Cover Story (Spotlight Weekly)

NEPALESE ECONOMY
Alternatives For Survival

Despite huge earnings from remittances, carpet, garment and tourism sector, Nepalese are yet to invest their earnings in the industrial sector. In a country where 86 percent of GDP is spent on consumption and only 14 percent as savings, the sustainable economic development is a big challenge. The achievements made in the export sector including the foreign employment during the past two decades changed the habit of consumption rather than injecting the culture of savings and/or investment. Past experiences have indicated that more the money Nepalese earn, higher the volume they spend on consumptive products. As long as the habit of consumption continues to dominate, boom in certain sectors like foreign employment would not provide long term support to sustain the economy

By KESHAB POUDEL

Almost all sectors in Nepal collapse after they reach a certain height but the country is yet to develop strategy for the sustainable economy. Following a recent assault against manpower companies by mysterious elements, the country’s burgeoning sector is in the crisis again.

“Of course, remittances increase the consumption pattern but it has virtually zero contribution in the investment. One of the important aspects of remittances is that it helped to create micro-economic stability,” said T.R. Basyal, an economist with Nepal Rastra Bank. “Since the remittances have significant contribution in the micro economic stability, it should not be damaged.”

This is not for the first time when the country’s burgeoning economic sector faced such turmoil. In the last five decades, there were a series of similar crashes and recovery. One of the important characters of Nepal’s economy is that it has been able to quickly search for alternatives after the collapse of a burgeoning sector.

Rice : Better yield required

“Whatever the panicky crated in the economic sector, Nepal’s economy has shown survival instinct searching new alternatives whenever there is crisis in one sector. Nepal’s economic growth has been affected by such crash but the country has shown instinct for survival,” said an analyst.

There has been a tendency of creating panic among the people following a crash in any of the booming sectors. From economists to politicians, all consider such periodic crises as total collapse. Few decades ago, when Gurkha recruitment was downsized, people predicted that Nepalese economy would not survive without it. Then came the carpet boom and when it collapsed, there were similar predictions. The tourism and garment have also passed through similar stages. Following the recent assaults on manpower agencies by mysterious elements, there is a sense of fear in the minds of economists and scholars that the Nepalese economy would implode without the support of remittances.

“We are aware about the role of remittances in the national economy. The government is sending high level delegation to Arab worlds to open more market to Nepalese laborers,” said deputy prime minister Bharat Mohan Adhikary at a recent interaction.

Contribution of Remittances

According to the recent data released by Nepal Rastra Bank, Nepal’s central bank, the total foreign exchange receipts in the first 11 months of the fiscal year 2060/61 (2003/04) was Rs. 217.1 billion and the contribution of remittances was 25.5 percent equivalent to Rs.55.3 billion. The country received Rs. 49.8 billion (23 percent) from exports and Rs.16.1 billion (7 percent) from tourism sector. Rest of money is coming from foreign aids including loans and grants. Nepal received Rs.36.8 billion in the year 1999/00, Rs.47.2 billion in 2000/01, Rs. 54.2 billion in 2002/03 in the form of remittances.

As remittances have made important contributions, the fluctuation in the level of remittances received will have a long-term implication in the economic sector, particularly in maintaining the micro-economic stability.

“Growth in all sectors is periodic. What is required is to consolidate the achievements. Had we sustained the boom in different sectors in the past, the country would have strong economy now,” said Nara Bahadur Thapa, an economist with the NRB. “We have seen spontaneous growth of certain economic sectors and there were sudden crashes. Our economy has never taken off. The current strategy of temporary adjustment needs to be changed.”

In the early 1990s, the carpet industries had flourished in such a manner that there was a rush for the investment in the sector. Likewise, boom in the tourism sector also marked another phase of economic development. Until December 1999, the number of tourist arrival was about half a million. Unlike other sectors like foreign employment, carpet and garment, tourism sector is a one, which needs to be consolidated for long-term.

Case of Foreign Employment

Garment factory : Downhill trend

Foreign employment is just a temporary phenomenon. Since Nepal has excessive manpower, which is not absorbed by the agriculture sector and industrial sector within the country, this sector emerged as a viable temporary alternative for Nepal to make up the loss bearing from the crash of carpet export.

Nepal will need its own manpower in case of industrialization and boom in agriculture sector. If these two sectors grow, they will absorb Nepalese manpower and there will be no need to send any worker abroad for the work. “At a time when the country cannot offer employment opportunity back home, the foreign employment is the best alternative. But we cannot rely on this sector for too long and we must invest the money earned as remittances in the productive sector,” said another expert.

At present the remittances also have rural linkages. This is second major source of money after the agriculture in rural areas. Remittance money has penetrated the villages and inner parts of the country. A large majority of 700,000 youths working in foreign countries are residents of rural areas.

With the assaults against the manpower companies by mysterious elements and temporary halt in the process of sending workers abroad, the country’s flourishing economic sector has received a big jolt. Since remittances remain a major sector supporting and maintaining the micro economic stability, any disturbance on this sector will have overall negative impact on national economy.

