 |
||
|
||
COVER STORY |
|
||
|
||
COVER STORY |
ECONOMY With the cease fire in the
country, there is a renewed hope that the faltering economy will once again pick up.
Economists, planneRs. and businessmen have all agreed that peace is the back-bone of any
economic development. The negative balance of payment, stagnant revenue mobilization, bad
news in both the export and import front and the abysmal growth of mere 0.83 percent in
the last year all indicate to major crisis in the macro-economic situation. Immediate
measures to revitalize the domestic industries and major investment in reconstruction are
required to boost the economy in the days to come By SANJAYA DHAKAL When the government and the Maoists
declared cease fire on January 29, Finance Minister Dr. Badri Prasad Shrestha was one of
the most happiest men around. Being burdened with mounting financial problems in the face
of growing insurgency, Shrestha was looking down the barrel of the gun that was waiting to
fire. The cease fire decision for him was akin to somebody taking his hands off the
trigger. But the gun is still there and he is still looking down the barrel. The noted economist-turned-minister
Shrestha had announced a number of policy decisions to improve the ailing economy after he
took over in October. But his team at Baghdurbar were losing in a game that was frequently
disturbed by elements out of their control.
The present government also has
two representatives from the business community. The Minister for Industry, Commerce and
Supplies Mahesh Lal Pradhan is a well-known businessman and the Assistant Minister for
Culture, Tourism and Civil Aviation Ravi Bhakta Shrestha was the president of Federation
of Nepalese Chamber of Commerce and Industry (FNCCI) before being appointed as minister.
Both Pradhan and Shrestha prefer to portray themselves as representatives of business
sector in every public forum they address. Though the cabinet is stacked with
experts of economic field, their challenge is no less. The mounting fiscal deficit,
negative balance of payment, stagnant revenue mobilization, rising regular expenditure and
falling development expenditure all point to catastrophic economic situation. On the face of all-round
deterioration triggered by the situation of insecurity and political instability, the
nation's economy seems to have been sustained merely by remittances sent by around a
million Nepalese workeRs. oveRs.eas. "The cease fire once again
brings light at the end of tunnel. For the economy to move, security plays an
important role. We are happy that a cease fire has been agreed and formal talks shall
begin. Now the goods can move all over the country. People will spend more. Tourists will
come, new sectoRs. will be opened up. These recoveries will definitely help the ailing
economy grow" said Rajendra Kumar Khetan, spokespeRs.on at the Federation of Nepalese
Chamber of Commerce and Industry (FNCCI) ñ an umbrella organization of the private sector
businesses in the country. Macro Economic IndicatoRs. "It is a very desperate
situation indeed. All the fundamental economic indicatoRs. point to crisis," said Dr.
Biswombhar Pyakuryal, a well-known economist (see box). According to the latest
macro-economic situation based on the fiRs.t five months of the current fiscal year
2002/2003 (beginning mid-July 2002)brought out by the Nepal Rastra Bank (NRB), the total
government expenditure declined by 1.9 percent which, coupled with the 6.4 percent rise in
the resources narrowed down the budget deficit. The rate of price rise remained lower. On
the external front, increase in import and decline in export compared with their negative
growth last year widened the trade deficit. The monetary statistics for the fiRs.t five
months showed a Balance of Payment deficit. Gross foreign exchange reserve of the banking
system increased by 1.1 percent to Rs. 105. 6 billion, in mid-December 2002, which is
sufficient to finance merchandise imports of 11 months and merchandise and services
imports of 10 months.
