 |
||
|
||
COVER STORY |
|
||
|
||
COVER STORY |
ECONOMY With the breakdown of peace
process and eerie prospect of prolonged conflict, the country’s economy is set to
suffer. Two months after the government came out with a budget that relied heavily on
positive outcome of peace process, the authorities now are grappling with the sudden turn
of events that threatens to throw their targets and programs off-balance. The time demands
they adopt prudent policies and spearhead with reforms to minimize the impact of
insurgency. Faced with internal war situation, the Nepalese financial pundits now need to
come up with revised programs to cope with the state of the affairs. By SANJAYA DHAKAL The abrupt end of the seven-month-long
ceasefire on August 27 when the Maoists unilaterally walked away from the peace process
has thrown cold waters over the government’s development targets and threatens to
severely retard the growth dragging this poverty-stricken country further down the path of
regression. However, last one month witnessed Nepal
convulse with not only political upheavals but also saw it enter the World Trade
Organization (WTO) and the Poverty Reduction Growth Fund (PRGF) of International Monetary
Fund (IMF). Despite acutely adverse internal situation,
Nepal was patted on its back by international financial community for its commitments
towards reforms. In normal times, these two events would
have been enough to make any finance minister glow with pride - but not now. Amid a pall
of gloom, the veteran economist-turned-finance minister Dr. Prakash Chandra Lohani is
extremely worried with the prospect.
The government has formed a 12-member
team headed by Dr. Lohani to counter the negative impacts of insecurity and violence on
industry, commerce and tourism sectors. Alarmed by the swiftly unfurling situation,
the government called a meeting of major donor agencies at the Finance Ministry on
September 10 where minister Dr. Lohani pleaded the donors for budgetary support. He told
the donor community that though the fundamental financial indicators like reserve of
foreign exchange, government’s financial state, export are positive, the risk-factor
has multiplied many fold after the derailment of peace process. The donor community, on
their part, have supported government’s efforts and assured it of budgetary support
also. But their emphasis on secure environment was not lost. “If the peace does not prevail and
conflict continues to escalate, then we simply cannot predict what will happen. Even to
achieve growth rate of 3.5 to 4 percent, some sort of peace will be the pre-requisite. But
our preliminary assessment indicates we may be able to reach that much growth. However,
there could be various scenarios,” said Dr. Shankar Sharma, vice chairman of National
Planning Commission (NPC). (see box) Brakes On Development The government’s earlier efforts at
development in the conflict-torn regions have not been able to deliver remarkable results.
Before the January 30 ceasefire, the government had enforced the Integrated Security and
Development Program (ISDP) with the aim to take development in the insecure regions
together with security. This program was to be redesigned as Integrated Peace and
Development Program (IPDP) to minimize the role of security forces and to ensure the
presence of the state in the violence affected areas. The program was to be implemented through a
joint funding of the government and donor agencies. The government for implementing IPDP
had even allocated US$ 2.7 million for the current fiscal year. But the turn of events has
marred this program as well. In this year’s budget, which was
presented two months ago, the government had apportioned around US$ 87.3 million for the
development of the infrastructures and socio-economic upliftment of the people of the
mid-west and far-west regions - a rise by 34.3 percent compared to the last year. The
significant rise in the budget was seen as the government’s desire to extinguish the
violent rebellion that was being fueled by the lack of development.
In the aftermath of August 27
withdrawal of truce, the officials are worried that they may not be able to utilize the
funds as desired. “With the new situation in the country, we fear that the resources
may not be utilized as we would have liked,” said Dr. Shankar Sharma. The budget had proposed US$ 67.5 million
for the road and transport sector out of which US$ 18.3 million was set aside for the road
development in these two regions alone – an increase by whopping 214 percent compared
to the previous year’s budget. “In the prevailing situation, the
government will not be able to release the funds for development. Even if it does release
the fund, the situation of insecurity will not permit it to utilize them,” said Dr.
Narayan Khadka, a well-known economist and former vice chairman of NPC. “The effect
on industrial, manufacturing and tourism sector will be the most profound while the
agriculture sector may not be that much affected,” Dr. Khadka added. Buoyed by the peace process, the government
had slashed the security expenses by US$ 7.84 million compared to the previous year and
earmarked US$ 192.3 million for this purpose. The total annual budget amount was US$ 1.33
billion. “Fortunately, the budget had the foresight of increasing the miscellaneous
budget of the Finance Ministry to meet the supplementary budget in emergency need.
