Economy Derailed
At a time when people expected Nepal to start reaping the peace dividends, the nation is embroiled worst possible conflict that has virtually paralyzed its economic spinal chord. As turmoil in Terai continues unabated, the nation’s economy lies thoroughly derailed. Industrial units located in the region have simply shut down. Amid curfews and violent protests, the eastern and central Terai region – the pocket where most of the industrial and manufacturing units are concentrated – lie disrupted. Forget about doing business, people have been stranded for over two weeks in these places due to constant bandhs and blockades in major sections of east-west highway. From trade to manufacturing and from transport to supplies, the economy is facing an all-out assault. Businessmen are too demoralized even to speak out their woes. As authorities frantically search for alternative routes to bring in essential supplies, people in Kathmandu valley and elsewhere across the country watch, with trepidation, the events unfolding in the plains
By SANJAYA DHAKAL
Udaya Pandey nervously watches the development in Terai. Pandey, who is a reputed garment exporter, has been compelled to shut down his unit of manufacturing in Kathmandu and shift to an Indian town in Andhra Pradesh.
Having helplessly watched spiraling down exports due to a plethora of reasons including phase out of Multi Fiber Agreement, higher cost of production and union problems, he finally held up his hand when even after the end of conflict, the bandhs and strikes continued leading up to the huge unrest in Terai.
“It was simply impossible to keep with the timelines of importers. You never knew when there would be transport strike at some part of the highway. I was forced to lease out the production to an Indian factory since there were still some importers interested to buy the goods,” he informed.
Pandey’s plight is shared by many businesspersons in the country today. Renowned industrialist Rajendra Khetan goes to the extent of saying that the whole business community lies thoroughly demoralized and disillusioned by the disturbing developments.
As the major industrial hub of the country through which the major highways link main Indian border points with the capital has remained totally paralyzed due to unrest for the past three weeks, the economic activities have shrunk considerably.
Paralyzed Economy
Regions of eastern and central Terai can be said to be nerve center of economic activities of Nepal . The Bara-Parsa corridor near Birgunj and Tankesinwari-Duhabi corridor near Biratnagar are major industrial hubs.
The Birgunj-Raxaul and Biratnagar-Jogbani are two of the biggest transit points between Nepal and India .
With Birgunj and Biratnagar both under severe unrest, the whole industrial and business activities in the region have been thrown out of gear.
As former vice chairman of the National Planning Commission (NPC) Dr. Shankar Sharma says, the unrest has hurt all the sectors of economy including trade, transport and manufacturing.
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Trade, including exports and imports, has come to a grinding halt. “For the last three weeks, all the industries in the region have shut down along with cessation of normal transport system,” said Khetan.
This indicates that not only the trade but the manufacturing as well as transport sectors have been disrupted. These three sectors make lion’s share of contribution to the country’s GDP. It does not, therefore, need a Sherlock Holmes to deduce the likely impact of the current unrest in the short-term and long-term on economy.
Economists like Dr. Sharma and Dr. Bishwambher Pyakuryal, president of Nepal Economic Association, agree that the unrest will trigger a series of implications on the national economy.
In short-term, the unrest could trigger supplies derailment and push rise in inflation. The livelihood of daily wage earners will be jeopardized the most as they will face lack of earning coinciding with sky-rocketing market prices of essential goods.
The revenue collection will be sorely hit. Reports of attack and vandalism at the custom revenue offices in border points in the region have aggravated the concern whether the government will be able to gather adequate revenue this year – if it is unable to collect adequate revenue that will have cascading effect on other areas of economy.
In long-term, the impact will be profound on Nepal ’s ability to attract investment. Development projects will also suffer. “This is going to have a substantial impact on all sectors of economy. The economic activities have gone into contraction. The confidence that was restored after the signing of peace agreement is fast dissipating,” said Dr. Pyakuryal.
He said that prolonged unrest will erase the confidence witnessed in the post conflict situation. “These unrest will further hurt the FDI prospects. The joint venture companies who had not backed out during the decade-long conflict and who were planning to expand in the post conflict period will be faced with a situation where there is a greater degree of unpredictability in the economy,” he added.
The concerns for Foreign Direct Investment (FDI) have risen at a time when a recent report by the Department of Industry had revealed that despite peace agreement, the investors have not started to have faith in Nepal yet. As per its report, in the first six months of the current fiscal year, the FDI approved by the government has declined by 80 percent compared to the same period previous year.
