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COVER STORY |
NEPALESE ECONOMY The politics and economic
shock waves of the September 11 terrorist attacks on the United States continue to
reverberate across the world. Thanks to its efforts toward liberalization and openness
over the last decade, Nepal can't remain isolated from the latest developments. As the
government is still assessing the situation and the private sector already feeling the
heat, concerted efforts need to be launched to cope with the aftermath and the enduring
challenges By BHAGIRATH YOGI What could be a more fitting symbol of
solidarity and nationalism for a grief-stricken country than its national flag? As the
demand for the national flag soared in the United States after the terrorist attacks at
the centers of the country's economic and military might last month, a little-known
company in Shanghai ran its factory round the clock to supply Americans with the emblem of
their patriotism. For Ranbaxy, a leading pharmaceutical company in India, demand for its
broad-spectrum antibiotic medicin e— cifran—also soared as the United States and
other countries feared a chemical or biological attack by terrorists. Ironically, the
September 11 terror attacks in the
United States presented both economic opportunities and challenges across the globe. For a small, impoverished economy at the
foothills of the Himalayas thousands of miles away, the tremors came in the form of faxes
reaching travel agency offices and hoteliers announcing the cancellations of guests.
Industry sources estimated that some 15 to 40 percent of the bookings in the hotels have
been canceled over the last three weeks. "Initial estimates put the losses likely to
be incurred by the hoteliers at around Rs 300 million," said Narendra Bajracharya,
President of Hotel Association of Nepal (HAN). The terrorist attacks in the United States,
which killed more than 6,000 people and injured thousands of others, could not have come a
worse time for Nepal's travel trade sector. As entrepreneurs and officials were
anticipating good sales after the sustained disturbances over the last two years,
international travel slumped, striking a big blow at the aviation and tourism industry.
Insurance premiums went up and there have been delays in cargo shipments. Naturally, the first victim of the worst
terrorist attacks in history was the movement of people and goods. Though the cost of
freight has declined marginally for the time being, exporters are worried about the slump
in demand in the US market and failure to deliver products on time, among other things.
Suffering from a number of problems for the last few months, the readymade garment
industry ó one of the highest foreign exchange earners for Nepal — had to bear a
body blow after the attacks (See Box). From tourism to garment and from handicrafts to
foreign direct investment, everything is going to be affected in the aftermath of the
disturbances in the biggest economy in the world. "Even foreign aid to Nepal might
decline if the full-scale war starts in the near future," said Dr. Govinda Bahadur
Thapa, an economist at the Nepal Rastra Bank (See Box). Considered as the engine of world
growth during the 1990s, the slowdown in the US economy had already started since late
2000. According to The Economist magazine, business investment in the United States had
fallen sharply and industrial production shrank by 4.8 percent by August. Unemployment
crept up only slowly to begin with, but the rise had recently begun to accelerate, going
from 4.5 percent to 4.9 percent between July and August this year. As the most lavish consumers in the world
would be tightening their purse strings, fearing a full-scale war to break out any time
soon in the inhospitable terrain of Afghanistan, exports from all over the world are
likely to shrink. The slowing of the economy in the United States and Japan would have an
impact in the markets worldwide. For Nepal, the escalation of the conflict in the Middle
East could result in the return of Nepalese laborers, leading to a significant reduction
in the flow of remittances. The latest crisis showed that unlike until
a few years back, Nepal could no longer sit back when serious disruptions emerge in the
world economy. Thanks to its growing integration into the global economy, the country is
affected by turmoil in the international economic system. Unfortunately, the latest disturbances have
come at a time when business confidence is said to be at one of its lowest ebbs. No new
investment is coming, consumer demand has not gone up and trade has not expanded within
and outside the country because of the Maoist insurgency over the last few years. The
recent spree of extortion, strikes and disturbances unleashed by the Maoists in different
parts of the country, including the capital, had robbed whatever confidence Nepalese
businessmen had in the country's law-and-order situation. Moreover, irresponsible remarks
and demands by some opposition parties, including the Nepal Sadbhavana Party and Rastriya
Prajatantra Party, for the imposition of ceilings on private property resulted in a
massive capital flight from the county. Up to Rs 6 billion, mostly in Indian and
convertible currency, may have left the country in the past few weeks, said sources.
