Economic Reforms

By Bijaya Ghimir

Anti-liberalist politicians and economists can be found across the entire spectrum of pro-government as well as opposition political thinking and they are unanimous in charging the government that the liberalization policy followed by it is dictated by the donors and that this policy has in fact been destroying the Nepali economy. Joining them on many occasions are the private sector business leaders for the reasons of their respective convenience.

And they seem to have a lot of logic to substantiate their claim. The poverty level has remained almost unchanged during the last 15 years. And the country’s position in terms of human development indicators is still far low with Nepal placed 129th among 162 countries. The authorities claim that the poverty incidence has come down to 38% in 2000, but authenticity of this claim is widely doubted. Perhaps the head counting of the poor to be carried out later this year will bring out a clearer picture.

Despite the claims and counter-claims about the efficacy of economic liberalization, nobody seems to be opposed basically to the need for liberalizing the economy. Five of today’s largest political parties have made it at least once to the government, and none of them dared to reverse the process of liberalization.

The truth is: those opposed to liberalization do not like to recognize what is being explained as the fruits of liberalization while the stalwarts of liberalization are not ready to see the fact that their policy has rather helped to widen the gap in income distribution.

No doubt, liberalization has had positive impact in the urban areas where a very small portion of the population (14%) resides, while it has been almost without any impact in the rural areas. Liberalization has indeed helped in new technology business, but such a new technology has not been able to improve the lives of the poor. About this the liberalist argument is that the government has been going very slow in introducing the liberal reforms thus causing the reform measure to lose their potency.

Mixed Results

Looking closer into various sectors and sub-sectors, it can be seen that liberalization in Nepal has had a mixed result. Last year the government granted license to the private sector Khetan group for cellular mobile phone service breaking the monopoly of public sector Nepal Telecommunication Corporation (NTC) in this business. As the immediate impact, NTC drastically slashed down the subscription charge and call tariff. Consumers are expecting further slashing down of the price when the service from the private sector actually starts to be available.

That means, the "invisible hand" as Adam Smith, the 18th century apostle of liberalization, called it, has been really working.

The market has automatically controlled the prices. Steel utensils are now selling cheaper than in the past. Similar is the case with textiles. Liberalization has also done away with the problems of frequent shortages. Till a few years ago people would need to wait in a long queue to get a 500 ml packet of skimmed milk. Now the product is available for asking. The relative price too has remained almost constant over the last 10 years in milk. If one looks at instant noodles, even the absolute price has remained constant. Air tickets to Pokhara and Biratnagar were prizes for only a lucky few who would be ready and knowledgeable to pay the ‘extra’. Now, the open sky policy has made plane flights easier than bus rides.

When the government efforts failed to tackle the shortages and to reduce the price, the private sector’s entry has immediately caused miracles. The skyrocketing onion price two years ago is the example. When a private sector trader imported onion from such unimaginable place till then as Germany, the prices immediately came down to the normal level.

That example is however contrasted by the recent debacle in case of sugar. But liberalists say it was the result of a clumsy handling of the situation by the government. Had the private sector been allowed a free play, the shortage would have reduced immediately, they point out.

The Other Side

These instances however do not fully represent the condition of the entire Nepali economy. In a village just a few kilometres away from the Ring Road encircling Kathmandu women succumb to labour pains for the lack of trained birth attendant. Girls drop out of school because tending the goats is more urgent a need for the family. There also are places, such as in Dadeldhura and Doti districts in the Far-Western region, where the infrastructure like road, electricity and communication are available, but commercialization is still almost non existent.

These examples show the dual nature of Nepali economy which has one small but fast developing urban sector side by side with a highly populous agrarian rural sector where the market mechanism is yet to make the first entry.

Unlike in the urban area, all the infrastructures are lacking in the rural areas. As Mahesh Acharya, the then finance minister, said in his budget speech for fiscal year 2000-2001, "our villages are now dotted with schools but ... large segments of poor ... cannot ... afford to send the children to school. We’ve added ... health posts, health centres and hospitals, but villages lack the services of health workers and doctors and adequate medicines ...".

Acharya is credited for ushering in the liberalization policy in 1991 as the first finance minister of the first elected government after the restoration of multi-party democracy. And his words signify the new realization that is lately dawning upon the leadership prompting a change in the policy focus. As a result, phrases such as "broad-based economic growth" and "taking the fruits of economic development to the level of the poor" are being used more widely.

