Economic Challenges of Next Govt in Nepal

Many of the economic challenges facing Nepal cannot be effectively resolved by Nepal government alone. International support, particularly in the form of economic assistance is essential. Nepal’s own economic resources are hardly enough to pay for the salary of the civil servants, which already is too low by international standard.

BY Prof. Hari Bansh Jha

The successful holding of the Constituent Assembly (CA) elections by the Nepali Congress led coalition government of seven political parties including the Maoists on 10 April 2008 was a historical event. The results of the CA elections under First Past the Post (FPTP) and Proportional Representation (PR) system show that of the 575 seats under the two systems (240 under the FPtP and 335 under PR), the Maoists bagged 220 (38%) seats followed by 110 seats (19%) by Nepali Congress, 103 seats (18%) by Communist Party of Nepal (UML), 52 seats (9%) by Madhesi Janadhikar Forum (MJF), 20 seats (3%) by Terai Mashes Loktantrik Party (TMLP) and 9 seats (2%) by Sadbhhawana Party SP). In addition to these six political parties, the remaining 19 political parties and 2 independent candidates won 61 seats (11%). Now the cabinet is likely to nominate 26 members for the 601 Assembly.

Yet none of the major political parties including the Maoists, NC, CPN-UML, MJF Terai TMLP and SP could get even simple majority (over 50%) seats in the Assembly to form the government. So the coalition government is imminent, though it is not yet decided as to how many parties are going to be associated in the yet to be formed coalition government.

As per the commitment made, it is likely that the nearly 240-year old institution of monarchy will be abolished and the country will be declared republic on the very first day of meeting of the CA assembly on 28 May. This per say will be a radical change. But more radical change will be economic restructuring. Political stability cannot return to this strife-torn nation until the large mass of the unemployed youth are provided gainful economic opportunities. This demands huge investment of economic resources in development activities like hydro-power, tourism, agriculture and service sector.

But it is likely that the priorities of the next government would be to address immediate economic challenges rather than pursuing the long-term development of the country. The government which has been subsidising the petroleum products including oil and gas has almost siphoned its treasury. Further subsidy in this sector is not possible due to the resource crunch and fast growth in the prices of these products in international market. So it is unavoidable for the next government to continue its subsidy to petroleum products.

If the fuel prices are increased, it will have a chain of multiplier effect affecting various sectors of the national economy. Prices of essential items like that of food, clothes and hardware will subsequently steeply increase, which will invite the wrath of citizens. Moreover, there is hardly any guarantee that overall price increase will ensure the smooth supply of fuel and other essential items in the market if the past experience is any yardstick.

The supply of electricity is erratic as it is off for almost 12 hours a day until recently, which has badly shattered economic activities including industries, transport and trade in all parts of the country. Each year the demand for power has been increasing at the rate of 8 to 10%, but the supply is almost stagnant despite the country’s potentiality to harness 83 thousand MW of hydro-power. Nepal has not been able to harness even 1% of its potentiality of hydro-power production and so the electricity production is as low as 1,755 GWh (2001).

Furthermore, the crippling general strike in Terai in southern Nepal and in other parts of the country has created a chaos. Life is plagued by uncertainty to such an extent that each day nearly 600 youth are fleeing the country by air to the third countries in search of employment opportunities, apart from many others who are moving to India for similar purpose taking advantage of open border with this country.

Carpet and garment together account for 70% of Nepal’s overall exports, but even they are severely affected due to political instability. Exports form just a part of import and the imbalance in trade is met by hard earned foreign currency. There is huge deficit in balance of trade and balance of payments. It is partly remittance and partly aid flow from bilateral and multilateral agencies that largely cushion Nepal’s economic system. Estimates put the value of remittance to Nepal over US $ 1 billion (2004) an amount larger than the earnings from tourism and agriculture together.

Many of the economic challenges facing Nepal cannot be effectively resolved by Nepal government alone. International support, particularly in the form of economic assistance is essential. Nepal’s own economic resources are hardly enough to pay for the salary of the civil servants, which already is too low by international standard. Hence, for the larger investment in development activities, the role of foreign aid cannot be minimised as it accounts for nearly 80% of the country’s development expenditure. Apart from India, Western powers including the multilateral agencies like the World Bank, Asian Development Bank and UN agencies are the major sources of foreign funding in Nepal.

Now the question is how the Maoist-led government would improve Nepal’s economy when it is in so shattered form. Can the Nepalese Maoists afford to toe China’s Maoist line and implement bold economic programme for socialist transformation of society by intensifying class struggle as in post-1949 period or Cultural Revolution in 1960s? Or, should they choose to maintain status quo in the economic system as largely practiced in Nepal by all the previous regimes? Or else, should they opt for largely capitalist model as adopted by Deng in China and Man Mohan Singh in India and try to transform the economy through massive dose of domestic and foreign investment?

Considering the geo-economic realities, Nepal needs to be pragmatic enough to choose economic model in its own set up learning experiences of modern India and China. Between Nepal’s two neighbors, India has given up regulatory economic system of control as practiced in the country until 1980s. Though India still claims to have mixed economy, there is a tilt in favour of capitalist system of growth with private sector taking lead in various sectors. Similarly, during Deng and post-Deng period, China, too, is fast returning to capitalism from extreme form of communism of state control over the means of production.

Because of the change in economic model of growth and the return of both India and China more towards privatisation and globalisation, India is making a rapid economic growth of 9.4%. With GDP of US $ 1.50 trillion, India forms world’s twelfth largest economy. On the other hand, with GDP of US $ 3.42 trillion (2007), China emerged as world’s third largest economy next only to US and Japan. With 70% of its GDP in the private sector (2005), China is likely to become world’s largest economic power by 2025 as it has fastest rate of economic growth of 10%. Therefore, in view of the geo-economic realities, Nepal needs to benefit most from economic growth model of both India and China in context to its own geo-economic realities.

(Jha is Professor of Economics and Executive Director of Centre for Economic and Technical Studies (CETS). He can be reached at cets@ntc.net.np)

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