Nepal’s economic challenges are real, but suggestions that it is already in deep crisis and may be going the Sri Lanka way are probably premature, unfair and unjustified. The surging trade deficit remains a big concern as it is expected to reach $18 billion this fiscal year. A Balance of Payments (BoP) deficit and a spiralling debt liability will pose a very grave risk to the economy that is already in deep trouble. Nepal’s central bank statistics show the country’s inflation averaged 7.14% in the current fiscal, which is the highest in the last 67 months.
Emerging scenario
There are other worrying trends. The country’s debt to Gross Domestic Product (GDP) ratio has crossed over 40% as of the second quarter of the current fiscal year. What is needed is a prudent fiscal management plan. So is the need to boost demand and empower Micro, Small and Medium Enterprises (MSMEs) with soft institutional liquidity support. To emerge from the shocks caused by the BoP deficit to the tune of NR258.64 billion, the decrease in remittance inflow and the fall in the country’s foreign exchange reserve by 16.3% to NR1,171 billion (in mid-March 2022 from NR1,399.03 billion in mid-July 2021), industry needs hand holding by the government and a rationalisation of taxes. Such a collaborative effort will help in increasing national economic productivity and mitigating the systemic risk on the economic front.
A lack of pragmatic policy interventions in Nepal and an abrupt move to reorient economic planning towards ‘self-sufficiency’ has exposed the structural vulnerability of Nepal’s economy. It is also true, and unfortunate, that Nepal’s economy is overtly politicised. Tensions between the Finance Minister, Janardan Sharma, and the Governor of the Central Bank, Maha Prasad Adhikari, with Mr. Sharma suspending Mr. Adhikari for alleged failures in discharging his responsibilities have undoubtedly contributed to the uncertainty. Mr. Adhikari has been reinstated on orders by the country’s Supreme Court, but the damage has been done.
In the short run, the government’s revenue and expenditure should be assessed for minimising the establishment cost. Especially so, it is needed for provincial governments where the operational part must be dealt with frugally to not burden the economy beyond a point. While several drastic measures such as an import ban on luxury goods and reducing working hours have been announced, these have not quite succeeded in allaying fears of an impending crisis. The ban on imported goods that have no competent alternatives in the domestic market will only hurt the economy until the production of domestically-consumable goods is increased. Fortunately, there are some positive signs of an economic recovery appearing, with tourism picking up thanks to the easing of visa and entry restrictions and foreign remittances also showing an upward trend. These need to be consolidated.
India will, undoubtedly, go the extra mile to help Nepal ensure a speedy and comprehensive recovery. India has not hesitated in being generous and in coming to Sri Lanka’s help despite political considerations which might have suggested other approaches. In Nepal’s case, Prime Minister Sher Bahadur Deuba is a known friend of India who likes to accord priority to development rather than playing to the political gallery.
His recent visit to India was successful in terms of reaching an important understanding on economic cooperation projects. It should be possible for Nepal to expect generous Indian support for its economic recovery to be based on broad-based consensus in Nepal which will also eventually help in resolving bilateral irritants that keep cropping up every now and then.
What Nepal’s national economy is facing today is a sort of crisis in the making.
Of late, the government is finding it difficult to overlook the difficult trade deficit but unfortunately with wrongly-placed measures such as curbing the autonomy of the Nepal Rastra Bank (NRB) and vilifying import per se instead of making interventions for much-needed structural economic reforms. The NRB underlines problem areas such as rising inflation, BoP deficit, decreasing remittance inflow, depleting foreign exchange reserves and burgeoning imports beyond an acceptable level. The NRB’s projection of a looming crisis has no takers in the Finance Ministry — that is on making strange short-term provisions rather finding the way out to avert a crisis in making.
Nepal is in dire need of augmenting its preparedness on the domestic economic front along with a need-based infrastructural haul to impart the right momentum to an economy that is overtly politicised and not inspiring enough for big business ideas to prevail and flourish. Nepal’s political economy should get the traction of national consensus to fulfil the aspirations of the people and also reposition the country to the global state with its strengthened economic prowess.
To not give an adverse response to the usual flow of goods and services, the government should lift the ban on imported goods which do not have competent alternatives in the domestic market. Until such time as Nepal makes a move to increase the production of domestically-consumable goods and end the cartel of businesses embracing competition and innovations, it would be helpful if Nepal remains open to successfully complete a mandatory transition of present sort.
There is no magic wand to ensure economic reforms and avert a crisis-like scenario. Nepal’s neighbour and the world’s largest democracy, India, is a fine example of a country that braved a severe BoP crisis in 1991 and transformed the economy through a sustained wave of economic reforms without letting political preferences override significant economic matters. In the time when isolation cannot steer the growth impulses of the economy, it is important for Nepal to cope with the shortage of industrial production and pressure of trade imbalance through excessive imports but without stopping to remain open to the world for healthy collaboration.
Geopolitical changes
The broad geopolitical and economic trends are also suggestive of doors opening to more active Nepali participation in the Indo-Pacific economic agenda, with the Nepalese Parliament approving the $500 million Millennium Challenge Corporation (MCC) grant from the United States; this could substantially upgrade energy cooperation between India and Nepal, and also India agreeing to the United Kingdom, the European Union and other major investment partners working together in third countries on development projects. Interestingly, the Nepalese seem to have independently made a reassessment of risks in recklessly deepening ties with China, thanks in large measure due to Beijing’s missteps, and the style and the substance of Chinese-delivered assistance.
There is much greater receptivity and a “felt need” across the political spectrum and in public discussion of the genuineness of India’s friendship aimed at contributing to the welfare of people of Nepal. The decision of the Government of India to set up an inter-ministerial standing group under the chairmanship of the Foreign Secretary, to coordinate sections and ensure more rapid follow-up of project decisions is also a welcome step.
Business leaders in India should be encouraged to be proactive in looking for new opportunities in expanding and diversifying trade and investment ties with Nepal including exploring possibilities in the context of a reset of supply chains in the post COVID-19 situation. There is no doubt that the economic challenges in the post COVID-19 situation, and the overall churning in the geopolitical environment have created an opportunity for both countries to devise innovative approaches to long-standing issues and to aim for new horizons in bilateral cooperation.
It is vital that Nepal deepen its economic ties with India and facilitate joint ventures that create immense economic opportunities. India’s unwavering commitment to peace and prosperity in Nepal and its complementarity in its relations with Nepal will help in creating a healthier economic ecosystem in Nepal. While the economic scenario is troubled — and it is unlikely that Nepal will emerge from it soon — it would be wrong to assume that a condition akin to a breakdown is inevitable in Nepal. Economic adversity has created the space for course correction and Nepal should be encouraged to devise a fresh approach to achieve this through calibrated efforts.
K.V. Rajan is India’s former Ambassador to Nepal. Atul K. Thakur is policy professional, columnist and writer with a special focus on South Asia. The views expressed are personal
