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Testing Times
Amid decisions to suspend aid by some countries, the economy could further stagnate
By SANJAYA DHAKAL
The signs are beginning to get ominous. The recent report by the Asian Development Bank (ADB) stated that the country's economic growth would continue to decline and settle at three percent in the current year "mainly due to anticipated weaker performance of agriculture, tourism and transport sectors."
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In its quarterly review, ADB has assumed that if there will be no further deterioration of the conflict in 2005 and progress towards a lasting resolution in fiscal year 2006 and 2007, the economy could grow by 3.7 percent in 2006 and by 4.3 percent in 2007. Reflecting on recent disruptions in these sectors, tourism receipts and worker remittances has declined by 19 and 7 percent, respectively in the review period, it notes
In the first six months of the current fiscal year, the foreign trade growth has shrunk. According to the half-yearly review released by the Nepal Rastra Bank (NRB), total exports had increased by 4.8 percent to reach Rs 27.5 billion in the period whereas the exports had grown by 10.4 percent in the same period last year. Likewise, the imports that had grown by 10.2 percent last year, grew only by 0.2 percent to reach Rs 63.82 billion in the period this year. The NRB has stated that there is adequate liquidity in the market. The national consumer price index increased by 4.6 percent whereas the wholesale index grew by 6.9 percent. In this period, the government suffered Rs 1.95 billion of budget deficit.
Fortunately, the total foreign exchange reserve has surged by 6.8 percent to reach Rs 131.11 billion. The reserve is able to sustain the good import for 12.3 months and goods and service import for 10.6 months.
Unveiling the mid-term review of the budget of the current fiscal year, Finance Minister Madhukar SJB Rana said that the government has reviewed the volume of foreign assistance for the period. It was estimated that Rs 17.95 billion foreign loan would be received this fiscal year - now this figure has been brought down to Rs 9.09 billion. Rana, however, said that the drop in the foreign loan would not affect any development projects 'this year.' Rana hoped that since the government has committed to abide by the Basic Operating Guidelines, the donor assistance would continue. The current year's budget had projected total foreign assistance of Rs 32.31 billion including both loans and grants.
Rana is also hopeful of aid resumption because 'the government is going to accelerate reforms.' "The government's priority is to take action against willful defaulters of bank loans and introduce flexible labor laws," he said. In the mid-term review, the government has adjusted the projected growth rate to 4 percent (down from earlier projection of 4.5 percent). Likewise, it has projected that there would be 3.4 and 4.3 percent growth in agriculture and non-agriculture sectors respectively.
In the first six months of the year, the development expenditure increased by 52 percent compared to the same period previous year to reach Rs 11.49 billion. Out of this total, Rs 6 billion was spent on education and Rs 2 billion on middle-Marsyangdi project. The regular expenditure, however, remained comparable with the same period last year at Rs 25.51 billion. Likewise, the total expenditure in the period increased by 12 percent to reach Rs 36.99 billion and the revenue collection increased by 12.2 percent to reach Rs 29.83 billion. The government has also adjusted the projected revenue collection at Rs 72.7 billion for this year. "If we meet the target of revenue generation, the limitation for internal loan would be maintained at Rs 9.06 billion," he said.
Meanwhile, economists have expressed concern over the impact of decision to suspend aid by some donor countries to Nepal. “Although it is good for any country not to accept foreign loans, Nepal at this point simply cannot afford to not take them,” said Professor Dr. Bishwambher Pyakuryal, president of Nepal Economic Association (NEA). “At a time when 10-15 percent of our budget is being used for debt-servicing, it will be impossible for government to claim that we can manage by internal resources alone,” he said.
Upon his return from recent donors' meeting in Paris, FM Rana had said that interests of bilateral and multilateral donors were different. He said multilateral donors focused on the implementation of Millennium Development Goals, Economic Reforms and effective aid utilization and that they have tied their aid with improvements in these fronts. Whereas, he added, the bilateral donors were mainly concerned with immediate ending of emergency, human rights protection and restoration of civil liberties.
At a time when around 30 percent of the total budget and 60 percent of the total development budget are contributed by foreign assistance, the significance of continuation of aid cannot be exaggerated.
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