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COVER STORY |
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COVER STORY |
ECONOMY With the country in the
stranglehold of a violent insurgency, all sectors of society have been thrown off balance.
Various sectors of the economy are reeling under pressure. With tourism at its lowest ebb,
exports on a downward spiral and unemployment rising, the whole economy seems to be
grinding to halt. To top that, the rebels are destroying the few development
infrastructures the country had built. The finance minister is groping in all directions
to meet skyrocketing security expenses amid declining revenues and predictions of a GDP
growth rate of under one percent. Surely, the country is in the midst of an economic
nightmare By SANJAYA DHAKAL Kiran Karki runs a grocery in Lagankhel.
Over the last six months, the crowd of customers he used to serve has turned into a
trickle. "People simply are beginning to stop buying anything other than essential
items like foodstuff," he said. Raghab Bista owns a cosmetics store in
Chabahil. His shop, which used to be swarmed by ladies, now sports a deserted look.
"It is really difficult to sell items these days," he said. The stories of Karki and Bista mirror the
down economic spiral Nepal has been caught in lately. Due to deepening uncertainty and
insecurity, economic activities are screeching to a halt.
Tourism, the main bulwark of the
economy, has been humbled. It has come down by 50 percent. Hoteliers and restaurateurs are
beginning to lay off employees. Trekking and travel agencies, too, are feeling the heat. On the export front, things look equally
dismal. Garment exports have come down by 50 percent. The US $200 million worth of
readymade garments Nepal exported in 2000/2001 has become an industrial lore. Apart from
worsening internal insecurity and an adverse environment, the garment sector also has been
hit hard by the drop in exports to the United States, which consumed 80 percent of output,
because of quota and duty restrictions. According to the Federation of Nepalese
Chambers of Commerce and Industry (FNCCI), the fall in exports has forced the closure of
more than 50 percent of Nepal's garment industries and resulted in the loss of more than
50,000 jobs. More than 90,000 people were directly employed by the garment industry and
around 500,000 people depended on the sector for their livelihood. The same is true for the carpet sector,
which provides employment directly to 250,000 people. Another one million people depend on
this sector. Carpet exports, too, have come down considerably in recent months. The
handicrafts sector, which directly employ 250,000 people, is facing similar heat. According to the financial survey of the
Nepal Rastra Bank for the first eight months of the current fiscal year, total exports
have declined by 7.8 percent to reach Rs. 34.93 billion. While exports to India have
marginally increased, those to third countries have come down heavily. Imports, too, are on a free fall. The
survey states that total imports have come down by 8.5 percent in the first eight months
of this fiscal year, compared to the same period last year, to reach Rs. 69.84 billion. Revenue growth, too, has declined by four
percent. The report states that foreign exchange reserve has decreased by 4.1 percent
compared to the previous year, and is currently around Rs 103 billion. As imports have
declined, the current foreign exchange reserve is adequate to sustain the country's total
product imports of one year and total product plus service imports of 10 months. The Maoists' spree of destroying vital
physical infrastructures, too, has taken a heavy toll on the country's economy and
development. The destruction of telephone towers, electricity transmitting stations,
hydro-power plants, bridges, and roads, among others, is estimated to be between $250
million and $300 million. Hounded by rising security expenses and a
violence-hit business and industrial environment, Nepal is set to achieve less than a
percent of Gross Domestic Product (GDP) growth rate in the current fiscal year - the
lowest in 18 years. According to preliminary estimates by the
Central Bureau of Statistics (CBS), GDP growth rate for fiscal year 2001/2002 has tumbled
to 0.76 percent against a projected growth rate of 2.5 percent. The numbers, which are yet
to be released officially, show a marked decline from last year's 4.71 percent growth
rate. Two years ago, Nepal's GDP had grown by 6.14 percent. The CBS findings, however,
project a considerably lower growth rate than that presented by the Asian Development Bank
(ADB) in its recent Asian Development Outlook. According to the CBS estimate, the
agriculture sector would grow by mere 1.7 percent. In Nepal, 78 percent of the total labor
force is involved in agriculture, whereas their contribution to the GDP is only 38
percent. By contrast, those involved in the non agricultural sector (22 percent)
contribute to 62 percent of GDP. The less than one percent projection of GDP
growth is extremely worrisome, given the more than two percent annual population growth in
the country. "It implies we will not be able to reduce poverty at all," said an
economist. Will the Economy Collapse? Certain segments of society are fond of
setting deadlines on when the economy would collapse if things did not improve. They have
borrowed analogies from the recent meltdown of the Argentine economy. But Finance Minister Dr. Ram Sharan Mahat
dismisses such predictions as alarmist. "The fundamentals of economy are still sound.