Though the outflow of money did not have any significant impact because of strong foreign
currency reserves in the country, it showed how vulnerable the Nepalese economy was. Recent reports say the Nepalese economy was
not doing that bad over the last few years. According to a report published by the
International Monetary Fund (IMF), the macroeconomic performance of the Nepalese economy
has been satisfactory during the past two years. Overall real GDP growth (at market
prices) surged from 4 percent in 1998/99 to 6 percent in 1999/2000, led by improved
agricultural performance and strong exports. Growth is estimated to have eased to 5
percent in 2000/01, owing to the dampening effects of higher oil prices and a marked
decline in tourism due to domestic disturbances. Consumer price inflation fell to under 1
percent in the 12 months to mid-2000 and remained below 4 percent during the following
year, with abundant food supplies offsetting the effects of higher energy prices. The external position was generally
favorable in 1999/2000 and 2000/01, with the current account close to balance and a steady
increase in reserves. Aided by strong exports and increased remittances, gross official
reserves reached $946 million in 1999/2000 and Executive directors of the IMF noted
that the primary challenge facing the Nepalese authorities would be to achieve strong
growth on a sustainable basis to reduce the continued high level of poverty. "This
will require comprehensive structural reform and substantial foreign aid, together with
political stability and internal security." With the Maoist rebels agreeing to
observe ëcease fire' with the government forces since July this year, Nepalese economy
was expecting a peace dividend. As the negotiations are yet to show signs of a lasting
peace and stability, businessmen are adopting a posture of wait and see. "We
have put on hold all the decisions regarding new investments," said a leading
industrialist, on condition of anonymity. "I don't see the bright prospects for the
Nepalese economy at least for the next couple of years." Officials on their part are still trying to
become optimistic. "The government is assessing latest developments within the
country and abroad and will take measures, as necessary," said Finance Minister Dr.
Ram Sharan Mahat. "We might even introduce a supplementary budget if the need
be," he added (See Interview). Businessmen, too, agree. "Reviving the
business confidence should be the top priority of the government," said
Narendra K. Basnyat, President of the Nepal-USA Chamber of Commerce and Industry. Added
Narendra Bajracharya, the HAN President, " The government should introduce a package
program without, further delay. If the tourism is hit, it will have a snowball effect on
all sectors of the economy." Diversifying market, both for exports and
tourism, would go a long way in promoting Nepal's interests, say entrepreneurs. If tapped
properly, the latest tragedy could also come as a blessing in disguise for Nepal, they
say. For example, some 20 million Japanese go on holidays around the world, most of them
to the United States, every year. "As they will be diverting to Asian destinations
this year due to disturbances in the United States, Nepal could benefit a lot only if we
could tap only 0.5 percent of that number (that is, around 100,000 tourists)," said
Hari Man Lama, managing director of Incentive Tours and Travels. "Both the government
and private sector should launch aggressive marketing campaign in Japan and other East
Asian countries to tap this opportunity." Officials have been talking about
diversifying the Nepalese export market (also known as the two country-two product
syndrome) to reduce excessive dependence of the readymade garment sector on the United
States and that of hand-woven carpet on Germany for quite sometime now, but nothing
concrete has emerged so far. This means that we should be focusing on long-term planning
and management rather than resorting to knee-jerk reactions. Obviously, the long-term
planning would require close assessment of the changing world scenario and positioning
Nepal in a fitting manner. Officials as well as the business community
are worried about the timing and intensity of the conflict as well as the response from
the Taliban regime in Afghanistan and other Muslim countries. The fluctuation in the oil
price and disturbances in the markets where Nepalese laborers are working, especially in
the Middle East, could have a far-reaching impact on Nepal. Nepal had to rescue its
workers from the Arabian countries during the Gulf War in 1991. With an estimated 200,000
Nepalese working in Gulf countries today, the impact could be more severe, say analysts. "An all-out war would have a serious
impact on Nepalis working abroad as well as on the supply and price of oil," said Dr.