Inequalities Growing

During the last one decade, the average annual growth in agriculture hovered around 2.5% which is hardly enough to surpass the population growth rate which stood at 2.27% per annum during 1991-2001, according to the preliminary data from the 2001 census. According to a projection, minimum 4% annual growth is needed to keep the poverty incidence unchanged with the current demographic trends unchanged. Though the growth rate in the non-agriculture sector was above 5.5% per annum its benefits were largely confined to the urban population. The belief that the increased growth rate in one sector will expand to other sectors and that the growth at the top will trickle down to the grass roots was very much proved wrong in Nepal as in other developing countries thus forcing the World Bank itself to reconsider its stance and come closer to the UNDP’s idea of human development.

Causes

"In the long run, everyone will benefit from liberalization", is the refrain of the liberalists. However, the statement has a catch - no liberalists has come up with an idea about how long is the long-run. Corollary of the above statement is that "some" may not benefit in the short-run.

That means, while introducing liberal economic reform, the government should have come up with appropriate packages for those "some" who naturally get marginalized in the process of development whether it is through liberal policies or others. Not that the liberal policy makers were ignorant about it. Acharya was repeatedly pledging to channelise the government resources to the rural areas and for poverty alleviation by reducing government’s involvement in the urban areas and also where the private sector investment is flowing in. Dr. Ram Sharan Mahat, the present Finance Minister, who was the other architect of the liberalization policy as the Vice-Chairman of National Planning Commission in early 1990’s when Acharya was the Finance Minister, also accepts that the liberalisation has had less impact in rural areas. But he also claims that the efforts of the government to benefit the rural people have been bearing fruits though the critics claim otherwise. However, the critics have valid argument is that the efforts to spread the fruits more evenly were not carried out effectively. The policies designed to facilitate the market mechanism have failed to affect the areas where there is no market mechanism at all. The liberalization policy lacked program to bring into the fold of market mechanism those sectors that have always remained out of it. In the absence of transport and communication facilities, the rural areas are not linked to the market. When tomatoes are selling for Rs. 20 a kilo in Kathmandu, it would be selling for Rs. 2.0 a kilo in some Terai village. Apart from communication and transport, the villages also suffer from the lack of credit facilities. It takes about five hours for an average Nepali villager to reach the nearest bank office. Moreover, credit facility is not available at all for agriculture marketing.

Perhaps the area of public investment from where the best long-term result can be expected is education. Though the government statistics show the literacy rate to be growing annually, it is still in the range of 50% with the figure almost half in the rural areas. This means, the size of population capable to make informed decision is very small in rural Nepal. Hence the poor receptivity about the government policies.

Another defect with the government activities related to the villages is also that the intended reforms were not implemented in the earnest. The Agriculture Perspective Plan (APP), which is perhaps the most unique plan in Nepal in the sense that no other plan has had similar political consensus as on APP, was not implemented at all. The condition of agricultural roads, the only sector in which the government was supposed to make major investment under APP, is enough to illustrate the failure of reform measures and how the government is responsible for this (see box).

Another problem in the villages is related to credit availability. And the amount needed is as small as five hundred rupees (about US$ 7.00), which if available, would bring about tremendous changes in the income of the poor families. The Rural Development Banks established on the Grameen Bank model of Bangladesh are proving incapable to be self-sustaining and they have now already turned to be new incarnations of what they were meant to replace - the collateral-oriented development banks. Though the liberalization in the financial sector has made it far more comfortable for urban upper and middle class, the rural area is totally left out. The latest household budget survey shows that 70% of the borrowing in the rural areas is from informal sources, thus indicating a very high demand for credit. However the banking institutions are not going to the rural area despite the fact that they are complaining of lack of areas where to invest. This means, the reform measures have failed to do what they are actually meant for - to remove market imperfections.

