in South Asia. The rich biodiversity comprised of three ecological regions - mountain, hills and terai - experiencing tropical, meso-thermal, micro-thermal, tiga and tundra climates provide 60-80 percent of the rainfall. The country possesses 2.3 percent of the world’s hydro- resources attributable to four principal river systems, the life-line of Nepalese economy viz., Koshi (east), Gandaki (central), Karnali (far-west) and Mahakali (far-west). Nepal has enormous advantages and competitive edges to create for a most popular tourist hub and global destination for tourists from all over the world. Preliminary geological surveys reveal that subterranean resources are available in the country. However, the extent and commercial potential of these mineral deposits are not exactly known.

Nepal is bestowed with 6,000 rivers and rivulets, 5,000 species of vascular plants, 175 species of mammals, and 850 species of birds and some specific herbal and medicinal plants are used for the treatment of cancer. Of total approximately 30 million population, the size of economically active population aged 15-59 years is estimated to be 54.2 percent (NLSS III, 2010). Nepal’s territory is double the size of Sri Lanka, 3.5 times greater than Switzerland, 6.7 times bigger than Israel, 23 times smaller than India, and 68 times less than the size of China. The striking features of Nepalese economy constitute that productivity and rainfall steadily increases from west to east; poverty is more acute and pervasive in the north as compared to south; and migration tends to shift from north to south.

2. The Current Economic Situation:

Nepalese economy is passing through a crucial phase circumscribed by poverty and stagnation. The macroeconomic indicator reflects that Nepal suffers from a sluggish economic growth rate compressed to 4.6 percent in FY 2011/12 against the target of 5.5 percent as envisaged in the 3-Year Interim Development Plan, 2010-12 (NPC, 2010). The average inflation rate is hovering around 11.9 percent in August 2012, highest in the last twenty-five months (NRB, 2012). The diminutive GNI estimated to be US$ 19 billion and inordinately low GNI per capita (approx. US$ 745) exhibit that Nepal's economy is conspicuously trailing behind other member countries in the South Asia region (WDR, 2012).

The economy is characterized by high cost economy, subsistence agriculture and alarmingly increasing dependence attributing to built-in structural constraints and dwindling comparative advantages and competitive edges to maximize benefits from globalization and liberalization. More than 74.0 percent of the total population still derives their livelihood directly from agriculture, which is encapsulated by staggering magnitude of disguised unemployment, mounting rural indebtedness, and a high incidence of poverty. A vast majority of the people (25.16 percent) still live in abject poverty with wretched economic condition and perpetual struggle for sustenance.

The rising consumption, poor savings and encouraging investment/GDP ratio led to a large fiscal and budget deficits. The fiscal and budget deficits are estimated to be 8.6 percent of and 4.3 percent of GDP, and total outstanding debt leveled at 32.7 percent of GDP in FY 2011/12 (Economic Survey, 2012). Merchandise exports grew at a slow pace and imports rapidly increased resulting in a huge trade deficit (Rs. 387.41 billion) in excess of the size of annual budget (Rs. 327.8 billion) during the same period. Unfortunately, the total magnitude of exports (Rs. 74.3 billion) is unable to match the import bill of petroleum products equivalent to Rs. 94 billion in FY 2011/12 (NRB, 2012). However, balance of payments situation (Rs. 127.70 billion) remained unexpectedly favorable and foreign exchange reserves moderately increased to sustain imports of goods and services for 10.3 months during the same period.

Growth of remittances has been robust as high as 23.0 percent of GDP, which has been instrumental in reducing extent of poverty over the years. Share of foreign exchange earnings from tourism sector stagnated and FDI declined to Rs. 7.14 billion in FY 2011/12. Revenues are buoyant that surpassed the annual target with tax effort ratio (TER) estimated to be 15.7 percent of GDP during the period. However, internal revenue mobilization is inadequate to supplement counterpart funding for development activities. Unfortunately, capital expenditure (Rs. 40.83 billion) suffers from ‘under-spending’ syndrome, which is compressed to 2.6 percent of GDP attributing primarily to inefficiency, corruption and poor governance.

Investment in agriculture, the biggest and priority sector has been minimal confined to 3.2 percent of total resource allocations, and the share of manufacturing sector remained below 6 percent of GDP. Financial sector witnessed a tumultuous environment and commercial banks suffered liquidity crunch during FY 2011/12 with reversal of credit crunch in recent times, and there is indication that liquidity crisis is likely to persist again. NEPSE index declined from 814 in 2008 to 389.74 in FY 2011/12 and the prospect for share market is bleak with negative interest rates on saving deposits. At present, the demand for credit is extremely low especially in priority sectors due to increasing risks and uncertainties with protracted transition.