“We used to send 300 people a day in different parts of the world. Since last week, this has totally stopped. If we cannot send manpower abroad, where do they get employment back home,” said Nirmal Kumar Gurung, president of Nepal Association of Foreign Employment Agencies (NAFEA). “It will have a major set back to Nepalese economy.”

Records show that remittances from Nepalese working abroad have grown tremendously - larger than the value of merchandise exports. Thank to the remittances, the gross official reserves remained high.

Isolated Rural Population

Overseas Job Seekers : A Good alternative

According to the World Bank’s Nepal Country Assistance Strategy 2004-2007, despite improving economic performance during the 1990s in which per capita income growth increased to about 2.5 percent, Nepal remained extremely impoverished. Although the most recent poverty estimates are rather outdated and comparability among different poverty estimates is questionable, it is possible to draw some broad conclusions regarding poverty trends over the last few decades.

The report reveals that the absolute number of poor in Nepal has increased since the mid-1980s; the distribution of income has become more unequal throughout the country.

With approximately 85 percent of the total population living in rural areas, poverty is largely a rural phenomenon in Nepal – a rural poverty incidence of 44 percent compared to 23 percent in urban areas. Of the country’s ecological regions, poverty in the mountains, at about 55 percent, is significantly above the national average, as it is in the more remote mid-and far-western districts (many of which are controlled by the insurgents) where poverty is as high as 70 percent.

While there have been noticeable improvements in human development indicators in recent years, they are still quite low and show significant urban/rural and geographical variations. There has been some progress in reducing gender disparities – e.g., life expectancy, literacy levels and school completion.

As long as the recovery in the manufacturing and exports and stronger agriculture performance and productivity is achieved, and higher investment, and the medium term growth in Nepal, is difficult to attain.

The recent economic growth has been in non-agricultural sectors, leaving behind the majority of Nepalis living in rural areas who depend on their farms. After growing at a rate of 5 percent per year during the 1990s, real GDP fell in FY 01/02 primarily due to decline in manufacturing and tourism.

Reducing the poverty in Nepal is not simply a matter of raising investment and growth rates. Over the past few decades, Nepal achieved good rates of economic growth and investment, with macroeconomic stability. However, inequalities appear to have increased and most Nepalis living in rural areas have not seen improvements in their incomes or living standards.

Nepal Country Assistance Plan of Department for International Development (DFID) states, “With an average per capita income of US$ 250 per annum, Nepal is very poor by any standards. There are huge differences between rural and urban areas. In the Kathmandu valley poverty rate is only 4 percent but in rural Nepal it is ten times higher. It is even more severe in the most remote regions (72 percent in the Mid and Far West). There are also large income disparities related to gender, caste and ethnicity. Such disparities are not confined to economic factors alone. There are significant regional inequalities in Human Development Indicators. Furthermore, HDIs for rural areas are about 30 to 40 percent lower than those for urban areas.”

“As elsewhere, reducing poverty depends, in part, on economic growth, macro economic stability and a good investment climate,” writes report. “Most of the benefits from the development efforts (and public expenditure) in the past four decades have accrued to the Kathmandu valley and surrounding districts and few urban centers. The lack of effective redistribution mechanisms means that the rapid growth on non-agricultural activities has mainly benefited urban areas. Most of the public interventions undertaken in the past have failed to stimulate rural growth.”

Stagnant Agriculture Growth

Carpet factory : Steep decline in business

Despite the potentials and possibilities to increase irrigation facilities, Nepal’s agriculture is still relying on the monsoon rains. The weather still plays determining role in the annual production. In case of favorable rainy season, the country’s economic growth results positive. If the weather is bad, the economy growth will suffer.

According to Economic Survey (2003/2004), in the year under review, weather in the rainy season was favorable and it was normal in winter. Favorable weather in the rainy season contributed to higher yield of crops in both hills and the terai.

Irregular rainfall and lack of irrigation facilities have adversely affected agricultural production resulting in the low growth. As imports have also somewhat rebounded, the current account balance recorded a slight deficit (about 1 percent of GDP) in FY 02/03.

Although remittances and exports of other merchandise products play important role, they are yet to have any impact on the overall economic situation of the country.

“Any adverse impact in monsoon may have far reaching consequences. If monsoon is bad, nothing can prevent the economy from crashing,” said an economist. “It is still agriculture in the Nepalese context that determines the overall growth.”

Opening Up Economy

Vegetable Market : Commercializing the agriclture

With the opening up of Nepalese economy, the country has seen many ups and downs in the sector. The boom changed the habit of consumerism rather than ushering in the practice of saving and investment. And a large number of rural populations are yet to integrate in sharing the benefits.

As Nepalese have started to send remittances from different parts of the world, the pattern of consumption in the urban areas has drastically changed. Since more than half a million of population are employed in foreign countries, it helped to increase spending in the consumption.