Beginning of Liberalization

It was in fact in mid-eighties itself that Nepal had started its steps towards liberalization after facing a balance of payments crisis. As the economic growth of Nepal stabilized at a very low rate at the end of the 1970s (2.4% in 1978/79 & -2.3 in 1979/80), the Nepali policy-makers still early eighties followed Keynesian guideline whole-heartedly and resorted to heavy deficit financing as Keynesian pump-priming intended to boost the economy. (However, some economists call it an effort to plunder the economy.) In Nepal, however, deficit financing leads to increased imports from India. Some economists say, it takes about only six months for the effects to be visible. Thus there was heavy reduction in Indian currency reserve of Nepal. Ultimately Nepal had to buy Indian rupee paying in dollars, thus spreading the pressure on the total foreign exchange reserve of the country and creating balance of payments crisis. That led to the famous post-Tihar devaluation of Nepali rupee which the then Finance Minister Dr. Prakash Chandra Lohani inadvertently described as "well-timed" arguing that the festivals were already over and thus found himself in a very awkward situation in front of the critics. It is said that the post-Tihar devaluation was effected under a condition of the IMF (Dr. Lohani does not agree to this allegation) as the first step toward entering the IMF facilities under Structural Adjustment Program (SAP) to pull the economy out of the problems being faced then. According to Dr. Lohani, it was after the devaluation that IMF came up with suggestion to go into SAP, since the first requirement for SAP was already effected by way of the devaluation.

Then followed several liberalization policies covering deregulation in the financial sector, the foreign trade, the interest rate on bank loan, the foreign exchange rate etc. And the political change of 1990 speeded up liberalization further by entering into Extended SAP (ESAP) of IMF. Some public enterprises were privatized; the government declared a policy to fully open all the sectors except public health and national defence for private domestic and foreign investment; subsidies were gradually phased out, and price controls were lifted.

In this process, many sectors have already been liberalized. And about the rest, the government has adopted a policy to liberalize them fast. Last year it made public also the program for second round of liberalization in which the financial sector reforms is the major component. However, the implementation of these second round of reforms has been very poor. It was brought in a hurry, it is alleged.

Liberalized Sectors

Many sectors of the economy have been liberalized over the last a decade and half. To make the foreign trade simplified, the foreign exchange policy has been relaxed and there is now full convertibility in the current account. This has removed major hurdles in Nepal’s foreign trade, particularly in imports. Anyone can open L/C by observing a few simple processes to import almost anything from anywhere under the sun. Likewise, the customs rates have been slashed down substantially. There were 11 slabs of the customs before 1990. These have now been reduced to five. The overall customs rates have come down 50%.

Similarly, there have been widespread changes in the revenue policies and rules. A uniform VAT has long been introduced replacing sales tax and various other indirect taxes. Reforms are being effected also in income tax rules.

Similar reforms have been effected also in the manufacturing sector. Though still not in effective implementation, as the private sector complains, there is One-Window System (OWS) to speedily dispense with the government decisions related to business sector. Establishment of industrial units has been simplified by removing the license requirement. Except a few sensitive sectors, it requires only a registration to set up an industrial unit. The rule is so simple, at least in writing, that the registration is to become automatically effective the moment the application is filed with the authority concerned. The revised Industrial Enterprises Act (IEA) and Foreign Investment and Technology Transfer Act (FITTA) have made it easier for the entry of foreign investment. This has enhanced the level of competition. Inefficient, hence uncompetitive, industrial units have either closed down, thus saving the wastage of resources, or are readjusting to the changed situation through various improvements. However, the pace of industrial development has not been as expected. The share of industrial sector in the GDP is still around 10% only.

The most dynamic changes effected by liberalization are visible in the finance sector. There were only two commercial banks 15 years ago. Now there are 15. There was not a single private finance company 10 years ago. Now there are over four dozen. Similar growth can be seen in the number of development banks and cooperative finance companies. With the presence of so many financial institutions, the financial market too has expanded. The stock exchange has become active and people have been increasingly being attracted to it. But the stock exchange is active only because of the scrips of the financial sector companies - i.e. banks & finance companies. The scrips of the manufacturing sector companies are, with two or three exceptions, performing very poorly. This has made it difficult for new companies in manufacturing sector to raise capital from the stock exchange.

The expansion in the financial sector has also brought about additional challenges of monitoring them effectively. The central bank has not been able to sufficiently upgrade its monitoring capabilities. The next challenge is in the form of reluctance of these banks to go to the rural areas.

However, the macro-economic indicators are at satisfactory level. Though the GDP growth rate is still subdued, the last three years have registered a comfortable performance on this front. Exports have been growing steadily and the foreign exchange reserve is at comfortable size and growing.