Likewise, the fund of US$ 23 million, which was set aside for holding elections, could
also be used as contingency fund,” said a senior official at the finance ministry. Plan B The budget this year had heavily relied on
the successful outcome of the peace talks. With peace pushed to the background, the budget
targets will be hard to meet, concede officials. Dr. Lohani had estimated that the economy
would grow by 4.5 percent this year – a sharp improvement compared to the 2.4 percent
growth in the fiscal year of 2002/03 and negative 0.5 percent growth in 2001/02. In fact,
Dr. Shankar Sharma had gone a step ahead to declare that in the ‘best case
scenario’ (read complete peace), the growth could reach six percent. However, with the situation reversing, Dr.
Sharma has said that even achieving 3.5 to 4 percent growth could be an uphill task.
Rajendra Khetan, a renowned industrialist, makes a more grim comment. “We are heading
towards a financial insurgency now. If the situation does not improve we may not be able
to achieve the growth rate as projected. Rather, we could remain static or even grow
negatively,” he said. So, to be able to utilize resources, the
government has decided to switch gears and is now embracing concepts like Quick-Impact
Programs, using NGOs to deliver development and mobile service. “The government is using two channels
to address this challenge (of resource mobilization) – one is the utilization of NGOs
and users groups in small projects like drinking water, irrigation and so on. Another
channel is to decentralize the resource mobilization and hand over resources to Local
Development Officers (LDO), who, in turn, will distribute the fund to users groups,”
said Dr. Sharma. Special Package The government, in an effort to soar up its
image, has announced special package emphasizing on mobile service, reconstruction and
corruption control. Kamal Thapa, minister for Information and Communications and
government spokesperson, unveiled the package and said the government has already enforced
it from September 16. Through mobile service, citizens living in
remote and outlying parts can avail of all kinds of government services like getting
citizenship, health services, local development facilities and so on at their village
itself. The government hopes that given the difficult geographical terrain and scattered
settlement, the mobile service would be most effective. Such teams would be headed by chief
district officer and chiefs of other district-level government offices and they would
visit at least one village of one constituency every month. The new package also stresses
on starting reconstruction of infrastructures destroyed in the last seven years of
insurgency. The reconstruction would be initiated in a planned manner to build electricity
facilities, telecom towers and other buildings to be used by local bodies, among others. Likewise, the new package also includes a
13-point strategy to deal with corruption. The strategy aims to make administration
transparent and responsible, announce code of ethics for ministers and assistants and
enable bodies to deal with corruption cases. Grim Figures The latest report released by the Nepal
Rastra Bank (NRB) about the financial state of the country during the last fiscal year
2002/2003 states that the period witnessed maximum trade deficit with Nepal’s largest
trading partner India. The deficit increased by whopping 80.7 percent. The reason for that
was given as imposition of quota by Indian government on major Nepalese exportable items
and growing India-centric imports. There was 27 percent increase in the
imports from India reaching the total value of Rs 56.11 billion. The overall imports had
increased by 16.9 percent. In the same period, the exports to India grew negatively by 7
percent. The goods worth Rs 26.91 billion were exported to India in the period. The
overall exports had grown by 4 percent to reach Rs 49.24 billion. Likewise, the report also stated there had
been sharp rise in inflation especially in urban areas reaching up to 6.1 percent.
