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COVER STORY |
NATIONAL ECONOMY Declining development expenditure and rising security expenses are any fiscal manager's nightmare. With economic growth projected to be one of the lowest in the decade and a slowdown gripping all sectors, the country is being hit hard. Internal and external factors have had their toll as the government tries to mobilize foreign assistance and cut unnecessary expenditure. The days ahead for Nepal's economy are anything but smooth By BHAGIRATH YOGI Prime Minister Sher Bahadur Deuba convened a meeting of the donor community at Shital Niwas Monday at a time when the government is engaging in an all-out war with the Maoist insurgents. Addressing the gathering of representatives of Kathmandu-based donor agencies, Premier Deuba acknowledged that the slowdown in trade, tourism and industrial production had severely affected revenue mobilization. Poverty is increasing and economic activities are shrinking due to terrorist activities, said Deuba. He sought the donor community's support in the government's programs for public works and employment promotion in the Maoist insurgency-affected areas. The prime minister also sought their support for the government's humanitarian relief works for disadvantaged groups, women and children directly affected by the conflict.
'There has been a very encouraging gesture from the donor community,' said Chiranjivi Wagle, a senior cabinet member who is also convenor of the high-level emergency management and coordination committee. 'The donors have expressed their full support to the government's programs.' Sources who attended the meeting, however, said the donor community was not as forthcoming as officials had expected. As in the past, the donor community asked the government to set its priorities straight and do more homework to carry out development programs. The donor community also criticized the government for what they called a lack of full-fledged commitment on its part to implement good governance programs, expedite economic reforms and effectively control corruption. Officials said there was no specific proposal from the government in terms of sums or projects for donor assistance. Sources said the government had anticipated assistance of up to US$ 70 million from the donor community to meet its development needs, but there was no breakdown or specific demands. The government has found itself in a tight spot. The growth of Gross Domestic Product (GDP) in the current fiscal year 2001-02 is likely to tumble to 2.5 percent, way below from nearly 5 percent last year, reports said. According to preliminary estimates prepared by the government's Central Bureau of Statistics (CBS), the sharp decline in the GDP is mainly due to sluggish growth of the agriculture sector estimated at 2.1 percent this year. Similarly, the non-agriculture sector is expected to grow by 2.76 percent only this year as against the robust growth rate of 5.6 percent last year. The CBS has projected that the per capita income of the Nepalese will grow nominally this year by just 0.5 percent to Rs 19,000 (approximately US$ 250). Despite the slowdown in the country's economy, low inflation has given some relief to common consumers, the Nepal Rastra Bank (NRB) said. According to the central bank, during the first quarter of the current fiscal year, National Urban Price Index registered a low increment of only 2.2 percent as compared to 2.9 percent recorded during the corresponding period last year. The low price of paddy due to combined effects of bumper domestic production and huge flow of cheap Indian rice played a crucial role for deflationary pressure on the grains and cereals group. The prices of sugar and sugar products recorded the highest rise of over 13 percent during the period, the NRB said. While all do agree that ensuring better law and order should be the first priority of the government, critics say the government is not serious toward adopting austerity measures and cutting down unnecessary expenditures. 'The government should finance its military expenditure by reducing unproductive expenses and push forward development activities with efficient and result-oriented approach,' said Dr. Dilli Raj Khanal, an economist and MP representing the main opposition Unified Marxist-Leninist. 'Nepal is now facing problems not only on the law-and-order front but also in the economic front. So the government must exhibit due seriousness to address these challenges.' Recent economic indicators also exhibit that the Nepalese economy is heading toward crisis. During the first three months of the current fiscal year 2001/02, recurrent (regular) expenditure has exceeded the revenue collection by Rs 453.3 million. During this period, the government has received foreign assistance of Rs 1595.4 million and has used overdrafts equivalent to Rs 2252.3 million from the Nepal Rastra Bank (NRB). Things were not the same till sometime back. Until fiscal year 2000/01, revenue was till higher than the regular expenditure though the revenue surplus was gradually declining. The revenue deficit has another serious budgetary implication on the absorption of foreign assistance, say experts. 'As the government needs to provide 20 to 30 percent of the total project cost from its own sources as counterpart or matching fund, the foreign assistance can't be utilized if the government fails to provide this fund,' said Dr. Govinda Bahadur Thapa, vice principal at the Bankers' Training Center of the NRB. With major export items like carpet and garments passing through critical phase, manufacturing sector in the doldrums and tourism hit badly after the 9/11 terrorist attacks on the twin towers in the US, Nepalese economy may have never faced such a critical situation. While the business community is keeping its finger crossed about the restoration of law and order with the declaration of nationwide emergency (to fight Maoist insurgency) last month, tourists in general are said to be scared to visit this Himalayan kingdom. 