The Department for Industry has informed that this year the total FDI commitment worth Rs 250 million has come compared to Rs 1.25 billion during the same period previous year. During this period, various companies like Bottlers Nepal Limited, Himalayan Snacks and Dabur Nepal had to shut down their operations for some time due to pressure from Maoist-supported workers. Of the FDI commitments of Rs 250 million, around Rs 128.9 million is for the service sector. In terms of commitment volume, China leads the lack with Rs 94.6 million followed by South Korea (Rs 48.8 million), Japan (Rs 36.7 million) and India (Rs 21.3 million).
Then, there will be the obvious negative impact on the sector of tourism, which was just limping back to normalcy from years of conflict.
A few days ago, the Nepal Association of Tour Operators (NATO) issued a statement expressing serious concerns about the rising instances of protests and strikes in the Terai region that is showing no signs of subsiding. “On one hand NATO is worried about the fuel shortage that has hit the tourism industry hard while on the other, the increasing number of casualties and the unrest in the region has left us shocked,” it said.
The NATO informed that the tourism industry is facing hardships due to this problem as “cancellations from various groups have already started pouring in.”
“At a time when the tourism industry is finally showing signs of revival and foreign clients are planning to come to Nepal , this crisis is posing as a major setback. If we do not forever forego these demonstrations and strikes immediately, we will never be able to improve the tarnished image of Nepal and promote Nepal as a safe tourist destination,” the NATO warned
Derailed Supply Unit
Two weeks after the protests broke out in Terai, people in the capital valley and elsewhere have already started to feel the pinch.
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The serpentine queues in front of empty petrol stations, reports of rising inflation and stalled supply system have begun to take their toll.
The authorities have scrambled to put the supply system in order. The meeting of high-level Supplies Committee, including representatives from the Ministry of Home; Ministry of Industry, Commerce and Supplies; as well as representatives of private dealers held recently decided to impose quota on petro distribution. As per the quota system, motorcycles will be entitled to get two liters of petrol while four wheelers will get five liters at a time.
The committee has also decided to use security escorts to ensure smooth supply of petroleum products and essential goods. But past experiences during Maoist-imposed blockades show that such measures are not very effective.
The Nepal Oil Corporation (NOC) has started using the alternative route through Sunauli-Bhairahawa and Rupediya-Nepalgunj points to bring in the petrol supplies. But these are, at best, measures to prevent public panic since these points are far away from nearby petrol depots in India and, therefore, very costly and unfeasible.
For a corporation that is already bleeding financially, to bring in petrol from costly routes would be very difficult, if not impossible. The NOC was already facing supplies cuts from its sole supplier Indian Oil Corporation (IOC) by as much as 30 percent since it failed to pay back outstanding dues that have crossed Rs 10 billion.
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The IOC is unlikely to continue supplying fuel to NOC in a normal manner for a long time. Recently, there was a news report in Indian media that India ’s petroleum minister Murli Deora had expressed inability to continue supplying oil to NOC without settling outstanding dues. According to a news report published in The Indian Express daily, Deora had turned down the Foreign Minister Pranab Mukherjee’s request for continuing normal supplies of petroleum products to Nepal , saying that the Ministry of External Affairs should pay for the losses if it wanted to extend the goodwill gesture. “If the MEA considers that uninterrupted supplies are to be made for strategic reasons as a gesture of goodwill to the friendly people of Nepal, it may consider supporting the financial losses to the extent of the under-recovery,” Deora wrote to Mukherjee. The letter added, “IOC is a commercial entity, and cannot continue making supplies in the absence of full payment. IOC would be constrained to cut supplies.”
This makes clear that woes of Nepalese consumers are unlikely to be addressed anytime soon.
Terai unrest is steadily having spill-over effects on economy. The actual magnitude and extent of the effects can be known once the unrest ends and dust settles. For the time being, people have no option than to keep their fingers crossed hoping for the swift end of the unrest and restoration of durable peace.
“Unrest Will Have Significant Impact’
Dr. Shankar Sharma
Dr. Shankar Sharma is a renowned economist. Former vice chairman of National Planning Commission (NPC) spoke to SPOTLIGHT on the likely impact of Terai turmoil on national economy. Excerpts:
What kind of impacts will the current turmoil in Terai have on economy?