Rays of Hope

Despite such contradictory trends, there are rays of hope. If the growing exports for the last three years and the easy access to the Indian market are continued, Nepal will benefit from the growth that is continuing in India though some other parts of the world may be facing recession at the moment.

Analysts also say that Nepal has crossed the transitional period of high inflation associated with initial phase of liberalization. Now the rate of inflation is at a very low level (around 3%).

Micro-financing is growing in the villages with local women forming self-help groups and Credit-Saving Group (CSGs). This has been motivating people towards income generating activities. Even a little support from the government or other outside forces to these efforts is likely to result in tremendous achievements.

There exists tremendous scope for further development in information technology, as studies have shown. The excess liquidity that is presently a headache of the commercial banks is certainly going to be invested somewhere in the near future, which will automatically pull the other sectors up. Hydro-power sector is likely to benefit from this excess liquidity.

Ghimire is associated with Kantipur daily.

Annual Growth Rates (Percentage)

* % change in value FOB.

** % change in the overall index of industrial & agricultural production.

*** At factor cost 1984/85 prices

Source: 1. Mid-term evaluation of the ninth plan.

2. Economic Survey, 2000-01

3. NRB Bulletins.

Structure of Economy
% Share in GDP

Source: 1. Mid-term evaluation of the ninth plan.

Social-Economic Indicators

Source: 1. Mid-term evaluation of the ninth plan.

2. Economic Surveys

3. Budget Speeches

Indiscriminate Liberalization & Nepali Economy

Dr. D. R. Khanal

Introduction

It would be pertinent to make it clear at the outset that the policy of liberalization was not propounded independently by the policymakers of the Nepali Congress government based on the deeper objective analysis of various socio-economic aspects of the Nepali economy. Instead, it was adopted along with the implementation of the Enhanced Structural Adjustment Facility (ESAF) loan program of the IMF and its accompanying strong conditions.

In such a background a question naturally arises: Has this policy based on externally dictated conditions made any positive impacts on the Nepali economy? There is a growing consensus that excessive state intervention, predominance of bureaucracy, absence of competitive environment as well as lack of incentive for creativity and work retard the overall development process through a cumulative negative effect on the level of production, productivity and standard of living of the people. At the same time, the international experience also shows that reckless liberalization and globalization policies followed without any sort of preparation toward fulfilling the necessary preconditions and proper sequencing will abruptly bring about severe economic crisis, exacerbated poverty and high unemployment.

Political Economy of Indiscriminate Liberalization

Upon some deeper analysis, it can be easily found that the globalization-led policies of liberalization being uni-modular are primarily aimed at creating and augmenting markets in all the developing countries for the over-produced goods of the capitalist countries besides ensuring creditworthiness of debtor countries.

At the same time the other aim is to exploit the cheap resources of the developing countries through either direct capital investment or relocation of industries in developing countries. In the process, an attempt is made through built-in policy packages that a new wealthy class in the form of comprador and bureaucratic bourgeois could emerge to become new consumers as well as a support base for many controversial and untimely liberalization policies implemented through the ruling elite.

When various components of liberalization policies in terms of their ramification on the country’s economy in general and in terms of the emerging production as well as social relations leading to the formation of new class structure in the society in particular are examined, then all the inter-linked intricacies involved become clearer. The overall policy dimensions are homogenous in nature. The prescribed sequencing is also framed in the same way for all the countries.  It is evidently clear that the liberalization in a country starts with currency devaluation with the argument that arbitrarily overvalued exchange rate discourages exports and perpetuates trade and current account deficits. As the foreign goods are expensive in the post-devaluation scenario, policies to reduce the customs and tax rates across the board are enforced to make them cheaper. It is intended to reduce the competitive strength of the import-competing local industries. As a third step, countries are compelled to provide more facilities to the foreign investors than to the domestic investors to attract foreign direct investment in the export-oriented sectors. Because of cheap raw material and labour already available in such a country, the additional incentives indeed attract more foreign investors. In this process, some local entrepreneurs and business people are made either minor partners through joint ventures or involved in various forms of service activities.

Likewise, some incentives through commission and other means are provided to the bureaucrats and other ruling elite for ensuring the emergence of a strong wealthy local class. This together with cheap imports (because of tax cuts) helps in the development and manifestation of consumerism, which in turn enables the creation of additional market to the products of the capitalist countries.

