Economic speed bumps yes, but no breakdown

Contact Counsellor

Last Updated06/05/2022

The surging trade deficit remains a big concern as it is expected to reach $18 billion this fiscal year.
A Balance of Payments (BoP) deficit and a spiraling debt liability will pose a very grave risk to the economy that is already in deep trouble.
Nepal’s central bank statistics show the country’s inflation averaged 7.14% in the current fiscal, which is the highest in the last 67 months.

The country’s debt to Gross Domestic Product (GDP) ratio has crossed over 40% as of the second quarter of the current fiscal year.
The decrease in remittance inflow and the fall in the country’s foreign exchange reserve by 16.3% to NR1,171 billion (in mid-March 2022 from NR1,399.03 billion in mid-July 2021), industry needs hand holding by the government and a rationalization of taxes.
A lack of pragmatic policy interventions in Nepal and an abrupt move to reorient economic planning towards ‘self-sufficiency’ has exposed the structural vulnerability of Nepal’s economy.
The government’s revenue and expenditure should be assessed for minimizing the establishment cost. Especially so, it is needed for provincial governments where the operational part must be dealt with frugally to not burden the economy beyond a point.
While several drastic measures such as an import ban on luxury goods and reducing working hours have been announced, these have not quite succeeded in allaying fears of an impending crisis. The ban on imported goods that have no competent alternatives in the domestic market will only hurt the economy until the production of domestically-consumable goods is increased.

India has not hesitated in being generous and in coming to Sri Lanka’s help despite political considerations which might have suggested other approaches.
In Nepal’s case, Prime Minister Sher Bahadur Deuba is a known friend of India who likes to accord priority to development rather than playing to the political gallery.
It should be possible for Nepal to expect generous Indian support for its economic recovery to be based on broad-based consensus in Nepal which will also eventually help in resolving bilateral irritants that keep cropping up every now and then.

The NRB underlines problem areas such as rising inflation, BoP deficit, decreasing remittance inflow, depleting foreign exchange reserves and burgeoning imports beyond an acceptable level.
The NRB’s projection of a looming crisis has no takers in the Finance Ministry — that is on making strange short-term provisions rather finding the way out to avert a crisis in making.
Nepal is in dire need of augmenting its preparedness on the domestic economic front along with a need-based infrastructural haul to impart the b to an economy that is overtly politicized and not inspiring enough for big business ideas to prevail and flourish.

There is no magic wand to ensure economic reforms and avert a crisis-like scenario.
Nepal’s neighbour and the world’s largest democracy, India, is a fine example of a country that braved a severe BoP crisis in 1991 and transformed the economy through a sustained wave of economic reforms without letting political preferences override significant economic matters.
In the time when isolation cannot steer the growth impulses of the economy, it is important for Nepal to cope with the shortage of industrial production and pressure of trade imbalance through excessive imports but without stopping to remain open to the world for healthy collaboration.

The broad geopolitical and economic trends are also suggestive of doors opening to more active Nepali participation in the Indo-Pacific economic agenda, with the Nepalese Parliament approving the $500 million Millennium Challenge Corporation (MCC) grant from the United States; this could substantially upgrade energy cooperation between India and Nepal, and also India agreeing to the United Kingdom, the European Union and other major investment partners working together in third countries on development projects.
Interestingly, the Nepalese seem to have independently made a reassessment of risks in recklessly deepening ties with China, thanks in large measure due to Beijing’s missteps, and the style and the substance of Chinese-delivered assistance.
The decision of the Government of India to set up an inter-ministerial standing group under the chairmanship of the Foreign Secretary, to coordinate sections and ensure more rapid follow-up of project decisions is also a welcome step.
There is no doubt that the economic challenges in the post COVID-19 situation, and the overall churning in the geopolitical environment have created an opportunity for both countries to devise innovative approaches to long-standing issues and to aim for new horizons in bilateral cooperation.

It is vital that Nepal deepen its economic ties with India and facilitate joint ventures that create immense economic opportunities.
India’s unwavering commitment to peace and prosperity in Nepal and its complementarity in its relations with Nepal will help in creating a healthier economic ecosystem in Nepal.

Prelims Take Away