Economic Flux and Nepal

We live in uncertain times. Economic theories are being re-written, complex financial systems are being re-engineered, and the virtues of capitalism and globalization are being questioned. After advocating for less regulation for much of the past decade, re-regulation was the buzz world in the recently held World Economic Forum (WEF) in Davos where attendees were also busy dissecting the what’s and how’s of the ongoing economic crisis. At the same time, seizing the moment, participants from the rival World Social Forum (WSF) camp were pointing fingers towards globalization and their capitalistic foes for the current economic mess. After decades of oblivion and where it was shadowed by Neo-Keynesian and Monetarist theory, Keynesian economics is back again thanks to the current Great Recession. In the United States, mainstream economists from both the left and right are now busy debating how best to spend the USD 800 billion stimulus package so that the US government can get more bang per buck.

In the light of the recent crisis, policies favoring protectionism in favor of free trade have been introduced in many countries and the priorities of the World Trade Organization (WTO) are in limbo. Explaining that in their current state organizations such as the International Monetary Fund (IMF) and World Bank (WB) are incapable of addressing the current global economic distress, reforms of these international institutions are being sought. And the much talked about Washington Consensus mantra, which laid down the policy prescriptions for developing economies, is dead.

After decades of overall growth and prosperity, the global economy is in a standstill due to negative growth forecast for the developed economies and tepid growth forecast for the emerging markets.

In our context, there are issues our policymakers need to be worried about. Though directly shielded from the current global crisis because of our nascent financial sector and little, if any, exposure to international capital movement, the current political bickering, labour union problems and recently released economic indicators related to inflation and growth figures all paint a worrisome picture.

While the price levels are coming down all over the world, inflation has gone through the roof in Nepal during the current fiscal year. The year-on-year inflation figures, according to the Nepal Rastra Bank (NRB) data for the last five months, are in double digits, substantially bringing down an average person’s real income. Economic growth, according to the recent report from the Asian Development Bank (ADB), is projected to be around 3.5% for the current fiscal year. At this current rate, our Per Capita Income will double only in 35 years (If we assume that average annual population growth rate for the next 20 years will be 1.5%). For a developed economy 3.5% is a healthy growth rate but given our rampant poverty, inadequate access to basic necessities and insufficient infrastructure, can we afford to lose another 35 years?

Given this background, the current global economic crisis can have multitude of effects on our small economy and further aggravate our economic well being. The decade long Maoist conflict which ended in 2006, subsequent Madhesh movement and the recent labour union problems have to a large extent decimated our industrial sector outside of the Kathmandu valley. Hence, from tourism to remittance to foreign aid, we are dependent on outside income to move our economy forward. Reports from the Middle-East and Malaysia suggest that the economic crisis has taken its toll on their respective economies. Workers are already returning back from these regions and more Nepali migrants workers are expected to come back as companies in these regions scale back on production. These developments have put remittance income, which contribute close to 20 percent of our Gross Domestic Product (GDP), into jeopardy. Similarly, with most of the developed economies either in or expected to be in prolonged recession, our tourism sector, which was starting to recover from the lost-years of conflict, could be struggling again as tourists from United States, Europe and other developed countries cut back on their travel plans.

The few industries that have survived the people’s war and the Madhesh movement are now teetering under the worst possible energy crisis. With 16-hours of load shedding, production levels are down and operating costs are up, affecting a firm’s profitability and return on investment, and consequently an investor’s investment decision. The energy crisis is particularly crippling to small scale enterprises that cannot afford ancillary sources of energy generators. The cut in production as well as high operating costs partly explains the current high inflation figures. Since the energy crisis, according to the Nepal Electricity Authority (NEA), is expected to continue for at least five more years, policymakers need to get their acts together to resolve the power crisis if they expect to either facilitate existing industries or bring any substantial new private investment.

Moreover, a serious introspection is required from the officials at the Ministry of Finance on how to move the economy forward. On the one hand, our finance minister, Dr. Baburam Bhattarai, has come up with a lofty slogan of double digit economic growth within a three year period. However, on the other hand, some of the recent statements from Dr. Bhattarai as well as his other Maoist ideologues in favor of socialistic ideals against capitalistic principles don’t bode well for the future of our economy. Sustainable double digit economic growth needs, among other things, business friendly labour policies, a well functioning capital market, and investor friendly tax policies, which, given the current state of affairs, don’t seem to be in the top-agenda of our finance minister. Dr. Bhattarai and other Maoist ideologues need to learn better from their fellow comrades’ experiments with Cuba and North Korea.

Published on The Kathmandu Post on Feb 18 2009