BOP Crisis: Dire problem, few options

BOP Crisis: Dire problem, few options
Myrepublica, 21-Dec-09
By PREM KHANAL

[NOTE: NepaliEconomy.com disagrees with the author's arguments. Please read the comment at the end of the post]

The impact of deepest slump in the global economy since World War II to Nepal´s economy was far less calamitous than many had feared.

However, emerging indicators in the domestic front have deepened fears that the aftermath of the global financial crisis will be more dangerous than many expect, as the country faces the worst-ever Balance of Payment (BOP) deficit.

Worrisome is the fact that the unexpected decline in the growth rate of remittance -- country´s economic backbone, which many believe as the time-lag effect of global crisis -- has pushed the economy on the brink, with no immediate sight of stabilization.

Not that all these cracks in the economy appeared all of a sudden. There were enough warnings, overheated consumption to be the main. When annual date was released in July, government experts, at least the central bank, could have easily sensed the looming crisis when national disposable income recorded an alarming increment of over Rs 200 billion in a year to touch Rs 1,193 billion last year.

Wasn´t it predictable that the economy was about to see a huge misbalance in foreign trade when consumption reached 92 percent of GDP last year while domestic production continued to shrink and exports remained stagnant? However, the authority concerned blissfully ignored such warnings.

Though it is too early to gauge the gravity of the BOP crisis and jump into a pessimistic conclusion, worst is that Nepal has too little things in hand to correct it.

Worsening foreign trade balance needs to be blamed first for the crisis. Country´s trade deficit -- that grew by a whopping 47.6 percent during the first quarter of the current fiscal compared to same period last year -- was one of the principal causes for the over three-fold increment in BOP deficit in a year. In theory, a country needs to boost export and curb imports to check the widening trade deficit.

Grim exports data of the country itself speaks volumes about intensity of the crisis. Nepal´s persistent problem is that any attempt to boost exports is constrained by lack of products that can compete in the foreign market. Even some past efforts to find new exportable commodities capable of competing with Chinese products in global market failed.

However, Nepal can at least make renewed efforts to breathe a new lease of life to dying traditional twin export pillars -- woolen carpets and readymade garments. The government can restart a fresh diplomatic effort to secure the US and European markets to revive these two commodities. It can think of providing a short-term subsidy for sheep farming in Nepal´s mountainous region to alter long-running dependency on expensive imported wool to make our woolen carpet competitive in the global market.

Checking imports by raising taxes or imposing additional duties can be one option to curtail consumption. But, such a step will fuel the already high inflation and will also hurt domestic demand that can ultimately add woes to long-running economic sluggishness.

Still tourism is one sector where we have a clear and undisputed advantage and it is the only sector that has the potential to correct BOP misbalance. But, current political landscape is less hospitable to promote the sector, as the political turmoil seems deepening rather than moving toward settlement.

Promoting Foreign Direct Investment (FDI) is one of the powerful and widely used instruments to make financial account, which witnessed an alarming 118 percent decline during the first quarter, surplus. However, Nepal can expect no FDI as long as the activities of militant trade union are not brought under control and labor laws are made flexible to balance the interests of both employers and employees.

Make no mistake, the BOP crisis is just a flicker for now. The divesting bang is imminent if prudent action is not taken immediately.