ECONOMY Critical Path

High inflation, declining industrial production, high import and lower export are some of the indicators which show a dismal performance of Nepal’s economy. Surviving in remittances and the strengthening dollars, Nepal’s Balance of Payment is in a go

July 9, 2012, 5:45 p.m. Published in Magazine Issue: Vol.: 06 No.-03 July 06 -2012 (Aashar 22,2069)<BR>

With the demand to keep the national economy out of politics, the Federation of Nepalese Chambers of Commerce and Industries (FNCCI), led by its president Suraj Vaidhya, has been constantly raising voices against intolerable political influence on the economic growth.


Likewise, the Confederation of Nepalese Industries (CNI), under its president Binod Kumar Chaudhari, has also been expressing similar concerns, urging the government to come up with a full-fledged budget stating that incomplete fiscal policy would destabilize the entire economy.


CNI- the umbrella body of the private sector- has, however, stressed the need for striking a consensus among leading political parties prior to announcing the budget.


These statements from the private sector come at a time when leading parties such as the Nepali Congress and the CPN (UML) are opposing the caretaker government´s preparations to come up with a full-fledged budget.


“To attract investment, the country must ensure economic independence of the government, regardless of the party leading it. There is the need to forge a consensus on economic policies and development modalities and strategies among  mainstream political parties,” said CNI senior vice President Narendra Kumar Basnet, at an interaction held at the finance ministry. 


“The policies of the past and of the incumbent government were focused on distributing funds rather than on economic growth,” Basnet added. “The government is set to raise development budget and enhance the pace of development spending.”


He said one of the biggest hurdles to promoting industrialization and attracting investment was the power shortage.


Political uncertainty has been Nepal’s only certainty for many years. Along with political uncertainties, political parties and politicians have been openly putting the economy at bay by using tools like bandhas, strikes, closures and budget issues as bargaining options.


In addition to various other issues, like power shortages and labor issues, have left both private and foreign investors fuming and have made a serious dent on the overall national economy.


Amidst widening political distrust after the dissolution of the Constituent Assembly, the government is preparing to bring the budget for the fiscal year 2069/70 through ordinance, but the lack of political consensus is hindering the process.


“To prevent the nation from further economic damage, there should be common consensus on the package of minimum economic agenda put forward by the private sector,” said Suraj Vaidhya.


FNCCI has requested the government to bring the annual budget on time and to pay heed to the economic situation. “The government will come up with a full-sized budget of around Rs 429 billion – the ceiling set by the National Planning Commission,” said Finance minister Barsha Man Pun.


Current Scenario

Although the government has been trying to bring a full budget, there might be obstructions. But Nepal, at this point in time, needs a full-fledged budget to push the economy forward.


After three years of partial budget, the full budget released and approved on time was for the fiscal year 2068/69 last year. Sadly, even till the dying stages, the government's expenditure was vastly limited in providing salaries to public employees and in making other routine expenses. Development works could not proceed as expected this financial year, as the government was able to spend only Rs 40.35 billion of the total budget allocated for capital expenditure in the first 11 months through mid-June.


According to the finance ministry, the amount spent by the government in the review period is only 56 percent of the total budget of Rs 72.61 billion allocated for the purpose.  However, the government is expecting that its capital expenditure will beat the mid-term review target of Rs 65 billion by the end of fiscal year which ends in mid-July.


“Spending in the final month of the financial year usually goes up as payments for the work conducted in the previous months are released during this time,” said Finance Secretary Krishna Hari Banskota.


This trend was seen in previous fiscal years as well. In the last fiscal year, Rs 65.43 billion was used in the period between mid-June and mid-July, while in the financial year before that, Rs 62.17 billion was spent in the final month.


This financial year, the government had earmarked a budget of Rs 384.9 billion, of which Rs 275.56 billion, or 71.5 percent, was consumed in the first 11 months. Of the total allocated budget, Rs 266.61 billion was allotted for recurrent expenditure and Rs 45.68 billion was earmarked for financing.


The government is holding ideal money and has not been able to fund the planned projects. Aid received by the government from foreign sector has not also been spent extensively. The major reason for the lack of development expenditure has been much criticized for the multifaceted contract-awarding process.





Investment in Crisis

Plans for the Investment Year have also got into a limbo after the dissolution of the Constituent Assembly (CA). The prospects of huge foreign investment coming into the country now are bleak. 


“Who will put money in a country that does not have a complete constitution and when political uncertainties loom large,” said Binod Chaudhary, president of Confederation of Nepalese Industries (CNI), after the dissolution of CA.


US $1 billion foreign investment target in the first six months of the investment year set by Prime Minister Dr. Baburam Bhattarai is also going into the long list of PM’s unfulfilled promises.


The other reason for lack of investment, apart from politics, has been labor problems and, more importantly, power shortages.


Looking at the current situation, power shortages are not coming to a halt any time soon as there has been no major investment in the hydropower sector.