There is no reason to be pessimistic and alarmist. The economy will pick up once the
security situation improves," he said. Most businessmen, too, do not believe the
country's economy will collapse within a certain period. "Nepal's economy is not big
enough to really collapse. We will continue to eat rice and dal no matter how worse the
situation becomes. Definitely, the economic situation could deteriorate further if things
do not improve, but I don't think it will collapse as such," said Bhaskar
Rajkarnicar, a renowned businessman who is also associated with the FNCCI. Other economists think that situation is
getting out of hand. "Indeed, the economy is going to become bankrupt. Even the
much-touted volume of foreign exchange reserve has dramatically come down by nearly Rs 9
billion in last one month," Dr. Bishwombhar Pyakurel, an economist, was quoted as
saying in Deshantar weekly. "The situation of the country is such that the general
expenditures alone are exceeding the total revenue collection." The government had hoped to collect Rs 60
billion in revenue in the current fiscal year. The Finance Ministry believes that, thanks
to the prevailing negative atmosphere, the actual collection would fall short by around Rs
7 billion. In such a situation, the upcoming budget might even have to depend on loans for
general expenditures. "The low rate of revenue collection is a matter of great
concern. But this is due to the inefficiency of the government. If it still employs wise
policies and ensures honest implementation, revenue growth can increase
considerably," said Bharat Mohan Adhikary, a former finance minister and senior
leader of the main opposition Unified-Marxist Leninist (UML). Another growing concern is the rising
security expenditures. Billions of rupees will have to be apportioned for security
purposes in the upcoming budget. And it will have to be earmarked by cutting down on the
vital development budget. "It is truly tragic that in a country with so much poverty,
the government is compelled to spend billions on security and defense," said an
economist. For any economy to survive and grow, the
confidence of businessmen is of utmost significance. "As long as businessmen have
confidence in the market, the economy will always bounce back. Therefore, the present need
is to act in such a manner as to safeguard the confidence," said Rajkarnicar. Positive Facts It is really odd to find positive
development amid the nightmarish experience of the Nepalese economy. Quite like the
proverbial silver lines of dark clouds, there are undercurrents that suggest businessmen
still have the belief and trust to drive the economy forward. Even in the midst of predictions of
economic strife, Kantipur Publications made a significant decision in going ahead with its
Rs 500 million Kantipur Television project. "We can still find few restaurant chains
opening," said Rajkarnicar. Likewise, for the first time the private
sector has bought television rights to the upcoming 2002 World Cup. Rajkarnicar's Ad
Avenues bagged the rights from German media giant KirchMedia for Rs 25 million after
state-owned Nepal Television backed out citing high costs. "It is my intention to just reach
break-even this year," said Rajkarnicar, adding that he has already received pledges
to recover 80 percent of the cost. These apart, the deluge of assurances from
Nepal's development partners also has provided much-needed respite to the economy. The
Nepal Development Forum (NDF) meeting held in January has pledged annual assistance worth
US$50 million for the next five years. Donors even indicated that money would not be a
problem if the country succeeded in utilizing it properly. Recently, Prime Minister Sher Bahadur Deuba
made a trip to Washington and London where he received assurances of more help. The United
States government has already requested its Congress to provide Nepal with $20 million
immediately. In mid June, the British government is
holding an international meeting to discuss and find ways to help Nepal in its security
and development. Representatives from the United States, the United Kingdom, India, China
and Russia would participate in the meeting, which has been shaped in the mould of the
meeting held in Japan a few months ago to assist Afghanistan. During his recent visit to Shanghai to take
part in the 35th annual meeting of the Asian Development Bank, Finance Minister Dr. Mahat
received assurances of credit assistance equivalent to $2 million for a government
expenditures improvement project. He said other donor agencies, including the Organization
of Petroleum Exporting Countries and the Swiss Cooperative Forum, also have assured Nepal
of all possible cooperation. Officials of the International Monetary
Fund (IMF) are currently in the capital for discussions on setting up the Poverty
Reduction Growth Fund (PRGF) and to evaluate the financial situation of the country.
