The suspense is Killing Me

Do we have an incredibly resilient economy or are we on the verge of an economic collapse because of a disconnect between policymakers and the rest of the nation? I really hope that it’s the former and not the latter because it’s not very hard to comprehend what would happen to the level of business confidence and the state of the economy if any other country’s political situation were in as bad a shape as ours. Despite the insurgency, Tarai unrest, labour union problems, energy crisis and other exogenous problems, the business community in Nepal has preserved and continued with their operations.

Some factories have closed down; the manufacturing sector in particular has suffered especially due to chronic labour problems and the energy crisis; but the overall economy has moved on, albeit slowly. But how long can we go on like this? Yes, we are a resilient bunch of people; and we have taken messy politics, numerous bandas, labour union problems and the energy crisis in stride and continued with our day-to-day affairs. However, instead of policymakers recognizing the past and current plight of the business community and working towards facilitating business through new policy measures, they have been perpetuating a policy vacuum created by the political stalemate which is worsening by the day.

During the last two months, we have failed to elect a new prime minister after holding elections for the umpteenth time. And because of the delay in the formation of a new government, our annual budget—where the government announces key fiscal policy measures for the coming fiscal year—is in limbo. The business community eagerly awaits the annual budget as major policy changes are mentioned in it—such as those related to taxation, foreign trade tariff, infrastructure and agriculture, among others. Moreover, the budget also gives an idea about the economic policy rationale of the policymakers, i.e., whether the incumbent government is more market friendly or has a socialistic ideology.

Businesses plan their next projects incorporating these policy changes. However, due to the delay in the formation of a new government and announcement of the budget, which is overdue by more than two months, there is uncertainty in the business community. And this is the catch: Uncertainty kills business activities.

When the business community is confident that a particular government will last for a certain period of time, they can plan and invest accordingly. They can rest assured that the prevailing policies will be maintained and that their investment won’t be put at risk because of sudden changes in economic policy due to a change in government. However, when there is uncertainty whether a certain government will last or not, business persons generally prefer to wait and watch.

This results in lack of investment and other business activities, and stifles economic growth. In Nepal’s context, there is no certainty as to when a new government will be formed and how long it will remain.

Since the restoration of democracy in 1990, Nepal has had 17 different governments, 16 prime minister changes, a decade-long Maoist conflict, direct rule under former king Gyanendra, the April movement of 2006 and numerous strikes and bandas. Political parties have split to merge again, and political leaders have left their respective parties only to return subsequently. Because of the frequent changes in government, there hasn’t been any continuity in economic policy. The lust for power among political parties has made Nepal one of the most politically unstable countries in the world. It’s no wonder then that over 60 percent of the respondents to an enterprise survey of Nepali industry for 2009 conducted by the International Finance Corporation (IFC) have identified political instability as the major obstacle to their business.

Despite this, our economy has moved on largely due to the perseverance of the business community. The business community has persevered hoping that things will change for the better some day. But then at some time, the policy vacuum caused by the political instability will start to take its toll. In fact, I believe it has already started to happen. While our neighbouring countries are witnessing a dramatic economic growth because of business-friendly policy changes, we are languishing in uncertainty. But for how long can we afford to suffer thus? This resilience won’t last indefinitely.

This article was first published on Aug 31st, 2010 on the Kathmandu Post
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