“If the current situation prolongs, under construction projects will not be able to end even after load shedding of 10 years. After importing petroleum products worth some NRs. 100 billion, only 9 percent of the power demand has been fulfilled by it, the rest, we are fulfilling by our own sources,” said Gyanendra Lal Pradhan, Chairperson of Energy Committee.


Meanwhile, the tourism sector is showing signs of recovery after the Visit Nepal Year 2011, but setbacks have already started as tourists are cancelling their bookings for their visit in the midst of concerns and uncertainties.


People working with tourism, on the other hand, have stressed the need to live with reality. “We consider tourism as an opportunity in crisis. We never lagged behind in receiving tourists even during the height of insurgency marked by strikes and political chaos,” said Aditya Baral, director and spokesperson of Nepal Tourism Board.


Inflation Woes

To add more problems, inflation is also slowly walking up the ladder. According to the latest macro-economic report released by Nepal Rastra Bank (NRB) based on the Ten Months' Data of FY 2011/12, year-on-year inflation as measured by the consumer price index increased by 8.7 percent in mid-May 2012.


Although for a developing nation the current inflation rate might not be alarming, the inflation problem is expected alongside general prices in the near future.


Along with the lack of other national outputs, unfavorable weather for the agricultural sector to thrive is expected to add more to the agony of the common people.


“Monsoon started quite late this year and there has been fertilizer shortage as well, this will have a negative impact on food production, and that will make food items further expensive,” said economist Bishwamber Pyakurel.


Liquidity surplus

From liquidity crisis to liquidity surplus, banks are facing opposite scenario than in the recent past. Due to excess liquidity, banks are reducing interest rates on loans and are requesting Nepal Rastra Bank (NRB) to bring favorable policies.


Banks have not been able to invest more than 50 percent of deposits due to lack of productive sectors and favorable environment.


Only NRs. 79 billion has been invested by banks in this fiscal year, while they have collected some NRs. 155 billion as deposits.


“Looking at the situation, it doesn’t look like this year or even next year will be good for the banking sector,” said Anil Shah, CEO of Mega Bank.


BOP Surplus

On the flip side, overall Balance of Payment registered its highest ever surplus of NRs. 100.10 billion during the ten months of the FY 2011/12 compared to a deficit of NRs. 12.32 billion during the corresponding period of the previous year, according to NRB.


But this surplus is not the result of increase of exports, and it has been possible only on grounds of high remittance earned by Nepalese, aided by devaluation of Nepalese Currency.


“The substantial rise in the growth of remittances coupled with the improvement in the service account was the responsible factors for the substantial surplus in the current account,” states a NRB report.


Major export of Nepal has been human resource for some years now, as more than three lakhs productive people are leaving the nation every year in search of better prospects due to lack of opportunities at home.


Thanks to the efforts from foreign workers, the Nepalese economy is surviving. If remittances are taken off from calculations, then it is expected that it will be difficult to maintain even BOP surplus as other exports of the country are very negligible, say analysts.






Nepal has also benefited from growth of the southern neighbor as the pegged exchange rate system with India has been providing outside cover for the economy.


Liquidity surplus

From liquidity crisis to liquidity surplus, banks are facing opposite scenario than in the recent past. Due to excess liquidity, banks are reducing interest rates on loans and are requesting Nepal Rastra Bank (NRB) to bring favorable policies.


Banks have not been able to invest more than 50 percent of deposits due to lack of productive sectors and favorable environment.


Only NRs. 79 billion has been invested by banks in this fiscal year, while they have collected some NRs. 155 billion as deposits.


“Looking at the situation, it doesn’t look like this year or even next year will be good for the banking sector,” said Anil Shah, CEO of Mega Bank.


BOP Surplus

On the flip side, overall Balance of Payment registered its highest ever surplus of NRs. 100.10 billion during the ten months of the FY 2011/12 compared to a deficit of NRs. 12.32 billion during the corresponding period of the previous year, according to NRB.


But this surplus is not the result of increase of exports, and it has been possible only on grounds of high remittance earned by Nepalese, aided by devaluation of Nepalese Currency.


“The substantial rise in the growth of remittances coupled with the improvement in the service account was the responsible factors for the substantial surplus in the current account,” states a NRB report.


Major export of Nepal has been human resource for some years now, as more than three lakhs productive people are leaving the nation every year in search of better prospects due to lack of opportunities at home.


Thanks to the efforts from foreign workers, the Nepalese economy is surviving. If remittances are taken off from calculations, then it is expected that it will be difficult to maintain even BOP surplus as other exports of the country are very negligible, say analysts.






Nepal has also benefited from growth of the southern neighbor as the pegged exchange rate system with India has been providing outside cover for the economy.


But, how long will the nation ride only on the back of remittances earned by Nepalese foreign workers and crawl behind the success of her neighbors? And how long will Nepal be able to send the most productive workforce out of the country? Till when will the power crisis grip the whole nation?

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