Finance Ministry officials believe that the IMF
would set up the fund this time taking into account the extremely difficult phase the
Nepalese economy is going through. The setting up of the PRGF would help the government's
efforts to reduce poverty and also boost international assistance in this regard. What Now? The Nepalese economy is currently in the
most sensitive phase. Like an expert cliffhanger, the government has to adeptly steer the
economy out of its troubles by employing prudent policies that are in keeping with needs
of the difficult times. "This is no time for the government to
be introducing drastic measures to upset the business," said Rajkarnicar.
"Rather, the government should encourage more financial activities so that the
economy would start picking up." As donors have indicated their willingness
to help the country, the question now is whether the government would be able to utilize
the assistance properly. Investment in the social sector and employment-generating
industries could be the best bet in the short term to deny violent elements further space
to play in. No doubt, the country is at the crossroads; choosing the right course could steer the nation out its crises it is facing. The wrong path would spell disaster. 'The Country Needs Strong Measures To
Address Its Economic Ills' — Dr. NARAYAN KHADKA Dr. NARAYAN KHADKA is the
newly appointed vice-chairman of the National Planning Commission (NPC). A well-known
economist, Dr. Khadka spoke to SANJAYA DHAKAL on various issues concerning the country's
present economic scenario. Excerpts:
How do you assess the present
economic condition of the country? The present economic condition in the
country is very challenging. We are going through a very difficult time. Because of the
Maoist insurgency, our development infrastructures have been destroyed, foreign investment
has been severely cut down and internal revenue also is not at the rate we had expected it
to be. There is a massive downturn in crucial export items such as carpet, garment and
pashmina. The overall economic environment has become very serious. The challenge for us
is how to manage the state of affairs and come out of present crisis. There are apprehensions in certain
quarters that the economy might collapse within 5-6 months. What do you say? We should not be so pessimistic. The growth
of revenue is not negative. It is still growing at 3 to 4 percent. Our foreign exchange
reserves are sound. It is not going to collapse. But the country does need strong measures
to address the economic ills we are facing. As you are heading the National
Planning Commission (NPC) at this difficult juncture, what will be your focus? My main thrust will be to make the people
feel change in their economic condition. The feeling of change is vital. Those suffering
from extreme poverty must feel the change. There is despair and pessimism in every sector
of life. People are saying that democracy has failed to deliver and that the economic
policies of the last decade have not worked. There is a climate of overall pessimism. My
challenge is to fight that climate and bring some ray of hope. People should not be
dwelling in the past; they should be looking to the future with a glimmer of hope. There is a feeling that an economic
campaign should be initiated together with the security campaign to fight the current
insecurity. What do you think the NPC could do in this direction? Security and development are inter-twined
not only in our country but everywhere. There cannot be development without security and
vice versa. The No. 1 challenge is to get rid of this vortex of security problem and at
the same time to continue development. The top priority of the NPC is to see to it that
development policies are geared towards addressing the security issues. If we begin to
abandon development works in the western or far-western region citing security reasons, it
would only aggravate the problem. It is vital to invest in social sectors like health and
education in such areas so that people will not feel deserted. It is the duty of the NPC
to ensure that security and development complement each other. As general expenditure is said to
exceed development expenditure in this year's budget, to what extent will this affect the
NPC's plans and policies? It is going to affect the overall
development policies and programs. At this critical juncture, we will have to follow
the traditional saying "cut your coat according to your piece". So, we really
have to cut down our expenditures. We cannot scatter resources in every sector. The task
of the NPC is to re-orient and re-focus the policies and programs of the past. The Maoists have been destroying
physical infrastructures of the country. To what extent has this pushed back the country's
development efforts? They are serious impediments to our
development goals. The country does not have enough resources to rebuild those
infrastructures immediately. The total destruction by the insurgents is valued at billions
of rupees. At the moment, the government does not have that much money. Naturally, in a
country like Nepal, the destruction of scarce development infrastructures is very
distressing. It is said that the present mode of