In the same period, the Net
Foreign Assets (NFA) of the banking system declined by 2.5 percent to Rs. 87.6 billion
following the decline of 1.8 percent last year. Major indicatoRs. of the stock market
registered a decline during the review period. The Nepal Stock Exchange (NEPSE) index
slumped by 69.9 points (24.6 percent) to 214.57. Market capitalization of the listed
companies also went down by 16.9 percent to Rs. 33.8 billion. Based on the cash flow data, total
government expenditure declined by 1.9 percent to Rs. 23.3 billion as against a rise of
9.8 percent last year. Of this, regular expenditure increased by 6.6 percent to Rs. 19
billion in comparison to the growth of 14.6 percent last year. The development
expenditure, however, declined sharply by 33.2 percent to Rs. 2.9 billion as against the
decline of 13.1 percent last year. The difficulties in carrying out development activities
due basically to adveRs.e law and order situation and weak overall resource position led
to a decline in the development expenditure. The report from the central bank also
stated that the total non-debt creating resources (revenue, non-budgetary and other
receipts, and foreign grants) increased by 6.4 percent to Rs. 19.7 billion as against the
growth of 6.2 percent last year. Of this, revenue collection, the major source of the
government resources, went up at a slower rate of 5.1 percent to Rs. 17.7 billion compared
to the growth of 7.1 percent last year. The revenue collection decelerated due to the
continued sluggishness in industrial production, tourism as well as other economic
activities. Foreign grants slumped by 50.3 percent to Rs. 562 million in contrast to the
rise of 5.2 percent last year. However, non-budgetary receipts, net, increased by 7.5
percent to Rs. 976 million. The government still suffeRs. from
Rs. 3.6 billion in budget deficits, which it met by mobilizing foreign loans amounting to
Rs. 1.4 billion, issuing development bonds equivalent to Rs. 2 billion and using surplus
of Rs. 18 million from its other accounts. The remaining gap of Rs. 153 million was met
through an overdraft from the Nepal Rastra Bank, the report stated. Export Import Trend In the last two yeaRs., the export of
carpet and garment, two most important exportable items, took a sharp plunge. In their
heydays, the exports of these two items alone raked in Rs. 30 billion worth foreign
currency. But their exports have come down by half at present. In the year 1991/92, the exports of
carpet peaked to the annual export totaling 15 billion rupees. But in the year 2001/2002,
it fell to 6 billion rupees. "There are billions of rupees invested in this sector.
At its peak, 550,000 people were employed by this sector. This has now come down by
half," said A.G. Sherpa, President of Central Carpet Industries Association (CCIA).
(See box) Likewise the fall in the exports of
readymade garment was also astounding. "In the year 2001, the exports fell by 23
percent (compared to previous year) and in the year 2002, it further fell by 22 percent.
Since January 2003, there has been slight improvement. In the year 2000 our total exports
peaked to 14-15 billion rupees. It came down to 10 billion rupees in 2002," said
Udaya Raj Pandey, general secretary of Garment Association of Nepal (GAN). (see box) The garment sector, where more than
six billion rupees have been invested, employed 60-70 thousand people in the past.
However, due to woRs.ening situation, more than half of them have been forced out of job.
Likewise exports of handicraft, too, has slowed down. The experience of Sherpa and Pandey
is corroborated by the data released by the NRB. According to the NRB report, on the
external front, aggregate export further shrank by 14.9 percent to Rs. 19.2 billion
compared to a decline of 5.8 percent last year. Export to India witnessed a reveRs.al this
year as it declined by 25.2 percent to Rs. 10.5 billion compared to the marked rise of
31.6 percent last year. Export to the third countries, which had declined by 5.8 percent
last year increased by 2.1 percent to Rs. 8.7 billion this year. "Presently, both the export as
well as import have declined. If you look at India only, the imports have increased but
the rise in import of goods whose price is rising high in India could spell disaster to
our consumeRs.. The fall in overall import means that the dooRs. of revenue generation,
too, is closing fast," said Dr. Pyakuryal. The NRB report states that the import
witnessed positive reveRs.al in the fiRs.t five months of the current fiscal year.
Aggregate import increased by Rs. 8.8 percent to Rs. 47.3 billion in contrast to the
decline of 7.4 percent last year. Imports of thread, rice, agricultural equipment and
parts, cement, electrical equipment, petroleum products, M.S. wire, rod, tire, tube, steel
sheet, medicine, industrial chemicals as well as other machinery and parts from India
increased. "Ironically, due to rising inflation in India, the prices of these
products are going up and we will thus be importing inflation from India if we do not give
proper attention to this fact," said Dr. Pyakuryal. Due to the prevailing import export
scenario, the trade gap has widened by 34.3 percent to Rs. 28.1 billion as against the
decline of 9 percent last year. The export/import ratio, which was 51.9 percent last year,
went down to 40.6 percent this year. This ratio with India fell sharply to 50.7 percent
from 76.8 percent last year, while the ratio with the third countries fell marginally to
32.8 percent from 33.9 percent last year. "Both import as well as export