One additional character of the present form of policies is such that, unlike in the past, it is now advocated waive all kinds of subsidy in agriculture. It facilitate a process of proletarianization in the agrarian structure through transforming feudal production system into capitalist type of production system.  This policy, thus, completely bases on the "trickle down principles" and hence ensures income disparity and wealth concentration process through accentuating marginalization people. The purchasing capacity of the majority of the people is either stagnated or reduced and hence the basic industries that compete with the imports and need growing internal demand are gradually shattered.

Other policies too are simultaneously geared to serve the above type class configuration. Much stronger efforts are being made these days to destroy the power of the trade unions of the third world countries. After the advent of World Trade Organization (WTO) there has been added emphasis on unrestricted flow of capital, more free trade and protection of the right over the investment and property acquired anywhere in the world. This is intended for strengthening the integration of the global capitalist system and to consolidate the monopoly power of the multinational companies. At the same time, the policy of complete privatization enhances the domination of comprador and other bourgeois in the decision-making process through elimination of the discretionary power of the government. In this process all subsidies demolished, and the level of development expenditure is curtailed in the name of promoting market forces and the private sector.

Impact of Liberalization

Today that Nepal is far ahead in terms of speed and direction than the other countries of South Asia in liberalizing the economy. The average tariff rate now is just 10 percent, which is the lowest in South Asia. Unlike in other South Asian countries, the insurance sector has also been liberalized to a greater extent. A branch of American Life Insurance Company (ALICO) is allowed to operate. Likewise, 54 percent foreign share in joint venture insurance companies has been already allowed. In India it is not more than 30 percent.

The bone of contention between China and EU pertaining to the WTO membership to China was in the area of insurance sector because China in no condition wanted to allow more than 49 percent foreign share in insurance companies. This shows how sensitive the insurance sector is from the standpoint of a country’s interest. But we did not bother about that.

Likewise, foreigners have been already granted the facility to purchase up to 30 percent share through the stock exchange in selected sectors. This is in addition to the free entry allowed to the foreign companies in the auditing sector. In addition, all types of subsidies provided to the agriculture sector have been completely demolished. It is broadly true in case of industrial sector also. Except the areas covered under the negative list, industrial sector has been completely liberalized for foreign investors.   In the name of cost recovery and inducement to the markets, enterprises involved even in the public utility services are repeatedly allowed to raise the prices recklessly. The convertibility in current account has been fully restored. Both interest and exchange rates are claimed to be market determined. More interestingly, not only that the economic policies being pursued are in line with policies followed in countries where there is an advanced stage of capitalism, the overall development strategies have also been followed broadly in the same line. Accordingly, a centrally dictated planning and budgeting system is still in practice despite big propaganda about decentralization.

This is with the motive of extracting commission at various stages ranging from project selection, and tendering to the implementation. As a result more than 75 percent of the money spent is siphoned off facilitating again an income and wealth concentration process by way of prevention of benefits to the intended beneficiaries. 

Economic Growth and Structure of the Economy

Although the policy of all out liberalization is claimed to speed up economic growth, the available data do not support this claim. The average growth rate over the last ten years has been hardly 5 percent per annum. It was about 4.6 percent during the 1980s. The growth rate in the agricultural sector in the 1990s has been just 2.6 percent, which is less by 1.4 percent in comparison to the 1980s. More frustrating is that this growth rate is hardly higher than the growth in population resulting in virtually no rise in per capita income of the farmers comprising more than 80 percent in total population. Although the growth rate in non-agricultural sector was about 6.8 percent, it was primarily due to higher growth in sub-sectors like transport, real estate and finance that benefited a very small portion of the population. The World Development Report shows that the growth in industrial sector in the 1990s was just 7 percent compared to 8.7 percent in the 1980’s. The trend of the last three years shows that the growth rate in this sector has dwindled to the order of 4.5 percent only. Almost all import competitive industries are being converted into sick industries. The major export industries are about to collapse. During the last one decade, about 75 percent of the cottage and small industries have collapsed. Because of wrong process and modality of privatization, almost all privatized industries have vanished.

Thus, neither agriculture nor the industry, which are closely linked to the people’s livelihood, could progress and prosper.

