Meltdown in Nepal

Meltdown in Nepal
eKantipur, 19-Nov-08
DR. KAMAL RAJ DHUNGEL

Recession is an economic term that refers to the phase of the business cycle in which the existing policies and activities fail, and the economy heads towards a crisis. A business cycle is a process in which economic activities vary around its long-term growth trends. The cycle in values shifts over time between periods of relatively rapid growth of output, which is termed as recovery and prosperity. The same cycle later turns into a period of relative stagnation or decline in economic activities, namely, the phase of contraction or recession.

The occurrence of these phases one after another and their repetition in the short as well as long run is a natural process of the business cycle. There are a number of indicators that exhibit particular phases in the business cycle, but they are conventionally measured using the real gross domestic product (GDP).

While dealing with recession, it is relevant to cite an old proverb, "A recession is when your neighbour loses his job, and depression is when you lose your own job." Recession is the phase of contraction in the business cycle when economic activities are slow. Accordingly, a period of general economic decline, specifically a drop in real GDP for two or more consecutive quarters, indicates recession.

The United States, Britain, the European Union and even Asian countries including Japan are almost in recession according to the rule of thumb of two consecutive quarters of falling GDP.

The International Monetary Fund (IMF) has also set a benchmark for recession which is a growth rate of less than 3 percent in real GDP implying a world recession. Its world economic outlook published on Nov. 6, 2008 predicts that the world GDP growth rate would fall to 2.2 percent in 2009 based on purchasing power parity (PPP) weights from 5 percent in 2007 and 3.7 percent in 2008.

Private firms are forecasting an even gloomier situation in 2009 with a number of them predicting that global GDP growth would be no more than 1.5 percent. If the predictions are true, the world is heading for serious trouble.

At this rate, middle-income countries are likely to suffer from recession from early 2009. The fast growing economies of East Asia including China and the countries of South Asia including India will be affected by the recession sooner or later. The Middle East and ASEAN will also be affected by the global economic crisis. Nepal's economy will be jeopardized as a result of the drop in the economic activities of these countries.

Advanced and middle-income countries are the main sources of livelihood for lower-income countries like Nepal. The country's economy in particular depends on agriculture and foreign employment which provide massive employment to the growing population. The Middle East, East and South Asia, Britain, Euro-zone, Australia, the USA and Canada are the places where hundreds of thousands of Nepali youths are employed. In recent years, remittances from these countries alone account for over 20 percent of the GDP.

Real estate is a fast growing business sector on Nepal's domestic economic front. Private investors have sunk big money into land and buildings by borrowing from banks. The probability of this sector becoming paralyzed by the present crisis is high because there is a high correlation between the real estate business and remittances. Past experience proves that almost all the money from remittances has been invested in this sector in urban areas. If our youths lose their foreign jobs, their income will diminish as a result of which they will lose their capacity to buy real estate on a greater scale. Consequently, this sector will be affected faster than others.

Reduction of poverty depends on remittances. According to the Nepal Living Standard Survey of 2003/04, poverty decreased from 42 percent at the beginning of the Ninth Plan period (1997) to 31 percent in 2003/04. Despite the protracted violent conflict that marked the period and consequent slowdown in the economy, the country achieved remarkable progress in reducing poverty. This achievement was not made possible by domestic economic progress but remittances. At this juncture, the nation's poverty reduction strategy will be affected by the global economic crisis.

The global economic crisis will have a serious impact on Nepal. Thousands of youths will lose their jobs in foreign countries resulting in reduced remittances. These young people will return home because the countries where they work will probably ban foreign employees to protect their own jobless. In essence, the foreign employment sector will become more vulnerable which will have a huge impact on the Nepali economy.

The writer is an associate professor at the Central Department of Economics, Tribhuvan University.