However, the status of foreign exchange reserve is impressive. The total forex reserve has
reached Rs 110.39 billion – out of which Rs 99.16 billion consist of convertible
currency. This figure is 23.5 percent higher than that of the previous fiscal year. The sagging investor confidence has
resulted in the drop by 41 percent in the investment sector last year. Compared to the
fiscal year 2001/02 the investment, including internal and foreign, dropped by 41 percent
in the fiscal year 2002/03, according to Department of Industry. There was total investment to the tune of
US $ 310.7 million in the year 2001/01, which dropped to US $ 183.3 million the following
year. The number of investment in new projects dropped by 22 percent in the period. The
drop in investment was witnessed in construction, trade, tourism and service sector. This
has led to worsening of situation of economic slowdown in the country. “The investment has decreased mainly
due to environment of insecurity and the emerging global trend,” said Baikuntha
Bahadur Adhikary, senior official at the Department. According to Nepal Rastra Bank Governor Dr. Tilak Rawal, in the 1990s, foreign investment worth US$ 6 million used to come to the country yearly, but the figure had declined to less than US$ 4 million in recent years. He said the national economy was being severely affected by non-financial factors mainly the insurgency and lack of law and order. Besides, incidents that could seriously
thwart investors have also occurred. Last month the Maoists set fire to the Everest Paper
Mill at Mahendranagar of Dhanusha district in central Nepal on August 24 night and
kidnapped three of its employees. Machines worth millions of rupees were gutted. Hundreds
of Maoists forced the door open, entered and set the mill on fire. The rebels sprinkled
kerosene and started the fire while powerful grenades were detonated at the big machines,
workers say. Before leaving after the rampage, the rebels kidnapped chief manager Krishna
Kumar Tederibal, senior production manager Devendra Garg and gate-in-charge Ramesh
Chandra, who were all Indian nationals. The factory used to produce 30 to 35 tons of paper
daily and used to employ hundreds of workers. A big cotton fabric mill was also destroyed
by the rebels two weeks ago in Thimi, Bhaktapur resulting in losses worth millions of
rupees. In the past, the rebels had also attacked
bottling plants of Coca Cola company in Kathmandu as well as Bharatpur, a city in central
Nepal. Likewise, incidents of forceful extortion from businessmen have been frequently
reported. The sharp decline in investment is feared
to spill over to the already unenviable situation of unemployment. The 1.5 million people
of working age out of total population of 23 million currently stay unemployed. Analysts
have continuously said that the burgeoning idle youth population provides breeding ground
for insurgency. Desperate to lure investment, the
cash-strapped government is preparing to reach into an investment security and promotion
agreement with India – Nepal’s prime foreign investment-generating country.
India had been urging for such agreement for a long time to guarantee security to its
investment in Nepal in view of conflict situation in the country. Indian side had been
requesting for such treaty since the rebels attacked a plant of Colgate-Palmolive –
an Indian investment, five years ago. Nepal has already signed similar agreements
with countries like France, Germany, Mauritius and United Kingdom. Nepal draws Foreign
Direct Investment (FDI) basically from countries like India, the United States, South
Korea, Britain, Germany among others. “Our country never had to face such a
large number of problems like now and there never was such a pressing need for urgency to
tackle all these problems together now.” This was what Finance Minister Dr. Prakash
Chandra Lohani said when he gave his budget speech for the fiscal year 2003/04. With the end of peace process, Dr. Lohani,
a well-known economist and politician who also was the chief negotiator of the government
with the rebels, now faces an even more uphill task. “The Business-As-Usual Attitude
Will Work No More” — Dr. Shankar Sharma
Dr. Shankar Sharma is
the vice chairman of National Planning Commission (NPC). He has been closely associated
with top-level economic planning body for the last one decade and is known as one of the
most influential planners the country has known. He spoke to SANJAYA DHAKAL on various
issues related to current situation of insecurity and its impact on economy. Excerpts: The government had introduced
budget relying much on successful outcome of peace process. Now that the peace process is
in tatters, do we have plan B? The plan B, basically, is about what
modalities we will now have to adopt to carry forward our development programs. One
modality is that we have decided to provide special security to mega projects like
middle-Marsyangdi, Melamchi or even Surkhet-Jumla road. If these projects are delayed or
obstructed, the country will have to bear heavy losses. So, we have beefed up security to
them since last one year. Another challenge is that we need to disburse funds and
resources to villages. Unless resources are disbursed there, the income-generating
activities, employment and even supplies of essential items would suffer. The government
is using two channels to address this challenge – one is the utilization of NGOs and
users groups in small projects like drinking water, irrigation and so on. These kind of
efforts known as quick-impact programs will be expanded. Another channel is that the
government decentralized the resource mobilization and handed over resources to Local
Development Officers (LDO), who, in turn, distributed the fund to users groups. This
modality was used in the last six months even for re-construction efforts. The government
is planning to continue this modality even this year. Furthermore, the government has also
decided to provide service through mobile teams. These teams will cater to services like
distributing citizenship, passport and so on. The team will also address issues of health
and education. I would also like to say here that in the last four years, the pro-poor
expenditure has increased by four fold. We believe that these kinds of activities are
immune to violence. Could you elaborate about the
quick-impact programs? This is a new program. This program has
been designed to provide relief in a short term. It is also related to income-generating
activities. While we have been using programs like Food For Work mostly for road
construction, this program will also look into building of small infrastructures like
drinking water, irrigation and others. We hope this program will also help in increasing
productivity in rural areas by creating employment and income-generating opportunities.