Poverty Alleviation

Though the proponents of liberalization argue that the social cost of liberalization will be transient and hence will disappear in the long run, nobody has come to know so far as to when will that long run materialize. The currency devaluation in 1990/91 had led to a price rise by 21 percent which is the highest in Nepal’ history. Withdrawal of subsidies coupled with government initiated price rises in various products had its effect on the relative price structure in both product and factor market with additional difficulties to the fixed income group and poor people. It also had very adverse income distribution implications with more gains and opportunities only to those who had wealth and resources.

The wrong privatization approach and modality, encouragement to the foreign workers, dwindling agricultural and industrial sectors along with productivity lag in the public sector led to very adverse impact on the level of both employment and poverty. The problem is perpetuated due to abolition of credit and other facilities to those who had no land and other asset. A total negligence towards the deprived people in the development process has made the situation more vulnerable. These, together with the centralized budgetary and planning system, excessive corruption, bad governance and neglect to participatory development approach led to an increase in both unemployment and poverty in an unprecedented way.

Now the level of poverty has surpassed 50 percent. Likewise, unemployment ratio has gone above 15 percent. Due to the severe unemployment problem faced by the educated youths, the youths are compelled to go to the Gulf countries for work though the work conditions there are not respectful. The overall ramification of the more than one decade long aggressive liberalization policies is that now the income inequality has reached at the extreme level, perhaps being one of the highest in the world. Ten years ago the highest ten-percent of the population was in a position to possess about 23 percent of total income of the country. Now its share in total income has exceeded 52 percent. 

Lack of Human Development

The last year’s budget speech had claimed big achievements in education, health, and drinking water facilities during the last 10 years. However, the reality is just the opposite. According to Nepal Living Standard Survey of 1996, which is the only latest comprehensive survey available, the overall literacy rate is 38 percent and the female literacy is just 24 percent.  Due to the commercialization of education, the standards of schools where the poor go have been deteriorating very fast. At the same time, the access of this group to education is reducing continuously because of growing cost of schooling.

A few surveys have shown that the cost of primary and secondary education rose by 65 and 54 percent respectively between 1991 and 1997. It takes between eight to ten years to get through the grade 5th. Only 40 percent of those enrolled get through the primary education. A dominant class of rich people is being consolidated in the society because only the very rich, not the poor, can afford a quality education.

In health sector, though the number of health posts is increasing every year, most of them in villages and remote areas have neither the medicines nor the doctors. The private hospitals and nursing homes are exploiting the common people. No system is there for monitoring them.

Though the official statistics show that more than 50 percent of the population is getting drinking water facilities, the situation in many of the villages is such that the taps are without water. In cities, the system of drinking water storage and distribution is at the point of collapse. As a result a process of enhancing true development, i.e. human development, has been hindered.

Retarded Infrastructure Development

During the last 10 years, more than Rs. 200 billion has been spent in the transport sector by the government, which is about 17.4 percent of the total development expenditure. 

Electricity and irrigation received 13.6 percent and 10.9 percent respectively. But when the amount spent is compared with the achievement, it is quite negligible. According to government statistics, additional irrigation facilities were extended to only 298,000 hectares of land during this period, which implies that about Rs. 86,000 was spent for every additional hectare of land to be irrigated. If the users groups are entrusted the works the cost comes down to eight or ten thousand rupees only. At the same time, the year round irrigation facility is available in below 20 percent of the arable land. The maintenance in the completed projects is very poor giving rise to growing suspicion about the economic viability of the donor funded irrigation projects.

In roads, a total length of 3600-Km (including both blacktopped and gravelled) was added during the last 10 years. This gives a per Km cost of Rs. 10 million. The cost escalation in this sector has been so high that last year out of the total development expenditure of Rs. 5.5 billion, only 50-km road was blacktopped. On the other hand, only 100 MW of additional electricity generating capacity has been installed during these 10 years, giving a per MW cost of Rs. 320 million. Very crude estimates indicate that the Incremental Capital-Output Ratio (ICOR) has reached 5.2:1 despite the 9th plan targeting to reduce the ratio from 4.1:3 during the 8th plan to 4.3:1.

A Blend of Contradictions

Some regard as great achievements the establishment of 30-40 finance companies, 5-7 joint-venture banks, and airline companies, schools and nursing homes in the private sector after the adoption of liberal economic policies. Similarly, some increment in the exports of goods and services along with rise in the foreign exchange reserve are also linked with liberalization policy. But, when sustainability and other issues in dynamic settings are analysed no such claim can be bolstered and justified.