'We need to tell tourists, thorough our diplomatic missions abroad and other media outlets, that the emergency is only targeted against the Maoist insurgents and it has got nothing to do with the visiting tourists,' said Basanta Raj Mishra, honorary secretary of Nepal Association of Tour Operators. 'Indeed, Kathmandu and other tourist spots are more safe now than before.' Despite such assurances, investors want to give a look for sometime before making a final decision. The bomb explosion at the Nepal Bottlers Ltd.óthat manufactures Coca Cola and other soft drinksó suspected to have been carried out by the Maoists is seen as an attempt to scare away foreign investors. Suspected Maoists have, in the past, hit joint venture companies including Nepal Lever and Surya Tobacco. Govt's response Officials say the government is committed to provide law and order in the country. 'The government will provide full industrial security to all the industries and businesses in the country,' said Purna Bahadur Khadka, Minister for Industry, Commerce and Supplies. 'Of course, we need close cooperation from organizations like the Federation of Nepalese Chambers of Commerce and Industries (FNCCI),' he added. At the initiative of FNCCI, among others, the government recently formed a high-level Board of Investment, to be chaired by the Prime Minister. The new board will not only listen to the grievances of the investors, it will also take initiative in streamlining the foreign direct investment projects, said officials. Critics, however, want to wait and see if the new mechanism really works. 'Former prime minister Girija Prasad Koirala formed a high-profile Business Consultative Group but it could not meet for the last two years,' said a leading businessman. 'We don't know if the group still exists.' Making promises and then forgetting them has been the favorite pastime of Nepalese leaders, say critics. The failure to renew Nepal-India trade treaty in time is one such example. 'It is obvious that the issue needs to be resolved at the political level. Prime Minister Deuba should discuss the issue with Indian Premier Atal Behari Vajpayee when they meet in Kathmandu during the upcoming SAARC summit,' said a business leader. For the government, meeting rising security costs is not an easy option. As indications are there of a prolonged conflict in the Nepali hills, sustaining a costly war is going to be a heavy burden for the country's economy. And, its first victims will be the on going or proposed development works. 'There will be across the board reduction in the development expenditure (to finance security expenses),' Prithvi Raj Ligal, vice chairman of National Planning Commission told SPOTLIGHT. 'The foreign-aided and other priority projects will, however, not be affected as only the low-priority projects will be scrapped.' According to Ligal, insurgency has hit the people living below the poverty level the most. 'Unemployment rises and service delivery is affected (due to insurgency). Development works also could not be implemented smoothly. So the government has given top priority to improve security measures,' explained Ligal. Officials said they were trying to rise up to Rs 4 billion to meet the security expenses. Sources said the government was also preparing for a supplementary budget, with provisions for raising customs duties, among others, to be present in the upcoming winter session of the parliament.' Businessmen are worried that they are not in a position to pay more taxes to finance the security expenses. 'At a time when the economic activities are down, the government should not impose burden on the industry and businesses,' said Ravi Bhakta Shrestha, President of FNCCI. 'Instead, the government should announce immediate measures to rehabilitate sick industries, promote tourism and boost exports.' Experts warn that the Nepalese economy is in a volatile stage now. 'The situation seems to be moving toward something like stagflation (inflation-plus stagnation) when men and machine are out of work,' said Dr. Bishwambher Pyakuryal, professor of economics at the Tribhuvan University. 'The government should not use the state of emergency to terrorize the terrorists only. It should adopt austerity measures and develop mid-term expenditure framework. If needed, the number of Ministries should be reduced and unnecessary employees should be bid good-bye.' Finance Minister Dr. Ram Sharan Mahat could also listen to what his Indian counterpart has said. In an interview with Outlook magazine, Yashwant Sinha, said, 'We have to cut our coat according to our cloth. But our cloth is very small while the coat is getting huge.' Adds The Economist magazine in its recent issue, 'The only reliable path of peace in Nepal is to end its widespread poverty. More than a third of the population live on the equivalent of less than $1 a day, making them receptive to the message of the communists. The surprising thing is that they do not have more support.' Fighting terrorism remains at top of the agenda for the Deuba government at present. But postponing long over-due reform programs and not taking drastic measures to cut unnecessary flab from bureaucracy will not help the government. It could even endanger the country's decade-old democracy, which is passing through one of its most serious crises. GDP by Industrial Origin (at constant prices/in Rs Millions) 2001/02 Q % change 1. Agriculture, Fisheries and Forestry 35439 36858 37632 2.10 2. Manufacturing 8218 8514 8684 2.00 3. Construction 9381 9467 9751 3.00 4. Trade, Restaurant and Hotel 10258 10560 10602 0.40 5. Finance and Real Estate 9204 9681 10117 4.50 6. Community and Social Services 9701 11158 11292
1.20 Total GDP at factor cots 88481 92865 95186 2.50 GDP at producers prices 94779 99567 102040
2.48 Note: R stands for Revised estimates and Q
stands for Quick estimates. Source: Central Bureau of Statistics 2001 'Our Economy is in a Volatile Stage' -Prof. Bishwambher Pyakuryal
