July 1, 1997 Sujeev Shakya

Doom and Gloom

If observers have been concerned about the squabbling parties and the resultant political downturn in Nepal, take a look at its economy. With the financial year coming to a close on 15 July, and the yearly ritual of the budget presentation during the upcoming monsoon session of Parliament, it is time to take stock. And the news is that the economy is in deep crisis. As far as the monetary and fiscal situation is concerned, there are three things to be worried about. One, the budget deficit has been contained by reducing expenditure rather than by increasing revenue. Two, inflation has been ´contained´, not through the implementation of sound policies, but by creative accounting. Lastly, with the Indian Rupee moving robustly towards convertibility, the Nepali Rupee is all set to be “found out” and ratcheted down a notch or two.

But more on that later. The economic downturn is all around for Nepali citizens to see, and no expert analyst is required to point it out. All along the Tarai, the industries are closed or functioning at extreme undercapacity, hit by low demand (people do not have money to buy). This is across the board, for rice and flour mills, textile factories and breweries. In fact, one reason the country as a whole is not facing grievous power outages despite the closure of the Kulekhani power project, which supplies nearly half of the country´s electricity, is because the mothballed factories are not making demands on the national grid.

In Kathmandu Valley, whose real estate market till a couple of years ago reminded one of boomtime Manhattan, even speculators are not buying property, construction has come to a halt, and to-let signs abound in every lane and neighbourhood. Foreign aid receipts, on which the Finance Ministry as well as Kathmandu´s rentier classes have long relied, are down drastically.

The budget deficit for the last nine months was NPR 3.5 billion against the year´s projected deficit of NPR 17 billion, which in itself does not look bad and the year should end with a deficit of NPR 5-6 billion. Unfortunately, this has not been achieved due to any great show of fiscal discipline on the part of the previous and present governments, but it merely reflects lower spending. Revenues have been low at NPR 20 billion in the last nine months, which is only half the year´s target set for the year.

Out of the total NPR 57 billion allocated, only NPR 28 billion was spent in the last nine months. While the regular expenditures have been in line with the budgets set, the so-called development expenditure has performed dismally, with only NPR 10 billion spent against the budget target of NPR 33 billion. It is inconceivable how the Nepali economy can proceed with such a sluggish development sector.

One of the most significant trends of the past year is the plummeting of the “miscellaneous cash receipts” which had helped prop up the economy as a whole by providing the liquidity flow. From a high of NPR 15 billion in the first six months of the last fiscal year, the receipts were down to NPR 3.5 billion for the same period this year. These refer, of course, to the income from smuggling gold, silver, electronics, and so on, mainly from Southeast Asia into the quasi-protected Indian market. The reduced income from smuggling has severely squeezed the national economy.

Interestingly, however, there is money aplenty in Nepal´s banks even though there is no cash in the market. Entrepreneurial activity is at all-time low, and the banks while away their time buying treasury bills and making interbank transactions. There can be no better indicator than this to show where the economy stands, or droops.

Inflation, although pegged at 7 percent by the Nepal Rastra Bank (the central bank), does not reflect the true price situation as there have been increases in both components of food and non-food and service groups. The weightage assigned by the Nepal Rastra Bank, the central bank, has always resulted in an underestimated reading as to the extent of inflation. A drastic oil price hike announced by the government in mid-June in anticipation of a price rise in India will push inflation to levels it has not attained before.

The trade deficit is widening, and during the previous nine-month period it stood at about 21 percent of the GDP, which is on the higher side. Foreign exchange reserves as they stand are good for less than six months of imports. The only welcome sign is the marginal decrease in the trade gap with India, compared to the same period last year. However, this is offset by a jump in trade deficit with other countries. While exports to the other countries have increased by only 10 percent over the last year, imports have jumped by 38 percent, leading to an increase in deficit by 51 percent over the comparable period a year ago.

The strengthening of the US dollar against all the major world currencies will not leave the Indian Rupee alone. The Indian exchange rate is unreal, and in all likelihood New Delhi will soon decide to let it move with the market and achieve full convertibility. Such a move by the Reserve Bank of India will affect all neighbouring countnes, but for Nepal it will be immediate and devastating for the much closer link its economy and currency has with India. The Nepali Rupee´s value will depreciate, with the trend of exports slowly pointing towards India. The fixed exchange rate will have to be reviewed downwards from the present rate of INR 100 = NPR 160 to as far down as INR 100 = NPR 180 to reflect the true value of the Nepali rupee. The shock waves that a devaluation would generated would be very destabilising for a country already reeling from political turmoil.

The situation is bad enough for Western diplomats in Kathmandu to have begun openly to castigate Nepali aspirations, as the German Ambassador Klaus Barth did when he ridiculed plans to seek foreign direct investment even while a Maoist insurgency picked up steam in the hinterland.

But what of the people, one might ask, as the economy heads for the lower regions. What is to become of them, a people which as the latest Human Development Report of UNDP indicates, are already the most destitute in all South Asia. In the past, because the economy was non-monetised, the public remained largely untouched by macro-economic trends. This is no longer the case; the Nepali people are hurting and it looks like they will be hurting some more.

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