Economy & Policy (Business Age)

Economy & Policy

Dithering Donors

Nepal is poor, has been poor, and will possibly remain poor for long as the trail on which she crawls reaches nowhere near prosperity.

Nepal’s West Minister style democracy, judging from its delivery potential, monitored over a decade, is capable of producing handful of Napoleon and Snowballs, perpetuating a farmland where all can be equal but a few more equal than others.

Perhaps, it never came to cold war author George Orwell’s mind that a West Minister style Nepalese democracy can best produce a breeding ground for the likes of Snowballs and Napoleons that Orwell conceived in his Animal Farm.

The economic track on which the wheels of the Himalayan Kingdom meant to roll was laid by a handful of people who wanted to eat better than what an average American could afford, dress more elegantly than an average French could manage and ride the luxury cars that the average Brits could dream of.

The attitude underlying the whole development scheme and the more-equal-than-other instinct to drive Nepal’s development, still remains the same. The players have changed colors but not attitude. The structural patterns that a few tugging the rein and others pulling the cart is still the same. The change may be there in forms but not in content or perhaps in process and not in product.

The twelve years old democracy has failed to make its custodians democratic. But, these few-more-equals see no wrong with democracy as did the Napoleons and Snowballs in Rana oligarchy or Panchayat days pseudo-democracy.

They hail it as a great democracy! They perhaps see the reason. Its they who can really see through the creams of democracy.

What else can transform paupers into politicians, that too, running gas stations in America, owning private airlines in Nepal and flying suitcase full of Indian rupees to Dubai for purchasing gold! What else can make one undergo such a metamorphosis in ten years whereby one can own, drink and enjoy world’s best products that until yesterday remained a far distant dream!

The post-cold war wind of privatization and deregulation that blew into Nepal with the fall of Berlin wall brought riches to these very few and starved people to death in western hills which Nepal – bigger the size of Bangladesh inhabiting only one-seventh of Bangladesh population - never saw before. Neither in Rana oligarchy nor in Shah dynasty!

In those conservative system too, they produced a bunch of men born-to-rule, who enjoyed benefits forcing others to bear burdens, much like post-democracy Nepal’s Napoleon and Snowball.

Even then, they sold poverty, illiteracy, ignorance, death and disease to the West and made money as they do now.

What has been changed over the past half a century is the prospects and scope for begging. Until yesterday, they were narrow, however, the post-Berlin wall era has widened them.

Today, the few more-equals can explore, discover, invent or create problems out of their sheer foolishness and sell them to the West.

A few tugging the rein of Nepal’s West Minister style democracy have sold more things in these twelve years than those in Rana oligarchy or Shah dynasty could sell over the past half a century.

Earlier, they didn’t ask money for combating corruption, good governance, down-sizing bureaucracy, streamlining administration, and ultimately sustaining a system that people increasingly lose interest in.

Except Rana oligarchs who leaned on East India Company’s crutches for survival and were lent support in perpetuating their iron-fist rule in return for their servility to British Raj, no Panchayat Snowball or Napoleons ever trotted the globe with a begging bowl for strengthening or sustaining their pseudo-democratic regime.

Nor they ever acted so unabashedly to seek financial help for curbing corruption pervasive in their own administration.

During the run up to NDF (Nepal Development Forum) last month, the World Bank’s Oashi and IMF’s Milner spoke in harsher tones. They rebuffed the few-more-equals for repeatedly making promises but never keeping them.

Even those carrying carrot and sticks like US Secretary of State and the British Minister for Foreign Affairs obliquely hinted at these few-more-equals that the insurgents under Mao beret were bad but they were not good either. They asked them to dry the swamp of corruption.

For those few, rolling the wheel of democracy in this down-sliding Kingdom, the flying in of the western leaders of clout and the offering of flower garlands by Panchkanyas (the puppet-like tiny little girls) at the TIA is a great shot in arms. They make a list of great achievements with likes of Powell and Bradshaw topping it and tell the people and parliament that they have done it.

The World Bank’s Vice-President rebuked the rulers for kleptocracy at the NDF inauguration. A few suspended their acoustic process and others thrusted cotton into ears.

Powell, Bradshaw, Oashi or Milner, all of them know that the money they pumped in helped rise concrete blocks in Kathmandu, hurling the impoverished lot, living in the hovels and huts, into greater swamp of poverty.

But still, they loan them, aid them, grant them. Never know why?

And these few Snowballs and Napoleons of our time in possession of purse boast of having run their diplomatic trade so craftily as to bring money into the country.

Not that the Western money lenders don’t know which pipe they put the money into and where do they trickle, yet they don’t raise fingers.