is not doing well. The indicatoRs. are fluctuating. To address this problem, we need to
have a stable long term policy. As yet, we don't have export import policy. New concepts
like special economy zone must be established," said Rajendra Kumar Khetan. The Road Ahead Nepalese economy has a difficult path
to traveRs.e in the days to come. To address manifold problems, the government needs to
adopt prudent and far-sighted policies. Although government says that it
expects the economy would grow by between 4 to 7 percent in the coming year, economists
and businessmen do not buy the argument. Dr. Pyakuryal says the estimation is not
reasonable given the current scenario. Khetan, too, agrees with Dr. Pyakuryal. "Only four and a half months
remains for the current fiscal year to complete. Last seven months has been too bad. I
hardly see growth more than one percent," said Khetan. "Definitely, there is a renewed hope
that economy will now regain normal health. But there are some cross-cutting issues that
the government needs to look into in the context of peace regime. The important thing is
to bring out a white paper on the current status of national economy. So, if the
government carefully addresses the priority sectoRs. and this peace situation prevails, we
can expect to have normal economic health by the end of the Tenth Plan. The government
should study the impact of macro economic policies on the social and economic sector and
tailor it to suit the people's aspirations in future," said Dr. Pyakuryal. He says
the negative effects of the bad economy of the last couple of yeaRs. will be felt for many
yeaRs. to come. Khetan wants the government to give
ample attention towards providing industrial security, setting up one stop shops like the
Board of Investment, supporting the manufacturing and tourism industries, doing away with
existing bureaucratic hassles and settling labor related issues in order to create
favorable environment for all round development of the country. Whether the present government will
be able to rise up to the occasion and revitalize the national economy, time only can
tell. 'There Is A Sense Of Relief Now' — A.G. SHERPA A.G. Sherpa is the
president of the Central Carpet Industries Association. He spoke to SANJAYA DHAKAL on the
current state of the carpet industry, a major export item of the country. Excerpts: How are carpet exports doing at
present? Business has declined by 24 percent
compared to last year. In recent months, however, there are signs that the sector is
picking up. How steep has been the decline in
the carpet sector? In 1991/92, it peaked to the annual export
totaling 15 billion rupees. But in 2001/2002, it fell to 6 billion rupees. There are
billions of rupees invested in this sector. At its peak, 550,000 people were employed by
this sector. This has now come down by half. What are the major markets? Germany is our biggest market. It covers
72-75 percent of total market. The USA is another important market, covering 17 percent. Don't you think there is a need to
diversify the markets? Absolutely, we have taken many steps to
diversify our market. We are trying to export carpets to EU countries. But we have to
compete with neighboring countries where the cost of production is lower. As we are a
land-locked country, our transportation cost is higher. Besides, we also do not want to
compromise on quality. We use quality dyes although they are costly. What steps have you taken to
improve the export volume? Recently, we took part in Domotex trade
fair in Hannover, Germany. There was a positive response in that fair and we expect our
export volume will pick up. Likewise, the government should mobilize its foreign missions
to promote our products overseas in an institutional and sustainable manner. The government is observing 2003 as
export year. How do you see the initiative? It is positive to see the government giving
attention to the export sector. But it has to translate its commitment into practice.
Still there are many hurdles for industries like ours. Will the cease-fire have any impact
on the carpet sector? There is relief that the environment for
the business has improved. But there is a long way to go yet. 'There Has Been A Slight Improvement' — UDAYA RAJ PANDEY Udaya Raj Pandey is the
general secretary of the Garments Association of Nepal. He spoke to SANJAYA DHAKAL on key
issues facing the garment sector. Excerpts: How has the cease-fire affected the
garment sector? Definitely, any hope of peace is welcome.
The situation of insecurity had really hurt us very much. Fortunately, there are
indications of slight improvement in the garment sector, which had been in a free fall in
the past couple of years. In the last two months, export of readymade garments has picked
up. You recently went to the US as a
member of Nepalese delegation to promote garments there. How fruitful was your mission? We had gone there to ask the American
government for duty free and quota free access to Nepalese garments. We met a number of
important officials there who were all very sympathetic to our cause. Particularly, US
Senator Dianne Feinstein from California even drafted a bill to help us gain duty free
access. But we felt we need to have a permanent lobbyist there in Washington. It is time
our government hired a professional lobbyist to further our cause. Though our visit was
successful, we feel there needs to be sustained follow-up to build on that. How dramatic was the garment
sector's decline over the last couple of years? It was pretty dramatic. In 2001, exports
fell by 23 percent (compared to previous year) and in 2002, it fell by another 22 percent.
