Stronger Headwinds Ahead

Together with currency depreciation, rising fuel prices have already begun to hurt the people of this import based nation which imports its entire fossil fuel requirement from outside. Looks like days ahead are going to be all the more difficult because in addition to reduction in supply of Iranian oil, Saudi Arabia wants crude output to decline by one million barrel a day.

Nov. 23, 2018, 10:31 a.m. Published in Magazine Issue: VOL 12 No.08, November 23, 2018 (Mansir. 07, 2075) Online Register Number: DOI 584/074-75

Probably the only good news about our economy is that Nepali farmers are harvesting the largest paddy crop in this financial year, which is mainly on account of timely and sufficient monsoon rains. This is the history in terms of rice production. This record harvest is significantly contributing to growth, in addition to helping lower the rice import bill. Latest information revealed that paddy output is expected to reach 5.66 million tones, 10 percent increase on the total paddy production of 2017\18. Adequate quantity of water from the sky facilitated paddy transplantation on more than 95 percent of the 1.55 million hectares of rice fields. Prime Minister Oli and his colleagues in government may also have drawn some solace from the revelations of multilateral bodies such as the World Bank, Asian Development Bank and the International Monetary Fund that the growth this year will be above 5 percent. Although this expected growth of around 5 percent is less than the wished growth of 8 percent in the current budget, anything around 5 percent should be something to celebrate and rejoice over in the disappointing period characterized by confusion, indecision, inaction and overall slackness in the economy.

External sector of the economy seems to be on a path of unstoppable deterioration and no signs of improvements are seen because in the very first month of this fiscal import of merchandise goods increased by a staggering 54 percent while exports of goods increased by just 3.2 percent, further widening the already alarming trade imbalance. If this continues, trade deficit, which stood at 39 percent of gross domestic product last year, could have serious negative impact on the foreign exchange reserve of Nepal which can currently cover country’s import requirement of goods and services for little more than 8 months. It may also be noted that despite remittance surging by 33 percent, outflow of money from our country is surpassing inflow. Balance of Payment remains negative by Rs.25 billion. In our earlier write-up, we mentioned that Nepal suffered trade deficit with all Bay of Bengal Initiatives for Multi Sectorial Technical and Economic Cooperation (BIMSTEC) nations. Another interesting revelation in this context is that Nepal suffers trade deficit with 112 countries of the world, while it enjoys surplus with only 28 countries. The highest deficit is with India, which has reached Rs.223 billion in the 3 months of this fiscal year, while trade imbalance with China during the period amounted to Rs. 52 billion. France and United Arab Emirates are the two more countries enjoying trade surplus of Rs. 14 billion and Rs. 8 billion, respectively. No positive change in this position is foreseeable in the near future because of our weak production base and failure of successive governments, despite promises, to provide meaningful support to those engaged in productive activities. It would be interesting to note that due to lack of an adequately funded effective procurement mechanism, farmers are not able to sell their paddy at the government- promised support price. It is equally interesting to learn that people of this agricultural country had to buy a wide range of products including flowers, sweets, vegetables and mutton to celebrate the great annual festivals of Hindu- Dashain, Tihar and Chhat. Any attempt at import substitution should seriously consider attaining self-sufficiency in agricultural products which requires not only allocation of adequate funds under the subsidy head in our annual budgets but make sure that the programs are well executed so that a sizeable amount is not left unspent at the end of a fiscal year as is the case now. If the increase in paddy production in the two yers,this year and last, can be achieved for a few more years, without having to rely much on the rain from the sky, Nepal will not only be self-reliant but resume its old position of a net exporter of this staple. Unfourtanetly, things of this kind are difficult to happen in our case where one finds emergence and resurfacing of different kinds of problems. Mention worthy in this context is the credit crunch that the economy experienced sometimes ago, which was said to be a result of mismatch in the growth of deposits and loans granted by financial institutions. On the pretext of inadequacy of loanable funds, financial institutions hiked their rates both on deposits and loans, offending their borrowers whose cost of capital went up substantially. After a relatively long period of liquidity crunch, the situation improved a bit in the last couple of months when financial institutions were urged to lower their lending rates raised earlier. Lowering of rates did not happen and is not likely soon because liquidity crunch has resurfaced again, which is blamed on heavy credit expansion by financial institutions. It may be noted that Nepal Rashtra Bank (NRB) had fixed ceiling for credit expansion at 20 percent but it has reached 23 percent. Further banks are said to have become increasingly speculative in that they have increased their foreign exchange reserves by Rs.36 billion in recent times, to take advantage of the rising dollar. It is advisable that foreign exchange reserve and BOP position is taken full cognizance of while expanding credit. Moreover, Rs. 207 billion lying unused at NRB shows inability of the government to spend, which may have contributed to this resurfacing of liquidity crunch. Our economy is facing headwinds and no positive change in the current scenario is seen because not only is the internal environment unconducive but existing global situation is also likely to negatively impact our economy.