planning is not working and that it needs major revamping. What do you say? Planning means allocating resources for their optimum use. Nepal is in a very critical juncture financially and otherwise. The crucial test of planning lies now. When resources are so limited and our needs are so vast, there is a need to use them very judiciously. The other thing is that after the restoration of democracy we adopted market-friendly and liberalized policies. The role of the government has been reduced to some extent by these policies. In the context of the globalization and expansion of market forces, the role of planning must be re-examined. The traditional function of planning may not work in an economic system where market and private sector have been given important roles. The methods and modalities of the planning system we have been following have to be re-examined in the light of our economic policies. 'Fear Of Economic Collapse Is Misplaced' — BHASKAR RAJKARNICAR BHASKAR RAJKARNICAR is the
chief of the Avenues Advertising Agency. Rajkarnicar is also associated with the
Federation of Nepalese Chamber of Commerce and Industry (FNCCI) - the private-sector
umbrella body of Nepalese businessmen. He spoke to SANJAYA DHAKAL on the present economic
condition of
How do you find the present
condition as a person involved in business and trade? The media trade, in particular, in which I
am closely involved has come down by 20 to 30 percent. But again, it is not total
deterioration. It only reflects how other sectors of economy are faring. The extent to
which other sectors suffer is the extent to which we suffer, as advertisement and media
expenses depend on growth. However, I believe this is a temporary phenomena. If we talk
about trade in general, definitely the trend is negative. Once again, I believe that not
all is lost. The sectors like tourism, banking, export and other services are feeling the
heat. The important thing is that we need not get frustrated because these sectors are not
showing blanket decline. There have been ups and downs. Do you think the economy could
collapse soon if things do not improve? I don't think so. The collapse of economy
in any country depends on beliefs and confidence of businessmen. If businessmen have
confidence in the market, the economy would not collapse. We do have huge liquidity
crunch, which shows eroding confidence. Likewise, other government policies have added to
this problem. I think this is not the time when government should be introducing stringent
measures like Voluntary Disclosure of Income Scheme and things like that. This is the time
when government should be building on businessmen's confidence, not hurting them. Such
strong measures can wait. If the government does continue with the wrong policies at this
juncture, there is a possibility of big accident. However, I still think that if the
government and the private sector boost the confidence of businessmen, no such accidents
would occur. What is the present state of mind
among businessmen? Definitely, they do not have a positive
mindset nowadays. They are not confident enough to expand their business. They are simply
surviving. Because of absence of peace, activities have come down. But our economy is not
that big that it would collapse. We eat rice and dal and we will continue to do that
unless the country turns into a desert. So the fear of economic collapse is misplaced.
True, there has not been much new investment. But still you can see restaurant chains
opening up. This shows there is a survival there. What can the government do at this
juncture, then? The government has to come out with really
good policies. It should not come out with wrong policies at this time. Besides, the
government had promised relief packages, which it did not deliver. Why did it have to
announce relief package if it had no intention of delivering it. Instead, it could have
come up with some practical packages. Practical packages like cutting down taxation should
be introduced. The economy is in a very sensitive point now and no drastic measures should
be introduced. I think the best bet will be to allow the economy to survive and recover
itself by building up business confidence. How is the destruction of physical
infrastructures hurting the investment environment? Well, it would give very negative message
to investors - foreign or domestic. Obviously, nobody would be investing at a time when
such destruction is going on. What is the FNCCI doing to address
these problems? The FNCCI is doing very little things
though it could have done a lot. I think the FNCCI is also hit psychologically. It had
been facing several problems and had been telling the government to do this and that.
There are so many problems before us but the FNCCI is confused about which problems to
address first. I believe it is high time that the FNCCI came out with a fresh perspective.
As the survival of the country itself is at stake, there is no point in harping on
economic problems alone. The FNCCI should now be taking initiatives to give a way out to
the country. It has done what it could to bring to government's notice the various
problems of various economic sectors. Such traditional approaches may not work at a time
when we are facing different kind of problem. Therefore, the FNCCI needs to re-orient
itself to be able to address the present crisis properly. The FNCCI should not be
satisfied with pursuing the economic agenda alone, because future of the whole country is
at stake. n |
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editor: spotligh@mos.com.np |