Professor of Economics at Tribhuvan University, Dr. Bishwambher Pyakuryal is known for his frank and critical views on different aspects of the Nepalese economy. A former board member of Nepal Bank Limited, Prof. Pyakuryal recently resigned from state-owned Nepal Industrial Development Corporation (NIDC) to head the Business Information Services Nepal Pvt. Ltd, a private-sector think tank. He spoke to BHAGIRATH YOGI at his new office at Kamalpokhari last week.Excerpts: How do you see the present state of
the economy? Revenue collection is negative and regular expenditure is higher than the revenue. This indicates volatility of the economy. Even before the declaration of emergency, the government did not have surplus revenue to pay for the remuneration and benefits of retired civil servants. The year 2002 is going to be difficult as major loans are going to mature. Debt servicing will also demand a significant share of the budget. Up to 65 percent of our development expenditure is being financed by foreign aid. But if we can't meet the regular expenditure (through our revenue), it will be very difficult for us to convince the donor community. This could push our society toward what is called a 'mass unrest society.' How serious is the situation? The government hasn't been able to redefine the sick industries. The program to rehabilitate sick industries has been awfully delayed. The government doesn't have any resources to rehabilitate sick units. The situation seems to be moving toward something like stagflation (inflation-plus stagnation) when men and machine are out of work. How effective have been the government's attempts? The government is about to establish an Assets Management Company to take over the non-performing assets (NPAs) of the government-owned banks. On the other hand, it looks like the government's entire concentration has been on two commercial banks only (Nepal Bank Ltd. and Rstriya Banijya Bank). Due to cumulative growth of the NPAs, the banks haven't been able to collect their overdue. Due to the present uncertainty and higher risks, there is virtually no demand for new investments. That's why many banks are concentrating on conventional areas. We haven't been able to explore potential areas of competitive advantage in the regional context. Isn't maintaining macro-economic stability an achievement? After 1990, we have seen that macroeconomic stability could not ensure the reduction of poverty. If the present rate of economic growth and population growth continues, it will take at least 20 years to double our per capita income. It has been proved that macroeconomic stability alone can't ensure economic development in a country like Nepal. At the same time, the low-level of inflation at present may not reflect future prospects for Nepalese economy. Can the state of emergency help
address economic problems? The government should not use the state of emergency to terrorize the terrorists only. It should adopt austerity measures and develop a mid-term expenditure framework. If needed, the number of ministries should be reduced and unnecessary employees should be bid good-bye. As the economy is passing through rainy days, we may have to compromise with social justice. So, besides liquidating loss-making public enterprises, the government should involve the private sector in almost all cases. We have a situation where the Ministry of Finance (MOF) is looking at the fiscal side and National Planning Commission (NPC) at the programs. The NPC and MOF should be integrated and bureaucratic junk should be eliminated. A one-window policy on the basis of inter-party consensus should be implemented. The present priorities of the government in real sense need to be narrowed down and re-prioritized. Different committees, departments and over-lapping institutions should be eliminated. The government should work keeping in mind the sentiments of the Nepal Development Forum, Least Development Countries and regional organizations. The government should bring out a white paper on the state of national economy. Has the focus on agriculture been
supported by the programs? The Agriculture Perspective Plan (APP) has demanded more inputs on fertilizer and irrigation. The APP has envisaged a 4 percent rate of growth for agriculture. But over the last four years, it has been less than 2 percent. In face, the government investment has declined in the areas prioritized by the APP. Resource allocations have been influenced by the political personalities, rather than on the basis of priority. A strong law should be formulated to check such aberrations. Government officials, including ministers, should be held accountable for the performance or non-performance of their ministries. What will be the impact of the
cutting down of development expenditure to finance security expenses? The country will suffer. It will have multiplier effect if the development expenditure is reduced. The government should be more assertive and more transparent and invite people's help and participation in all sectors. The government can't do anything from the existing resources. Of course, there will be dramatic improvement if the security situation improves. More joint ventures and foreign direct investment could flow in. In fact security is the most important element for promoting investment. The problem with us is that our institutions haven't been able to sustain our economic policies. We are suffering from structural, supply-side and policy-level constraints. So, we should devise such policies that will have an influence on price and consumption behavior of the people. If we always remain as a transitional economy, when will we graduate from the state of an LDC? How can Nepal deal with bilateral problems while remaining an active member of SAARC? The issues like certificate of origin, value addition, surge and safeguard measures also have some kind of commonalities (that have cropped up between Nepal and India) at the regional level. So, Nepal should raise such issues at the level of SAARC. If a consensus could be built up on such issues at the regional forum, bilateral problems could be solved.n |
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