It will have significant impact. At present, most factories have shut down due to unrest. Since non-agriculture sector contributes 60 percent to our GDP, this will have serious impact.
What kind of immediate impact do you foresee?
Trade is at standstill. Both exports and imports have been affected. Transport sector is also paralyzed. Likewise, manufacturing sector is also disrupted.
And, what about long-term impacts?
This will hurt our investment prospects. New investments will be hard to come by. Development projects will also suffer.
Will it affect estimations of 4 percent growth this year?
If this unrest prolongs then definitely growth will be affected. But there are other factors as well. Anyway, contribution from transport, trade and manufacturing sector on growth have been affected. Revenue has also been severely affected.
“Economy Now Will Have Greater Degree Of Unpredictability”
Dr. Bishwambher Pyakuryal
Professor Dr. Bishwambher Pyakuryal is the president of Nepal Economic Association He spoke to SPOTLIGHT on the economic implications of unrest in Madhes. Excerpts:
What kind of implications will the unrest have on economy?
This is going to have a substantial impact on all sectors of economy. The economic activities have gone into contraction. The confidence that was restored after the signing of peace agreement is fast dissipating.
How will it affect common people?
Already our minimum wage was unable to sustain livelihood of wage-earners. This episode will hit at livelihood at micro level and hurt local economic growth. Delivery of essential goods will be affected. This will lead to rise in inflation further putting pressure on the wage earners.
What about impact at macro level?
The confidence will vanish. Investment opportunities would be lost. International experiences have proved that in post conflict situation the transaction cost of economy is nearly double than those at normal times. These kinds of unrest will further increase those costs.
Will it hurt prospects of FDI?
Definitely, it will. Even a recent report had said that the level of FDI had dramatically come down by 80 percent this year. These unrest will further hurt the FDI prospects. The joint venture companies who had not backed out during the decade-long conflict and who were planning to expand in the post conflict period will be faced with a situation where there is a greater degree of unpredictability in the economy.
Can the economic growth be satisfactory then?
The estimation of growing by 4 percent may not be achieved.
“Business Sector Is Totally Demoralized”
Rajendra Khetan
Rajendra Khetan is a renowned industrialist. He spoke to SPOTLIGHT on how the business community is watching the worsening situation in Terai. Excerpts;
How is the mood of business community these days?
The business community is totally demoralized. The business sector was already hard-pressed due to pressures from the trade unions. With the sudden unrest in Terai, the community is really demoralized.
How has the unrest affected business sector?
Since past 21 days, most industries are totally shut down. This will have tremendous impact on economy. After the success of 19-day-long Jana Andolan, there was a new sense of recovery. But the business sector has been neglected and we don’t see the presence of state in many areas.
How will this impact the economy?
This will incur big loss to the country in terms of revenue and in terms employment, among others. Daily wage laborers are under huge stress. Due to strikes, unrest and power cuts, the cost of production has also shot up.
What happens once the Terai situation comes back to normal?
Even after it is resolved, there will be persisting feeling of fear and unpredictability. Earlier there was only one conflicting party but now it seems there have been fractions of them.
ALARMING TRADE DEFICIT
Recently, the government secretary Bharat Bahadur Thapa had revealed the astounding and unsustainable trade deficit the country is suffering from. Secretary at the Ministry of Industry, Commerce and Supplies, Thapa said that in the last fiscal year, Nepal conducted total trade transactions worth Rs 222 billion. "Of that, our exports totalled Rs 60 billion while our imports stood at astounding Rs 162 billion. And nearly 70 percent of the transactions were with only one country ( India )," he said. Secretary Thapa revealed that data of the first few months of the current fiscal year, too, were indicating the continuation of the same trend. "Our exports have further declined in the first six months of the current fiscal year," he said. Speaking at a program, held in Kathmandu titled "Trade Policy and Export Diversification" organized by South Asia Watch on Trade, Economics and Environment (SAWTEE), ActionAid Nepal in association with the UNDP Regional Centre, Thapa said that Nepal was lagging far behind in trade growth at both global as well as regional level. Secretary Thapa also expressed apprehensions over the likely fall out of the recent reduction in tariff line of some products by the Indian government. 'Traditionally, our exports have flourished by taking advantage of preferential arrangements. Such preferences are fast eroding at all level and in all sectors. As countries are moving ahead with bilateral agreements, there is a need to identify our strengths," he said.