No donors will ever tolerate Clintons, Bushes, Blairs and Thatchers and their handful of cronies enjoying the world’s riches while the rest Brits and Americans being crushed under grinding poverty and starve to death in their democracy.

But, it doesn’t bother them if that happens away from home.

Why can’t the western money lenders ask any Mahesh Acharya, Ram Sharan Mahat or Sher Bahadur Deuba from among the gang of forty-one, how can they manage such a palatial residence and a posh life-style with the ministerial perks?

Are they running consultancy firm, or do they win contract for conducting baseline surveys or impact assessment of some World Bank or IMF run projects?

If not, how can they erect castles in Budhanilkantha and Maharajganj while the rest of the 23.5 million working hard day and night to meet both ends?

If they dither asking them these questions, they will be helping eradicating poors and not eliminating poverty by producing more concrete blocks in Kathmandu and sweeping those huts and hovels into Bay of Bengal.

Burdened Under Debt Burden

Nepal has historically been resorting to deficit financing to bridge the revenue-expenditure gap required for carrying out the development activities in the form of either grants and external or internal debts. The government has a limited authority to collect internal debts, though the limit was raised to Rs 9 billion recently. Grants in respectable chunks do flow in from bilateral and multilateral donors, but is largely insufficient to meet the resource needs. And now with the absolute outstanding debt figures rising annually, which crossed the Rs 200 billion mark in 2000/01, how long can Nepal shoulder the debt burden?

Nepal has taken a good stride in the economic front since the government adopted liberal economic policies after the restoration of the multi-party democracy system. The Gross Domestic Product (GDP) has grown on an average of 5 per cent in the last decade. Foreign trade has seen a dramatic rise from mere Rs 30 billion in 1990/91 to Rs 170 billion as of 2000/01. Even the social sector indicators in the decade have improved. Multilateral and bilateral donors have tremendously aided Nepal by extending the much-needed grants and loans. As such, the credit for the achievements in the last decade goes not just to the government machinery but to the donor agencies and countries as well that not only financed a number of development projects but also took pains to ensure its effective implementation. However, as of late, the economy is on the downhill. It is in this light that a pertinent question is being asked by many lately: "How long can the country bear the debt burden?"

Nepal’s total debt as a ratio of its Gross Domestic Product (GDP) as of fiscal year end 2000/01 stood at over 49 per cent. Though the debt-GDP ratio has hovered roughly in and around the 50 per cent mark in the past few years, Nepal’s outstanding debt soared from Rs 113 billion in 1994/95 to cross the Rs 200 billion mark in 2000/01. This is a matter of major concern. Nevertheless, despite the increase in debt-GDP ratio, other indicators like the debt-revenue and debt-exports ratios have improved. Since 1995/96, the debt-revenue ratio has come down from 459 per cent to almost 410 per cent. Similarly, the debt-exports ratio has also scaled down from 644 per cent in 1995/96 to 350 per cent in 2000/01. The improvement in these ratios may reflect a cosy and comfortable position. However, the improvements need to be much more.

However, what rings the alarm bell now is the slumping revenue collection of the government. The collection in the first six months for the current fiscal year touched only 37 per cent of the whole year’s target. Exports have warred, tourism industry is in serious trouble, and security expenses since the declaration of a state of emergency in November last year and the following mobilization of the army to quell the Maoist rebellion is on the rise. And to make matters worse, there is no way to tell for sure that these sectors will see better days anywhere soon, not just viewing the domestic security condition, but also in the light of the disadvantages that Nepal would be subjected to with its accession into the WTO.

With many of the debts repayments beginning to mature now, various government agencies have begun showing their concern over the persistent increase in Nepal’s debt. Debt servicing eats up a substantial portion of the annual budgets. The government is cash-strapped and this questions its ability to service its debts in days to come. Around 13 per cent of the total budget for the current fiscal year has been earmarked for debt servicing. And out of the total budget of almost Rs 100 billion in the current fiscal year, Rs 27 billion stands as deficit, which the government has to bridge with loans from the donor community, and which Nepal must repay in due course. Though the fact that Nepal has a relatively lower capacity to absorb debt may come as a solace, yet that leaves no space for complacency.

One of the other alarming facts is the continued depreciation in the Nepali rupee lately. Any depreciation in the exchange rate will directly inflate the debt bill of the country. Seven years back the exchange rate of the Nepali rupee with the US dollar stood below Rs 50, which now stands at over Rs 77. Over fifty per cent depreciation in the rupee in the past seven years mean that total debt liability in Nepali rupee terms has increased correspondingly. And that holds true especially for those loans whose repayments have begun only recently. For other loans whose repayment begin a few years later, the amount to be paid back in terms of Nepali rupee would be much higher. One measure to reduce this risk could perhaps be entering into swap currency-exchange deals with donors and lenders. But would the lenders agree on that?

