Nepal’s Economy Constraints And Opportunities

Prof. Madan K Dahal

Nepali economy is passing through a crucial phase of low level equilibrium trap circumscribed by poverty and stagnation. With extremely diminutive size of GDP (US$ 25 billion) and inordinately low GNI per capita estimated to be US$ 862, Nepal is one of the poorest 25 countries in the world and ranks 17th as classified by World Atlas. It is also one of the most corrupt countries in South Asia as stated in the report of Transparency International and ranks 3rd in South Asia, according to Fragile State Index (FSI). Nepal’s performance is trailing behind other countries in terms of Global Competitive Index, Doing Business Index, Human Development Index, Fragile State Index, Corruption Perception Index and World Happiness Index.
Against the initial projection of 7.2 per cent for current FY 207/18, the growth rate is likely to be squeezed to 4.9 per cent as of latest estimate of ADB attributing to massive flood in Terai coupled with heavy landslides in hills and mountains, including drastic fall especially in the production of food crops. The striking features of Nepalese economy are that agriculture productivity and rainfall steadily increase from west to east, poverty is more acute and widespread from south to north, and migration tends to be skewed from north to south.
The macroeconomic indicators suggest that total exports confined to Rs. 73.05 billion against alarmingly increasing size of imports (Rs. 990.11 billion) resulting in a huge trade deficit (Rs. 917.6 billion) equal to 35.2 per cent of GDP in FY 2016/17. The trade deficit went up to 64.6 per cent with India leading to growing dependency with one single country, India. Not only the current account deficit increased but also balance of payments situations (BOP) remained negative during the last seven months in current fiscal year. The budget for current FY 2017/18 is estimated to be Rs. 1,278.99, which is 49.2 per cent of GDP and the capital expenditure is confined to Rs. 335.18 (26.25 per cent of total expenditure) and so far only 18 per cent has been exhausted during the same period in FY 2017/18.
Although revenue (Rs. 609.2 billion) is buoyant, it is not adequate to supplement development expenditure and not only budget deficit is growing but also revenue deficit exists that calls for increasing demand for internal and as well as external loans to bridge the deficit in current FY. Revenue-GDP ratio marked 23.4 per cent and the burden of taxation is relatively higher employing per capita income criterion. The tax structure is entirely dominated by indirect taxes with high incidence on low income strata with high propensity to consume. Most unfortunately, capital expenditure suffers from ‘under-spending’ syndrome attributing to inefficiency, rampant corruption and poor governance. Subsequently, the growth rate of remittances (Rs. 695.5 billion in FY 2016/17) steadily declined compared with previous years and yet its contribution to GDP is 26.9 per cent. FDI stagnated during the same period and foreign loans accounted for Rs.47.8 billion, and foreign exchange reserves went up marginally to Rs. 1,079.5 billion in FY 2016/17. Financial sector is tumultuous with volatile capital marked followed by erratic fluctuations in NEPSE Index associated with frequent credit crunch.
The ‘White Paper’ recently published by MOF/GON identified numerous anomalies facing the economy, which is on the verge of collapse. Nepali economy is entirely based on imports, remittances and, to some extent, foreign aid. Under the existing vulnerable circumstances, economy requires ICU treatment to bring it back into normalcy within next two-three years. Otherwise, it might lead to ‘Banana Republic’ with the promulgation of new constitution characterised by ‘Republic, Federal and Secular’ order. Thus, the vision or mission of Nepali economy should be to build a strong ‘economic nation-state’ through active participation of the people ensuring a high quality of life to each individual and household within given timeframe.
Nepali economy suffers from structural constraints with several master-bottlenecks to development. Although Nepal is strategically located between the two economic powers with explicit advantage, it is disadvantageously placed in the context of international trade. Since Nepal is a landlocked but not land-linked country, there is no direct access to sea and transportation cost is very high and, therefore, all goods are exorbitant beyond the capacity of 65 per cent people below the absolute poverty line (Oxford/UNPP, 2016). The transit facilities with India and China must be strengthened, which would help reduce the cost of doing business in Nepal.