3. Critical Constraints to Growth :

The major critical constraints to growth in Nepal include: (1) high-cost economy, (2) subsistence agriculture, (3) alarmingly increasing dependency, (4) extremely poor infrastructures, (5) low investment in priority sectors, (6) acute and pervasive poverty, (7) limited items for exports (8) lack of employment opportunities at home, (9) fragile industrial relations (10) lack of pragmatic industrial and foreign investment policy, (11) persistent stagflation, (12) huge subsidies to public enterprises, (13) frequent disruption in the supply of petroleum products, (14) poor capacity to spending capital expenditures, (15) revenues are inadequate to supplement the counterpart funding, (16) relatively high tax burden, (17) tumultuous financial sector, (18) poor implementation of reform programs, (19) growing inefficiency, rampant corruption and poor governance, and (20) prolonged transition.

4. The Major Crucial Issues:

The major crucial issues facing the economy include: (1) how to transfer excessively dependent extra population from agriculture to more productive non-agriculture sector by creating employment opportunities and thereby reducing extent of poverty? And, (2) how to integrate domestic economy with neighborhood, regional and global economies to maximize benefits from globalization, liberalization and market economy to achieve a sustainable, high and inclusive economic growth?

5. Foundation of Nepalese Economy

The prime foundations of Nepalese economy are comprised of: (1) Hydropower: Of total theoretical hydropower potential (83,000 MW) only 0.9 percent has been exploited so far and domestic demand is estimated to be 1,200 MW for FY 2012/13. Hydropower development could enrich prosperity in South Asia Region. (2) Tourism: Nepal has enormous potentials to make a regional hub with global destination to attract tourists from all over the world. (3) Biodiversity: The rich eco-system and a variety of species have tremendous economic potential. (4) Export Potential: In 2010 Nepal Trade Integration Strategy (NTIS) indentified nineteen key commodities and services that have export potential. (5) Human Resources: Increasing remittances through foreign employment have been instrumental in poverty reduction. (6) Agriculture especially high value crops: There exists enormous potential for agriculture development especially high value crops through promoting agribusiness and commercialization.

6. Mission, Vision and Strategic Objectives:

The vision or mission of Nepalese economy is to build a strong economic nation-state through achieving a high, sustainable and inclusive growth with active participation of the people ensuring a high quality of life to each individual and household within given timeframe.

The specific strategic objective should be to: (a) increase diminutive magnitude of GNI from US$ 19 billion to US$ 100 billion and transform economy from a low income with US$ 745 GNI per capita to the level of middle income economies with average GNI per capita estimated to be US$ 3,764 by 2025; and (b) ultimately, make Nepal the “Switzerland” of Asia by 2050.

7.  Conclusion:

It is necessary to devise a model for export-led and private- sector led open and competitive economy with due consideration to social security and welfare of the people. The model must ensure a high growth trajectory with substantial poverty reduction especially through mobilizing FDI on a greater quantum for infrastructure development. It is important to explicitly distinguish the sector functions to be undertaken separately by the government and private sector.

There is need to expedite both vertical and horizontal merger of financial institutions by offering attractive package of incentives. The defaulters should be given a maximum three-month time to settle the loan above Rs. 10 million borrowed from financial institutions. In case of delinquency the government and NRB should strongly act against the defaulters to expedite repayments through the sale of collateral including from the personal guarantee. The primary function of the cooperatives should be tied-up with the production activities for creating employment opportunities especially at local levels, and this should be made mandatory.

There is need to set reordering of priorities and correspondingly determine the level of investment based on viable economic areas comprising hydropower, tourism, bio-diversity, human resources (foreign employment and remittances), limited exports (carpet, garments, handicrafts and pashmina), and agriculture with special reference to high value crops. The government should effectively induct and implement the policy of economic diplomacy to expedite bilateral trade and investment on the basis of comparative advantages and competitive edges with friendly countries in cooperation with Nepalese diplomatic missions abroad. The economic diplomacy should also be instrumental to mobilize foreign assistance in priority areas especially in the context of economic growth and poverty alleviation.

All state owned enterprises (SOEs) except specified by the government should be privatized within a maximum three-year period. The government should totally abandon the policy to undertake business, establish industries and provide subsidies to SOEs, for this comes under the jurisdiction of private sector - a vehicle for economic development. The government should effectively work in tandem with private sector to attract FDI for initiating mega-projects in priority areas by creating investment-friendly environment conditioned to enduring peace and stability in the country. In compatibility with the spirit of liberalization the government should open up access to investment across the country and maximize the benefits from globalization especially through promoting joint ventures in banking sector.

A scientific land reforms system should be introduced with a view to increase productivity of agriculture and individuals must have the right to create wealth but with payment of taxes to government as per the existing rules and regulations. The government must be able to abolish dual ownership on land by offering reasonable package of incentives to absentee landlords if they are willing to relinquish ownership and transfer entitlement to the actual tillers. The new constitution must have the provision for ensuring “food security” as a fundamental right.

Industrial relations need to be substantially improved through initiating tripartite agreement among private sector, trade unions and the government. The development plan, annual budget, national policies and programs should be formulated on the presumption of “interdependence” to galvanize the cooperation from neighborhood economies, donor communities and multilateral funding agencies. The National Planning Commission (NPC) should maintain its separate entity and play the crucial role of a “Think-Tank” at macro-level backed by legal status to effectively implement its decision and formulate the periodic plans ensuring appropriate delivery of the results.