Since January 2003, there has been a slight improvement. In 2000, our total exports peaked
to 14-15 billion rupees. It came down to 10 billion rupees in 2002. What is the scale of investment in
the garment sector? More than six billion rupees have been
invested in this sector. At its height, the garment sector alone employed 60,000-70,000
people. Now more than half are out of work due to the slowdown. Many factories have closed
down as well. Where is your biggest market? America is our biggest market. It consumes
85 percent of our products. We are also trying to diversify our exports to European
countries. But since we have been exporting readymade garments to the USA for the last 15
years, it is still our prime market. Besides, there is ample opportunity to increase our
exports to the USA. At present, 100 countries export garment products to the USA, whose
domestic industries supply half of its total demand. As far as Nepal is concerned, we
occupy a meager 0.01 percent of the total garment market of the USA. 'Our Economy Will Not Be Able To Achieve
Anything Even If Peace Prevails' — BISWOMBHAR PYAKUREL
BISWOMBHAR PYAKUREL,
a prominent economist, spoke to SANJAYA DHAKAL on the present situation of nation's
economy. Excerpts: How do you see the overall economic
scenario at present? The situation is not good. The economic
indicators of the first six months of the current fiscal year 2002/2003 show that
development expenditure has declined by 32 percent, whereas the regular expenditure has
gone up by 7 percent compared to the same period the previous year. Revenue generation has
also declined from 7 percent last year to 5 percent this year. The balance of payment is
negative. The exports to India have dramatically reduced by 25 percent and imports from
India have increased by 13 percent. The alarming thing is that the country's trade deficit
with India has increased to 34 percent. On the other hand, the external assistance, too,
has decreased by almost 50 percent compared to last year. What about the inflation rate? There are reasons to worry. Reports say
that inflation is rising in India. Basically, the price of agriculture products is rising
and the annual wholesale inflation rate has escalated due to rise in the price of
manufactured products as well. This has a direct bearing on our country. The price of very
things we import is rising. So, we will be importing the inflation from India. Inflation
in India, at present, is around 5 percent whereas it is less than 2 percent in Nepal.
Hence, I see more difficulties for our national economy in the coming days. What we could
do is revitalize our domestic industries so that we have to depend less on the imports.
Besides, increase in inflation also means increase in interest rates. So, it restricts the
possibility of further cut in interest rate, which in turn will affect the lending.
Subsequently, investment will also come down. So, not only the domestic economic
indicators but the Indian indicators, too, does not look good. We must start giving
emphasis to promoting industries the demands of whose products exist within our country.
For instance, we import 60 percent of total banana consumed here from India. What
restricts us from producing banana on our own? The government has a role here. In a
country where market forces have not grown well, talking too much of a market economy
would be doing injustice to our people. As an economist, what are your
hopes and expectations from a permanent peace? Definitely, there is a renewed hope that
economy will now regain normal health. But there are some cross-cutting issues that the
government needs to look into in the context of peace regime. The important thing is to
bring out a white paper on the current status of national economy. Actually, it was in the
period of 2000 and 2001 when our economy suffered most. It was when the major economic
indicators began to show dismal and even negative outlook. Fiscal year 2001/2002 could be
termed as disastrous for national economy. When we developed the Tenth Plan, we have
recognized last two years as base years. But these very years eventually proved to be the
weakest ones in the history of Nepal. I believe we have yet to fully feel the impact of
these dismal years for at least coming 2 to 3 years. So, if the government carefully
addresses the priority sectors and this peace situation prevails, we can expect to have
normal economic health by the end of the Tenth Plan. What should be the immediate
measures on the part of government, then? First of all, we should accept that the
roots of prevalent political instability lie not only in politics but also in economy. For
instance, the average incidence of poverty in the country is 38 percent. But this average
jumps to 70 percent if we consider only those districts where the Maoist insurgency has
really taken hold. This shows the disturbing and dramatic income inequality. Though the
per capita food production increased, the government could not guarantee food security.
The per capita foreign assistance in Nepal is quite high in this region but the aid
utilization is low. The government, therefore, should study the impact of macro economic
policies on the social and economic sector. How do you find the export and
import trends in the last few years? Both export as well as import declined. If
you look at India only, the imports have increased but in the rise in import of goods
whose price is rising high could spell disaster to our consumers. The fall in overall
import means that the doors of revenue generation, too, is closing fast. Last year, the economic growth rate
was said to be 0.83 percent. How much would the economy grow by in the coming year in case
peace prevails? We need to correlate between GDP and
poverty to arrive at such prediction. But looking at the present trend, I think our
economy will be able to achieve nothing even if the peace situation remains. The
government has been boasting that the economy would grow by 7 percent if the situation
improves and would grow by 4 percent if it worsens. But this looks exaggeration to me.
There is no way we can reach 4 percent growth rate if the situation worsens. Such
estimates are neither reasonable nor professional. I think the government needs to
re-estimate the Medium Term Expenditure Framework, based on which the government had made
projections for revenue generation and resource allocation. Apart from that the government
needs to quantify in monetary terms the cost for reconstruction and rebuilding of
destroyed infrastructures as soon as possible. |
Send your feedback to the
editor: spotligh@mos.com.np |
