November 24, 2015 Sujeev Shakya

A Wounded Economy

The first thing people notice after an accident is visible bruises. It is only after a while that they know about the internal organ damages. And only after an assessment of the real injury does one figure out the time it will take to recover. The same holds true for the current economic crisis. Currently, judgements are being passed based on what can be observed—serpentine queues at fuel stations, empty shelves in stores, rise in price of food items, desolate restaurants, the smoke from using firewood for cooking, and the stress on people’s faces. The impact of the current crisis in the Tarai compounded by the unofficial Indian blockade that some experts in Delhi opine in private, will not abate in the months to come—even if the Madhes movement diffuses.

Until now, we have only been focusing on the trees; it is now time to look at the forest, ie, the larger impact of blockade on the Nepali economy, already heavily battered by earthquake, for the next three to five years.

Not an Option  

It is now very clear that the GDP for 2015-16 will be negative, something that did not happen even during the peak of insurgency. This means that Nepal will have to shelve its plans for graduating to a middle-income country by 2030 as this requires an annual growth rate of at least 10 percent plus and investments of $ 6-8 billion each year. Major long-term economic milestones are also likely to be postponed by three to five years.

Nepal is still not credit rated and already has problems in terms of the perceived risk of investment in the country. Given the current crisis and the potential disruption of supply chains in the future, foreign investors are likely to seek political risk insurance to cover themselves against losses that are caused by political disruption. We can recall that even in major hydropower deals, the risk associated with closure was assumed not to exceed 20 days at a stretch. For projects, this would mean that the costs would go up by three to five percent with annual costs increasing at the same level. When an investor compares Nepal with other options in Asia and Africa, Nepal will cease to be an option at all.

Banks and Indian Businesses

There are still some questions that need to be answered in regard to the banking community. What will happen to the goods lying at the border that has been paid through a small portion of letter of credits with the major risk borne by the banks? Will the banks be able to recover money from the people who do not settle their Letter of Credits from the guarantees they have taken? What will banks do saddled with goods whose costs have multiplied several times over due to demurrage and other costs? The market is already aware of many importers who have decided to leave Nepal and find new countries to do business in. How will banks recover money from them? When tourism industry was impacted during the insurgency period, banks were saddled with a spate of assets, as was the case when the garment industry nosedived. We are now looking at a similar problem but on a larger scale. Does the government have any plans for bailing out businesses or banks if such a situation were to arise again?

By now, the Indian establishment has also agreed that bilateral relations are at a low ebb, and Indian investments and investors will not be seen in the same manner in Nepal anymore. What will happen to investments committed in hydropower, will they come? What will be the execution risk on the ground? The Budhi Gandaki project has already been earmarked for domestic investments and removed from the list of projects Indians can invest in. Apart from folks in border towns interested in small trading operations and people with long-term relationship with Nepal, Indian investors have already taken Nepal off their foreign direct investment destination map.The current situation only gives them a bigger reason not to come to Nepal. Most international investors are guided by their regional offices in Delhi and given the cold relationship between India and the track record of the Nepali government, even potential plans will be deferred, leave alone making real investments.

Misplaced Priorities

The reaction of the international community in Nepal is very clear and it follows the pattern of non-involvement visible since the British left South Asia in 1947. They like to be silent observers even if the events take an extreme turn as demonstrated during China’s annexation of Tibet, and Sikkim’s annexation by India. We will see more donor activity in cottage-industry activities rather than tackling larger issues of economic development or projects that could have a geopolitical impact.

As for the Prime Minister’s address to the nation, it sounded somewhere in between reading an election manifesto and a plan of someone who just got the mandate to be PM for a five-year term. However, the proliferation of informal trade in fuel that is controlled by a state-owned enterprise perhaps indicates the focus on short-term gains. The real actionable long-term view is missing. Worse still, the government is yet to even the bill to form the Reconstruction Authority and is instead seeking to task a policy-making body with implementation of rebuilting works. Further, by annulling the re-appointment of the Chief Executive Officer of the Investment Board—recruited through a competitive process—to pave the way for another political appointment is a clear indication of the governement’s priorities lie.

Blockades generally create short-term impacts; it is the attitude of the government in handling it that results in long-term impacts on an economy.

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