Very serious problems are being faced in the areas of public expenditure control and resource management after liberalizing the economy. In 1989/90, the share of regular expenditures in GDP was 6.4 percent. It surged up enormously to reach 9.1 percent of GDP in 1999/2000. In contrast, very unpleasant developments exacerbated in the areas of development expenditure resulting in the level of development expenditure dropping from 12.6 percent of GDP to 8.8 percent of GDP during the same period. As a corollary to this, the growth in revenue has almost stagnated over the last few years hardly exceeding 11 percent of GDP.  A matter of still greater concern is that the rate of increase in revenue has been very low (11-12 percent) over the last three years. This is hitting very hard at the developmental works.

Although the internal deficit financing has been reduced to a large extent, this was made possible simply by raising the external dependency ratio in an unmanageable way under the instruction of the donors.  Consequently, the total foreign debt, which was about Rs. 37 billion in 1989/90, went up dramatically and reached Rs. 200 billion in 1999/2000. It is interesting to note that last year the government broke all the rules and norms of economic fundamentals, and took more than Rs. 5.57 billion equivalent as overdrafts from the central bank. Public expenditure control and resource management are the main pillars of liberalization. But the preceding analysis leads to conclude that at the practical level just the opposite policies have been pursued.

It is said that a healthy and strong financial sector is the heart of liberalization. But the so-called premise that an open and liberal policy leads automatically to a stronger and more competitive financial sector has been proved totally wrong in Nepal. It has neither reduced the spread between the interest rates on deposits and lending, nor has there been any other improvement. The joint venture banks have been able to earn some profits by keeping accumulated dollars in accounts with foreign banks. But the two biggest commercial banks in the public sector are passing through serious crisis. The Nepal Bank Ltd., which was earning huge profit every year when the government owned the majority shares in this, is in loss in the tune of more than a billion rupees a year now after the private sector took the majority shares.

In the mean time privatization has become a total failure in Nepal. Not only that the public enterprises are being sold for throwaway prices but also that the whole strategy and procedures adopted have been completely wrong. This is why the total operating loss of public sector enterprises has exceeded Rs. 750 million last year. Interestingly, it was about Rs 2.5 billion before last year.

Though there has been some increment in exports during the last few years, the sustainability problem has gravely emerged as noted above. There has been no improvement in commodity diversification, nor we have been able to create even a rudimentary base toward industrialization. In 1989/90, export and import gap against GDP was 10.6 percent. This has now gone up to 13.3 percent in 1999/2000. It is more than obvious that the rise in foreign exchange reserve has been due to the inflow of miscellaneous capital as well as foreign assistance. At the same time recent trend indicates that along with the dwindling exports the reserve has started declining fast. Despite so many facilities in the midst of liberalized economy no significant foreign direct investment has entered Nepal. Whatever foreign investment has been received is in those areas where a very quick benefit is anticipated without any long-term technological and other benefits to the country. This at the same time reveals that for attracting the genuine foreign investment other institutional and structural factors are more important.

Problem of Good Governance

The proponents of indiscriminate liberalization argue that a very liberal economy eliminates distortions and anomalies of the state-controlled economy by way of enhancing transparency through information flow and competition. But in Nepal this has never happened so far. Rule of law, accountability, transparency, financial discipline, people’s participation in the decision-making process and rights of the common people in enjoying the fruits of development have been limited to the speeches. In reality corruption has flourished and it seems as if there is no law, no government.

Conclusion

The way Nepali Congress government is going ahead with the imported policy and with the wrong conviction that indiscriminate liberalization is a panacea, is bound to destroy the country’s economy further. Without its drastic correction the economy will be in big tragedy in the days to come. In this connection, first it is necessary to redefine the role of the state by assigning it a catalyst role in the areas like poverty reduction, social and infrastructure development and upliftment of the socially excluded and the poor. What is needed is balanced liberalization policies promoting the private sector principally in such areas like industry, trade and business along with strengthening of complementary and partnership type relationship between private sector and the state. The main thrust in the process of pursuing liberal policies should be internalizing the benefits to the domestic economy to a greater extent possible. For this a selective policy approach in conjunction with proper sequencing based on given socio-economic conditions needs to be followed in a phased manner including protection to the basic local industries.

(Former member of National Planning Commission, Dr. Khanal is a Leading Economist and also the Member of Parliament with CPN-UML ticket)