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Comments

• Posted on - 2013-02-08    by     David
• The article will certainly help open the closed eyes of the concerned sectors if they are forced to read and implement them. Nepal has become such a country where the country has been run by uneducated idiots. Perhaps, this article will try to make them wise . God plz bless the politicians of Nepal with wisdom. David from China

• Posted on - 2012-10-12    by     Dr. Purushottam Shrestha
• I feel much enriched by reading this article which has provided insights into overall Nepalese economy. The article is very informative and comprehensive. It gives fruitful thoughts to the political leaders, planners, policy makers and development practitioners. Recommendations given by the Author are such that could help transform in to Modern Nepal if that are internalized and implemented seriously by the concerned sectors and institutions. The data and information show considerable potentialities in some sectors which are still underutilized such as 1) hydro power, 2) tourism, 3) Biodiversity, (4) Export Potential, (5) Human Resources: (increasing remittances through foreign employment have been instrumental in poverty reduction), and (6)Agriculture especially high value crops. The author has made best effort even to develop Mission, Vision and Strategic Objectives to build a strong economic nation-state through specific strategic objective to: increase diminutive magnitude of GNI and transform economy from a low income to the level of middle income economies with average GNI per capita estimated to be US$ 3,764 by 2025 is commendable. In the conclusion, opinions given by the Author are vital. He has also touched upon the trade union which has become very serious issues these days regarding its role in every government, nongovernment institutions, industries, bank and financial institutions. So, this issue also needs to be taken into account and resolved timely. Regarding poverty reduction, Microfinance institutions (MFIs) have played a crucial role to mitigate absolute poverty. Moral and physical support from Nepal Rastra Bank as a patron of MFIs, Government, External Development Partners is highly required to expand the outreach in the rural and remote, hills and mountain areas. I request the respected author kindly heed attention in this sector too. Finally, I wish the Author for his continued contribution and effort to share such a valuable ideas and way forward for the transformation of the country into modern nation through economic growth thereby reducing abysmal poverty and inequalities.

• Posted on - 2012-10-09    by     Balaram paudel , Birat nagarpaud
• “Nepalese Economy :Development vs. Underdevelopment” by prominent economist, Prof. M .K Dahal Chairman, Mega Bank reveals a clear deteriorating picture of Nepalese economy. The paper has deeply concerned on declining several macroeconomic indicators such as stagnant economic growth, under spending habit of capital expenditure, hovering annual inflation rate of 11. 9 percent and extremely poor export earnings Rs 74.3 billion even unable to meet import bill of petroleum products Rs 94 billion. Trade is known as the engine of economic growth in the present day world of liberalization and globalization. However, Nepal has not been able to take benefit from international trade since its export is extremely low due to weak competitive capacity in the international market. Who is responsible for a deteriorating economic situation? Planner, policy makers and concerned authority must answer to the public because deteriorating economic situation implies decreasing economic activities in the country , growing unemployment ,low-income and ultimately poverty which is just like an economic punishment to the innocent people. The paper has explained 20 constraints to economic growth which must be addressed if Nepal wants to achieve the economic dynamics. The area in which Nepal has comparative advantages have also presented in the paper. Responsible authority needs to go through this paper and needs to implement correcting measures to improve the degrading economic situation. Without properly addressing the economic aspect of the people, it is not possible to consolidate nationality and national integrity. Finally, I would like to congratulate Prof. Dahal for his magnificent writing. His vision, mission, goals are not only clear but also pragmatic. Balaram paudel, Biratnagar

• Posted on - 2012-10-08    by     Prof.Dr. Mohan Lohani
• Prof Madan Dahal's article is,as usual, thought provoking and provides ample inputs for policy makers of the country.He has reviewed ,examined and analysed both the ills and strengths of Nepalese economy.It is a pity that the country,despite enormous resources,particularly in the hydropower sector, is bogged down in poverty and contunues to be categorized as one of the least developed among developing countries(LDCs).Nobody would dispute Prof.Dahal's contention that the country's economy continues to be plagued by 3 formidable challenges,namely, inefficiency,corruption and bad governance.He points out some crucial issues such as transfer of 'excessively dependent extra population' from agriculture sector to more productive non-agriculture sector and the need for integrating domestic economy with neighborhood, regional and global economies.It is possible to 'achieve a high ,sustainable and inclusive 'economic growth if we succeed in devising a model,as Prof. Dahal argues, for 'export-led and private sector-led open and competitive' economy . Prof.Dahal, one of the top ranking economists of the country, occupies a prominent place among the intelligentsia of the region. He is invited ,from time to time, to attend international seminars and present his expert views on problems and prospects of national , regional and global economies.The government of the country would do well to benefit from the experience and expertise of a highly competent economist like Prof.Madan Dahal who is currently chairman of Mega Bank, a leading bank in the banking sector of the country.I wish him all success. Prof.Dr. Mohan P Lohani, Former Ambassador to Bangladesh, Sri Lanka and the Maldives

• Posted on - 2012-10-08    by     arman bajgain
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