Right now, we have allocated a small fund for this program. But donors have shown interest
and hopefully, this will expand. The pilot projects of the quick-impact programs have
given hundred percent successful results. So, I don’t think funding will be a problem
here. And then, we are operating the Poverty Alleviation Fund. Presently, the government
has allocated Rs 400 million to this fund. But we have already received commitments for
US$ 15 million to this fund – it depends on whether we can utilize the fund. You had said two months ago that in
best-case scenario we could even achieve 6 percent growth rate. Apparently, you will have
to revise that estimate. Now, what do you foresee? If the peace does not prevail and conflict
continues to escalate, then we simply cannot predict what will happen. Even to achieve
growth rate of 3.5 to 4 percent, some sort of peace will be the pre-requisite. But our
preliminary assessment indicates we may be able to reach that much growth. However, there
could be various scenarios. One thing is clear, to meet the challenges before us, we will
have to work hard. The business-as-usual attitude will work no more. Nepal is set to enter the PRGF
program of International Monetary Fund (IMF). What will that mean to our economy? We can enjoy some basic advantages from
this. The IMF, generally, looks after the macro-economic stability and financial sector
reforms. The decision to allow Nepal’s entry into its Poverty Reduction Growth Fund
(PRGF) indicates that our performance benchmarks are satisfactory. This will, in turn,
reassure donors as well as investors about Nepal’s financial state. Nepal will also
get US$ 20 million per annum from the IMF. Furthermore, entry into IMF’s PRGF will
make it that much easier for Nepal to latch onto the Poverty Reduction Strategy Credit
(PRSC) of the World Bank, which will provide us US$ 70 million per annum. Most
importantly, this decision will give a positive signal to the international community that
despite adverse security situation, the government here is serious on reforms. What about Nepal’s entry into
WTO? There will be lots of opportunities for
increasing our trade. However, there will be no automatic benefits from the membership. On
issues like tariff-binding, we have negotiated comfortably and there will be no problem to
meet our commitments. We have decided to open around 66 service sectors. A lot will depend
on how we will move forward in the days to come. The government also has started
handing over schools to local community. Can you tell us something about this program? We have handed over more than 450
sub-health posts, in 12 districts, to the local community. More than 350 schools have been
similarly handed over. Our target this year is to hand over 600 schools but we are
confident that we can hand over around 1000 schools in the period. This program is
assuming encouraging pace. And our quick assessment of these programs has also shown
positive results. You had said that the government
has plans not only of reconstruction but that of massive rebuilding. Could you shed some
light on that? Yes, two months ago when we discussed about
reconstruction, we thought that instead of merely talking about reconstructing the
destroyed infrastructure, which totals Rs 3 billion in monetary value, we should seize the
opportunity to launch massive national rebuilding process. We have already identified
areas of our focus if we are to address issues that are said to be the root causes of
conflict. Therefore, we have put forth an agenda for nation rebuilding. And we are
preparing on that front. We are also preparing the donors for such massive rebuilding.
They have indicated their full support. The government had not increased
the security budget this year, but many think that the expenses will soar since conflict
has resumed. Will the government be able to meet the rising security expenses? Our regular budget will not exceed. This
concern is also shared by others. Donors have requested that they wish their budgetary
support is not diverted to meet regular expenditure, particularly, the defense
expenditure. In our analysis, we have found there are items in our regular expenditure
that can be used for trade off. There is adequate cushion. |
Send your feedback to the
editor: spotligh@mos.com.np |