One alternative that could avert burgeoning debts is by raising internal debts instead. However, that is likely to jeopardize the macro-economic stability that the government is enjoying presently. Any increase in internal debt, the limit to which the government recently raised to Rs 9 billion, will have a direct bearing on inflation and domestic market rates. And disturbing the fundamentals of the hard-earned macro-economic stability would only negate the achievements made in the past few years.

The donor community in the recently concluded meet of the Nepal Development Forum (NDF) have pledged strong support to Nepal’s development endeavours, with promises to provide US $ 500 million annually to finance Nepal’s resource gaps, especially for the successful implementation of the plans and programmes set in the upcoming Tenth Five-Year Plan. But is the aid commitment enough to make Nepal feel comfortable? Certainly, it is the conditionalities attached with the aid flow that matters. While inflow in the form of grants is not a threat to Nepal’s debt position, aid in the form of loans, though they generally carry a grace period of ten years, would only inflate the total liability of the Nepali government. And although multilateral and bilateral donors charge only a little service charge to their loans, can Nepal withstand the burden for long?

Nepal is presently passing through a critical phase with the state of emergency imposed and the Royal Nepal Army mobilised to quell the violent Maoist insurgency. The security bill is on a continuous rise and it is unlikely that the current government-Maoist conflict will end soon, which raises the possibility of capital flight, disinvestment and slump in the manufacturing sector, all due to security concerns. The World Bank and the International Monetary Fund had announced to cancel debts of Highly Indebted Poor Countries with a view to reducing their burden. Perhaps, the time is approaching for the World Bank and the International Monetary Fund to extend the same facilities to Nepal as well.

Two Percent can Make a Difference

The objective of a budget is growth. But how significant are the differential rates of growth? There can be hardly anything of greater importance. How much time India takes to banish poverty and join the league of developed nations depends directly on what rate Indian economy grows at.

I have hardly come across any person who realises the significance of a 2 percent difference in rate of growth compounded annually. Almost everyone grossly underestimates what this 2 percent difference would mean over a long period of time.

Peter Lynch, the legendary stock investor, explains with a wonderful example in his book, One Up On The Wall Street’: "Consider the Red Indians of Manhattan, who in 1626 sold all their real estate to a group of immigrants for $24... At 8 percent interest on $24 compounded over all those (362) years, the Indians would have built up a net worth just short of $30 trillion (Rs 13,95,00,000 crore)." But at 6 percent "they would have made $34.7 (Rs 1,61,355 crore) billion by now. What a difference a couple of percentage points can make, compounded over three centuries..."

Warren Buffett the most successful stock-picker of all times has managed to pick investments which have grown at over 23 percent compounded every year over the last three decades. This has made him one of the richest men in the world. Less than a life-time of this compounding has given him wealth in excess of US$ 30 billion (Rs 1,39,500 crore) starting from a negligible base.

If India’s per capita income grows at 7 percent, Indians will just about catch up with the Americans in a 100 years; with a 9 percent growth rate the average Indian earning US$ 2.5 million (Rs 11.6 crore) annually would be more than six times as rich as the average American in this 100 year period. Great but India can do better. If India were to grow its per capital income at 18 percent per annum by adopting completely libertarian free market policies. In that hypothetical scenario, the average Indian becomes as rich as the average American within our lifetimes; before the end of 31 years.

Will India ever to adopt free market policies which give her this growth? No. I cannot see anything like that happening in the near future. The government will just not give up 99 percent of its powers – there are too many vested interests which will prevent this from happening and that is the bad news.

There is, however, good news too; no matter what happens India and the rest of the world will continue to grow. It is only a matter of time before every citizen of this world is incredibly, obscenely wealthy by present day standards. Our great grand children and their children will enjoy wealth beyond belief.

In the year 3000, that is a 1000 years from now let us see what the average annual income of Indians would be starting at US$ 452 (Rs 21,000) and growing not at 18 percent or 6 percent or even 2.5 percent but just at 1 percent compounded every year. Hold your breath. The income would be US$ 9.47 million (Rs 44 crore). Incredible but true. There is no printing error.

However, we can certainly do better. As against a 1000 years, this same level would be achieved in 403 years if the growth rate is 2.5 percent, 147 years at 7 percent growth. We will not mention an 18 percent growth which though possible now is not sustainable as India becomes a mature developed economy.

India will be rich, Indians will be rich; it is a foregone conclusion. The growth rate will decide the all-important question; When?

Wadhwa is an author and economist.