Many new sectors have supported Nepal’s economic development process from time to time. However, no single sector could be sustained for a longer period of time like that of agriculture.

The crash in foreign employment sector, many believe, would also bleed the economy. The attacks on the manpower business, economists say, will have effect in the consumption rather than total investment.

More the money is pumped into the national economy and more the money the large number of population will have, more will be spent on consumption. When the country does not have any other industrial sector for investment, consumption is the only way to spend the money.

Consumption of Indian Goods

Sacks of rice : Need to envolve from subsistence economy

Interestingly, a lion’s share of the money earned from remittances is used up in consumption. A typical Nepalese after returning from abroad likes to invest on building home – which not only shots up real estate values but also creates demand for construction materials like cement, rod etc – as well as on consumer goods. And almost 60 percent of his spending is done while buying Indian goods as the latter occupy the biggest share in the Nepalese market.

Any economic slowdown in Nepal will reduce the purchasing capacity of Nepalese. The reduction of consumption capacity will ultimately affect Indian companies. More income the people have, more the consumption of Indian products.

In the last five years, the imports of all kinds of consumptive goods from India have increased tremendously creating serious problems on balance of payments with India. From machinery to vegetables and fruit and other consumer items like cement, iron, clothes, the demands of such products is rising in Nepal.

From motorbikes to motorcars and other big machineries, Indian products have high demand. In the last few years, Indian vehicles and motorcycles continue to replace Japanese vehicles. They have even been able to thrive in the competition. Nepal’s economic boom also benefits the Indian economy as the money Nepalese are earning through the hard labor is spent on buying Indian products.

According to the recently published National Wholesale Price Index by Nepal Rastra Bank, imports of transport vehicles and machinery goods increased by 5.3 percent compared to 1.4 percent in 2002/2003 and -0.5 percent in 2001/2002. Nepal imports Rs.81.651 billion rupees worth of products from India whereas Nepal’s export to India is worth Rs.31. 244 billion. Nepal has a total Rs.50.4 billon trade deficit with India. India shares 59.3 percent of total export of Nepal whereas shares the total of 58.8 percent of imports.

Nepal’s overall economic loss means the loss to India also since Nepal’s dependency on India on both the exports and imports front is rising. Remittances support the consumerism but it also supports the micro-economic stability.

The remittances has ushered in a new wave of consumerism as one can see flourishing restaurant business, real estate, housing and markets, vehicles and cars. However, there has been no investment in industrial sector.

Subsistence Economy

A big hotel : Sound infrastructure

Although underdeveloped economy has many disadvantages, it has also some advantages at the time of crisis and turmoil. Despite frequent general strikes and disruption of the economic activities, Nepalese people in general are yet to feel the heat.

Whether some parties call five-day bandh, three-day bandh, one-day bandh or even weeks long blockades, a large number of rural population do not even feel its implications. In a developed economy, disruption merely in the power supply for a short period of time could also create a havoc causing serious economic setback. As a result, in developed countries, no political party can imagine to disrupt all the activities like that seen in Nepal.

Since Nepal’s economy is still based upon subsistence, general strikes disrupt life of only a small fraction of the population. From five-day bandh to week long blockade, it did not make major differences in the urban life as well.

People can minimize the use of items unnecessary in unusual times. “The bandh, general strikes reduces the habit of consuming items like fruits, vegetables and other tin packed products,” said an economist.

Nepal’s Backbone

A cluster of houses : Growing spending on construction

As long as the monsoon is alright, nothing can bring substantial change in the life of common people in Nepal. The disruption in other trade and business activities will have effect only on the marginal urban population.

If there is frequent and serious fluctuation in the monsoon rainfall, then the country will have a very difficult time. Any major shift in the monsoon will adversely affect Nepal’s economy. Since agriculture still occupies 39 percent in the Gross Domestic Product, any fluctuation will have far reaching consequences, particularly to the overwhelming majority of people who live in villages. Thankfully, the political parties or other organizations do not have command over the pattern of the monsoon.

With several economic disruptions and upheavals, Nepal – a country with more than 80 percent rural population living in subsistence – is still surviving economically. Despite the threat and dire predictions by the economists, the country found temporary alternatives from carpet to garment and pashmina to tourism. In the past few years, the remittances constituted one of the major sectors to save Nepalese economy. At a time when country’s 86 percent of Gross Domestic Product (GDP) is spent on consumptions, there is a challenge to make this sector sustainable for long-term economic development of the country. The economic trends show that more the money people make, more they will spend on consumption. From carpet boom to garment and from tourism to pashmina, it did not support to sustain the economy but only increased the consumption.

Following the several rounds of crashes and recoveries in many formal sectors, the country needs to seriously ponder about investing in the agriculture sector, which not only provides employment to the people but also helps to increase the growth. If the government continues to encourage the temporary phenomenon, it will increase the consumption rather than open up viable economic alternatives.