The transition has been prolonged. A common minimum program for socio-economic transformation lies idle in the Comprehensive Peace Agreement document of 2006.
How can one then expect the execution of government’s policy to ensure the rights of all citizens to education, health, shelter, employment and food security? There is a lack of consensus in identifying and agreeing on the national economic priorities. Increased misunderstanding has slowed down the process of developing strategic framework to limit the involvement of myriad actors each carrying out their own interests, agendas and priorities. It’s not only the ruling government and responsible political parties which have undermined the degree of vulnerability of delaying the consensus-building initiatives as agreed in the CPA, 2006; the development partners also lag behind in adding value to their assistance program in designing the delivery mechanisms and implementation framework that demand higher skills and expertise.
Nepal’s immediate priority is to negotiate, mediate and reach to consensus by resolving contentious issues in a constructive manner. In the short-term, international community were justified to get involved in providing relief and recovery assistance but in the long-term, the country should have been prepared to build up a system of sustainable political and economic governance. Nepal’s economic transition is not only prolonged but fractured and gradually contracted. Political instability has limited government’s capacity to address the binding growth constraints such as inadequate and devastated infrastructures, restrained industrial relations, limited access to opportunities, higher income inequality and labor market rigidities.
The liquid assets of the commercial banks have declined. The balance of Nepal Rastra Bank (NRB) as well as the balance held abroad has declined. The deposit mobilization has increased by only 4 percent (Rs 22.9 billion) during the first eight months of FY 2009/10 as against 14 percent (Rs 60.2 billion) growth in the corresponding period of the previous year. The credit to the production sector increased by 10 percent compared to a growth of 12 percent but it increased by approximately Rs 15 billion in real estate sector compared to roughly Rs 8 billion last year during/of the review period.
High trade deficit with India necessitated NRB to purchase Indian currency equal to 64 billion through the sale of USD 1.4 billion. The IC equal to Rs 48 billion was purchased through the sale of USD 1 billion last year.
Due to India’s high growth estimates from 7.2 percent in 2009/10 to 9.0 percent in 2010/11 and an increase in budgetary allocation for the promotion of financial sector and industrial growth to attract domestic and foreign investors, it is expected that IC will again be appreciated against US dollar. As Nepali currency is pegged with IC, the revaluation would mean Nepal incurring trade deficit from third country import making monetary management extremely difficult.
The consumer price index still remains at 11.2 percent. Price indices of sugar and sugar related products have increased by 61 percent compared to an increase of 53 percent in the same period last year. The added problem is the weakening of external sector. For example, export has declined but import has increased creating huge trade deficit. Total trade deficit increased by 61 percent (Rs 213.33 billion) from 30 percent deficit last year. In Feb/March alone, Nepal’s merchandise imports soared by 58 percent. Total Trade Deficit with India rose by 54 percent. Export to India was worth Rs 40 billion while import remained at Rs 254 billion. The drop in exports was attributed mainly to the decrease in exports of readymade garments, zinc sheet, plastic utensils, pulses and GI pipe among others. The hike in the prices of clinkers and cement in India is going to make the imports of Nepal’s construction material very expensive creating additional difficulties in funding for rehabilitation and reconstruction works – the ratio of export to import dropped to 16 percent in the first eight months of 2009/10 from 25 percent a year earlier.
The current budgetary policy of the Indian government allows 2 percent rebate on pre and post shipment credit, which erodes Nepal’s competitiveness in India and international market in similar items produced by SMEs such as clothes, carpets, and leather products. The policies to increase cost competitiveness is, therefore, absolutely necessary.
Declining growth and budget Deficit – is expansionary policy a viable option?
When revenue mobilization to GDP grew by 14.8 percent in 2009 compared to 13.2 percent in 2008, the budget deficit in 2009 declined by 3.8 percent of GDP from 4.1 percent in 2008. This decline was largely due to the increase in revenue collection. The revenue during first eight months of FY 2009/10 declined to 26 percent from 39 percent last year raising doubts about sustaining expansionary policy in the midst of liquidity crunch and declining revenue.
The budgetary surplus declined from Rs 11 billion to Rs 5 billion. Because of the high growth in recurrent as well as capital expenditure, total government spending increased by 32 percent (Rs 121.43 billion) compared to an increase of 14 percent last year. Recurrent expenditure increased by 29 percent (Rs 79.37 billion) compared to 20 percent last year. The capital expenditure, which is Rs 22.45 billion, is only 21 percent of the budget estimate. The government revenue has also declined from 39 percent to 26 percent.
The looming problem is executing priority projects with reduced income. Balance of Payments (BOP) has recorded a deficit. The gross foreign exchange reserves in US Dollar declined by 9 percent to USD 3.26 billion in mid-March 2010 against a growth of 5.7 percent in the corresponding period of the previous year. The increase in trade deficit and the slowdown in the growth of remittance inflows resulted for such deficit in the current account. Our experience shows, maintaining roughly 5 percent growth is generally necessary to adopt expansionary fiscal policy. Since growth rate is re-estimated to 3.5 percent from earlier projection of 5.5 percent, first, there will be massive decline in nation’s resources and secondly, failed execution of expansionary fiscal policy can be expected to negatively affect the key economic indicators.
POSSIBILITY OF STATE COLLAPSE
Although aforementioned characteristics have higher degree of commonality in other post-conflict economies, Nepal’s additional problems of violence, insecurity, higher rate of growth and unemployment of people aged 15-24, non-functioning executive and legislative bodies can possibly lead to state collapse similar to what happened in Liberia, Bosnia-Herzegovina, Democratic Republic of Congo, Sierra Leone, and Somalia. This necessitates international assistance to help design country-specific modality to repositioning the country within the normal development trajectory. From this perspective, I think international community has failed to gradually transfer skills and responsibilities at the local level.
Priority areas and sectors in development cooperation have not been appropriately addressed. Assistance should be made to reduce the conflict potential of vulnerable sectors rather than mere elaboration of non-applicable notion of economic development. Broadly speaking, to address the cross-cutting issues of reconstruction, security and growth, an important step to take would be to design a framework, which includes mechanisms instruments and institutions that can prevent, manage and resolve conflict.