Bleak Growth Prospects


July 29, 2012, 5:45 p.m. Published in Magazine Issue: Vol.: 06 No-. 04 July 27-2012 (Shrawan 12,2069)<br>

One of the alarming states of the Nepalese economy is that the inflations are rising high. Transport prices were hiked due to the rise in the prices of petroleum products. Rise of prices in petroleum products gets reflected in the transport fares. The monitoring by the government is not good. By declaring the Year for Foreign Investment, the government is implementing an ambitious FDI project with a target to double foreign investment in Nepal. Between 8-9 billion rupees were committed last year. I don't understand how such ambitious plan to double foreign investment materializes.  The flow of money is running in higher speed in the market due to the government's policy to accept foreign investment even in small projects. It is very unfortunate that 46 percent of the foreign aid in Nepal is out of the control of the government. Our economy has been passing through an inflationary period. This kind of money spending in the project will increase the circulation of money.

One of the major problems of the country right now is the soaring unemployment. We are encouraging young people to go for remittances. This type of economy which is based on remittances is always vulnerable. On the one hand we don't invest money to build our human capital. On the other hand we fail to lure the youth back in home. Annually, the government recruits only 1000 youths in civil service. Private sector has not generated any employment opportunity in the last five years. Nepal's trade deficit is huge. Out of Nepal's total trade, eighty percent is with India. We are exporting vegetable ghee to India. The money generated from export of such item is much different from what Nepal pays for the import of raw materials. Readymade garments and pashmina have picked up a little bit. Given the weak market in the developed economies, including the Euro zone, Nepal has had a very little opportunity to expand export. There is over Rs. 250 billion trade deficit. Along with huge trade deficit, the government has failed to achieve the target of ambitious plans like fast track road and hydropower projects. At the same time, in the name of attracting foreign aid, we have been accepting everything. This increases inflation in the country.  Nepal has increased foreign currency, with certain amount coming through remittances and certain amount through tourism. Due to rise in the value of dollar against Nepalese currency, Nepal's debt service charge too has gone up. Due to growing remittances, Nepalese currency has strong command now. It helps families of remittance earners. Can we bypass manufacturing sector in the case of positive results from the service sector? For a sustainable and long term growth, the manufacturing sector has an important role to play. Manufacturing sector will support employment, long sustainable growth and others. Only after a strong performance of the manufacturing sector, the country can grow. However, Nepal's manufacturing sector is so poor that it is not in a position to sustain economic growth. Foreign investment in the service sector is very risky. This is the reason one has to think about the foreign investment in the service sector. If we ignore the manufacturing sector, looking at the service sector, it will hamper Nepal's economic development in the long run. Country's higher priority areas like hydro, information technology, health and education need to get the boost. For all this, there is the need to have an inter-party consensus on the economic agenda. Without political consensus, Nepal cannot implement even the international agreement.  Nepal has to decide how many projects will be launched under the public private partnership and how many projects will be launched under cooperatives. There is no record of spending of cooperatives. Even Nepal Rastra Bank has just recently included the money spent by financial institutions in calculating inflation. At a time when there is no institution to collect the savings and cooperatives, no body knows how much influence is there in increasing the inflation due to spending of these institutions. There is the need to have separate institutions doing separate things.  In the present context, Nepal's left oriented parties are now in power and their main agenda is to encourage the cooperatives.  According to this philosophy, they want to establish a cooperative in each and every organization.  How the government can positively involve cooperatives in financial transactions remains to be seen. Nepal needs to encourage institutional investors from foreign countries. There are only individual investors who are coming to Nepal. Although we have signed BIPPA agreement with India, we are unable to protect the interest of our manufacturing sector. We have not identified our fault lines in manufacturing sector and other areas. Our competitiveness is low not only in other parts of the world but even in Indian state of Bihar and UP with regards to the cost of production. Nepal's total labor factor productivity is lower than that of Bihar, UP and West Bengal. Even if they provide us free access to the market, we are unable to compete. Nepal has a huge trade deficit with India and China. Our concerns must be now on how to reduce the trade deficit. The government needs to introduce the plan. Nepal's inflation has gone up from 7.5 percent to 8.5 and growth estimation is also going down. As this year’s monsoon is delayed and fertilizer supply has badly affected the farmers, it would definitely have negative impacts on the next year’s GDP. Despite some positive signs in micro-level economy, Nepal's overall economic prospect is not encouraging.   

(As told to New Spotlight)

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