Trade war between the two largest economies has begun to take a toll on both sides in conflict. There are indications that Chinese economy has begun to slow down and the conflict has also taken a toll on American companies. China’s automobile sales decreased by 11.7 percent in October, bringing the world’s biggest car market closer to an annual contraction. Cumulative sales have fallen amid slower economic growth and damaging trade war between the two largest economies. Responding quickly to this contraction, Chinese authorities have halved the car purchase tax from 10 to 5 percent. It is being felt that despite the huge surplus that China enjoys in trade with the US, President Trump’s resolve and actions to correct the imbalance are not likely to produce efficacious results soon. There are strong suggestions from a cross section of people within the US that the two countries should end the dispute because continuation of this unpleasant situation would seriously hurt economies of both countries. While Chinese officials opine that US-China trade dispute can be resolved through talks, US authorities dismiss suggestions coming from different quarters to resolve the dispute as nothing more than an attempt to pressure President Trump into a deal. They also strongly feel that if a deal is struck, it will be on Trump’s term who has been repeatedly accusing the US major trading partners of being unfair since long to his country, which has a global trade deficit of 800 billion dollar. Chinese officials have made it clear that they will further open the economy and make sure that their currency, Yuan, does not go below 7 to a dollar.Despit this resolve of the Chinese authorities, independent observers feel that Yuan is likely to remain week as long as the trade war persists. Notwithstanding a fair degree of flexibility shown by the Chinese authorities in resolving the conflict, it is almost certain that China cannot be squeezed into extending huge trade concessions unilaterally. Americans and Chinese have begun to openly and strongly differ a lot at different fora on trade related issues. Therefore, the expected meeting of the two presidents on the sidelines of the soon-to-be-held meeting of the G-20 nations in Buenos Aires is not likely to have any encouraging outcome, even if the two decide to meet. One thing to be noted is that Chinese have emerged as great spenders and the number of Chinese visiting abroad is likely to reach 259 million by 2030. Another worth mentioning fact is that the US has service trade surplus with China, which is attributed to increasing number of Chinese visiting the country every year. Many countries in the world want both Chinese capital and Chinese tourists.

Another worrisome factor for us is the depreciation of our currency, which is pegged to Indian currency, against US dollar. Chances of our weak currency gaining some strength in the near future are slim because existing fundamentals in India, trade and current account deficit, will not let the Indian currency appreciate soon, which automatically decides the fate\level of Nepali currency. Together with currency depreciation, rising fuel prices have already begun to hurt the people of this import based nation which imports its entire fossil fuel requirement from outside. Looks like days ahead are going to be all the more difficult because in addition to reduction in supply of Iranian oil, Saudi Arabia wants crude output to decline by one million barrel a day. Saudis seem determined to decrease oil export in December by 500,000 barrels a day, clearly ignoring President Trump’s urging that oil producing countries should increase oil production to arrest its rising prices. Saudis want global oil supply to decrease so that there remains no scope for prices to go down in the near future. On fossil fuel front, the two traditional allies seem to be working in opposite direction.

In addition to the myriads of problems on the economic front, the governance front is also beset with numerous problems, forcing people to raise questions about the appropriateness of the newly adopted federal system of governance. Serious problems seem to be existing between the federal government and seven provincial governments, Kathmandu’s serious problems\differences being with Province-2 government which at one stage made preparations to three laws related to administration, civil services and public services commission, defying objection from the federal government. It may be mentioned that the row between the federal and provincial government escalated after the Province-2 Provincial Assembly endorsed the Provincial Police Act by suspending a provincial assembly regulation. This act of the provincial government did not go well with Kathmandu, with leaders of the ruling party stating that the provincial government should not have moved to bring the Provincial Police Act before the related federal law. Federal Government’s recent executive order to the provincial governments allowing them to deploy and transfer police personnel up to sub-inspector level has also been termed unconstitutional. Experts opine that Kathmandu has an obligation to enact laws to define powers of federal and provincial governments on policing, which cannot be defined by an executive order. Experts suggest regular meeting of the Inter-Provincial Council, provisioned in the constitution, could prevent misunderstanding between the federal and provincial governments. Hope Prime Minister Oli, who has to chair the meeting, does not take too much time to hold it, shedding his reported apprehension that the chief ministers are ganging up against his government. Let us not blame the ailing Prime Minister too much at a time when he has been criticized by his own party colleagues for continuously postponing the party’s standing committee meeting, where the government’s performance is scheduled to be evaluated. It would be no exaggeration, however, to state that with the exception of some encouraging steps taken in the initial stage, this government, enjoying two-thirds majority in the House, has thoroughly disappointed people in less than a year of its governance. We can simply wish the ailing Prime Minister good health so that he can increase his mobility and monitoring activities because the headwinds ahead are going to be much stronger than the ones currently faced by our nation and the economy.

Dr. Tilak Rawal

Dr. Tilak Rawal

Dr. Rawal is former governor of NRB.

About Us And Others
Sep 22, 2018
Rains And Our Economy
Aug 18, 2018
Powerful Government Confronted
Jul 21, 2018
Budget Of The Federal Government
Jun 15, 2018
Politics And Our Economy
May 03, 2018

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