Agriculture is the biggest and priority sector with high incidence of poverty and rural indebtedness and its contribution is as high as 33 per cent of GDP, where a two-thirds of population directly derive their livelihood and yet this is a subsistence sector with conspicuously low investment from both government and private sector. It is necessary to move towards commercialisation of agriculture with increasing subsidy to boost production especially of high value crops and herbal products ensuring competition with Indian products in terms of quality and prices.
Dependency has alarmingly increased over the years with one single country, India due to growing trade deficit with deteriorating terms of trade and Nepal is compelled to sell more than 53 per cent of remittances to meet the demand for Indian currency in Nepal. It is, therefore, important that Nepal must diversify trade with other countries. It is not possible to reduce the extent of trade deficit with India during the short run unless productivity and production massively increased in potential areas and export augmented to India. There is need to urgently review the existing Nepal-India Trade Treaty with a view to promoting export of goods from Nepal to India by lowering down existing value added components, removing quantitative restrictions in selective commodities and reducing the number of products under sensitive list.
Infrastructure development is very poor and extremely inadequate to speedily back up industrialisation due to the lack of energy as well as connectivity. Economic development is impossible without industrialisation and industrialisation is not possible without adequate supply of energy. The contribution of manufacturing sector in Nepal is confined to less than 6 per cent of GDP. The total production of hydropower is estimated to be 961 MW and the current requirement is projected to be 2,300 MW as of 14th three-year plan. In addition, Nepal is importing 380 MW hydropower from India against the payment to India. Although tourism sector has tremendous potential to spur economic growth, its contribution is merely limited to 2.9 per cent in recent years and this is highly competitive sector at both regional and global levels. This, investment in physical infrastructure must be increased to ensure a high growth rate with dignified package of social security.
Rampant corruption predominates all spheres of the statecraft, which is protected by politicians at the helm of affairs. The Report of Auditor General published in 2017 revealed that unsettled account levelled at Rs. 500.08 billion, which is 19.2 per cent of GDP. The top bureaucrats, like Secretary are transferred from one ministry to another within four months at the whim of new incumbent ministers and also there is frequent political intervention in judiciary and security forces. Good governance is antidote to corruption. The CIAA must be strengthened through amendments to Acts and Regulations with provision for ample budget and necessary manpower.
The major needs of Nepalese economy are to: (1) Effectively accomplish the reconstruction and rehabilitation activities and return the economy into normalcy within next two-three years with promoting ‘self-reliant’ economy by mobilising potential areas in cooperation with private sector to sustain the unforeseen economic catastrophe attributing to natural disaster, economic blockade and global economic meltdown in the future. (2) Transfer the population excessively dependent on agriculture to more productive non-agriculture manufacturing sector by establishing small and cottage and medium-scale industries based on comparative advantages and edges, and create employment opportunities at home, thereby reducing the extent of poverty. In addition, it is necessary to attract FDI in mega priority projects by reviewing Foreign Investment and Technology Transfer Act including other facilities.
(3) Integrate Nepalese economy with the neighbourhood economies, especially those of India and China, as well as regional and global economies for a take-off and maximise the benefits from globalisation and liberalisation ensuring prosperity by achieving a high, sustainable and inclusive growth in the long run, and (4) Upgrade the economy from the status of LDCs to a developing economy by 2022.
In addition, it is also significant to mobilise cooperation in mega priority projects and maximise benefits through Belt and Road Initiative launched by China. Finally, there is the need to declare the period for strong ‘disciplinary action’ against corrupt politicians and bureaucrats and implement austerity measures in all spheres of the state from the centre to the provinces, including all 753 local bodies. At this critical juncture, there is no alternative to massive economic development for preserving national unity, geographical integration and sovereignty.

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