Govinda Thapa. "We might even have to face a oil shock as was the case in the late
eighties." With the growing integration of Nepal into
the world economy, the country can no longer afford to remain an idle spectator in the
world scenario. Whether it is foreign relations, strategic matters or economic issues,
Nepal needs to carefully formulate policies and strategies to deal with emerging crises.
Of course, there will be a need for close public-private partnership to address such
problems by bridging the crisis of confidence that currently seems to exist between the
two. ‘It Could Have A Long And Serious Impact On The Nepalese Economy’ — Dr. GOVINDA B. THAPA
Vice Principal at the
Bankers Training Center of Nepal Rastra Bank, DR. GOVINDA BAHADUR THAPA keeps himself
abreast of latest developments around the world and their likely impact on the Nepalese
economy. He spoke to SPOTLIGHT on related issues. Excerpts: What do you think would be the
impact of recent terrorist attacks in the US on the Nepalese economy? As the shock waves have spread around the
world after the terrorist attacks in the US, I visualize a long and serious impact on the
Nepalese economy as well. If the US decided to execute war it can have more serious and
long reaching impact. One of the major sectors being affected by the recent development
will be the readymade garments that had established itself as the top export product from
Nepal. Second, there are indications o significant reduction in the number of tourists
coming from the US and Europe. Third, multilateral agencies like the World Bank and IMF
and other organizations have canceled all their international meetings in the aftermath of
the attacks. It will have adverse impact on the tourism. Fourth, as the US and European
governments will be diverting their resources for rescuing sectors like airlines affected
after the attacks and towards financing the war, there might be substantial reduction in
the foreign grants that we were receiving. The long-term impact on our economy will also
depend on magnitude, focus and center of the war, among others. Could it have some impact on the
flow of remittance to Nepal? We don't have much remittance coming from
the US and other European countries as the cost of living is high there and number of
Nepalese working is also relatively small. The main source of remittance (other than
India) is the Middle East and South East Asian countries. If war escalates in Afghanistan,
Nepalese workers from the Middle East could return out of insecurity. If the supply of oil
is disturbed we could also face a situation of ëoil shock' as was the case in 1974 and
1979. So, what could be done to mitigate
such impact? In terms of tourism, we should focus on
countries like India, Japan, Korea etc. and launch aggressive marketing campaigns there.
We should immediately go for market diversification in case of the readymade garments. We
should explore if we can send Nepalese garments to countries like Australia, Korea, Japan,
South East Asian and European countries. As we will not be getting more grants, the
government should go on trimming its expenditure. We should be more conscious on the
fiscal management. Though we don't need to worry on the front of foreign exchange
reserves, export and inflation, import has failed to increase thus having impact on the
revenue collection, industrial production and other activities in the market. As our
market is focused in urban areas only recent disturbances like extortion, strike etc. have
had impact on the industrial production. There haven't been additional economic activities
due to global economic slowdown, deteriorating law and order and political instability. So
far as the war is concerned, we are helpless. But in order to insulate the economy from
the problems created within the country there should be attempts to end the on-going
government-Maoist talks in a positive way. Otherwise, our economy could hit the rock
bottom. Do you mean that the domestic
factors are more crucial? Of course. Deciding factor in the Nepalese
economy is domestic factors though inflation and interest rates here are very much
affected by the same in India. This year the agriculture production is good. In order to
create an environment for investment, the government could bring out a crisis management
package. It should focus on increasing production, increase both import and exports and
create employment opportunities. There will not be long term investment from the private
sector now as it is adopting the policy of wait and see. The investment will not come
unless the current political controversy is settled. |
Send your feedback to the
editor: spotligh@mos.com.np |
