2010: Nepal's macroeconomic outlook

2010: Nepal's macroeconomic outlook
Republica, 20-Jan-2010
By BISHWAMBHER PYAKURYAL

As a result of the ongoing economic downturn, we may not see an expansion in global economic activities. However, we should be thankful that the world economy, for now, has at least been spared from speculative damages. But in Nepal, all three villains namely recession, inflation, and depression are still going strong and hurting macroeconomic fundamentals. These three factors continue to injure Nepal’s economy. The following paragraphs attempt to justify my statement.

If recession is taken as a business cycle contraction because of reduced economic activities, this also indicates a period where there is a reduction in a country’s GDP for at least two quarters. Nepal has experienced contraction, the first symptom of recession, whereby the country has even exceeded several quarters of sustained recession. Going by the statistical information received from the Ministry of Agriculture and Co-operatives (MoAC), we can see a weak performance in the production of major cereal grains that induced a decrease in GDP. We can see, in the second quarter of FY 2009/10, there has been a decline in paddy and maize production by around 11 percent and 4 percent respectively as compared to FY 2008/09. These two products together assume 10 (paddy 7.5) percent share in GDP and about 27.5 (paddy 20.75) percent share in agricultural output. Therefore, as major crops exhibited relatively lower yield, there is not much hope to meet the growth target of 5.5 percent in the year 2009/2010. The logical estimate for growth would be around 4.2 percent. This should explain that Nepal is still under recessionary pressure and therefore has been victimized by the first villain—recession.

The second villain is inflation. Considering the trend and impact of inflation, it is found that the annual average consumer inflation increased to 13.2 percent in 2008/09 compared to an increase of 7.7 percent in 2007/08. The annual average price rise of food and beverages group was 16.7 percent. The year-on-year (y-o-y) consumer price inflation rose to 11.4 percent in mid-July 2009 from 12.1 percent in the previous year. Although less, in comparison to the level of mid-July 2009, the y-o-y inflation as measured by the consumer price index remained at 9.9 percent in mid-November, 2009. The news remains bad with regards to the price related to sugar and related products during 2008/09. During the first four months of FY 2009/10, price indices of sugar and sugar-related products increased by the highest rate of 50.6 percent compared to an increase of 37.6 percent in the same period the previous year.

Thirdly, with regards to depression, which can be defined as a situation with high unemployment rate and loss of trade, the scenario is again weird. Let us consider the labor market policies that refer to measures that target individuals or households to ensure a minimum standard of living. Labor policies have been more frequently pronounced in recent years in the expectation that it safeguards the laborers from unforeseen eventuality. The ultimate goal of the government should be to make economic growth compatible to workers’ advantages. In this regard, investment is the key element, which helps in increasing demand by creating jobs. This is what is not happening at all since no employment opportunities are being created. The labor market is still unable to address the job demands of vulnerable groups of people including youths, displaced households and freed but unemployed bonded laborers.

It is projected that the demographic transition currently underway in the region will result in population increasing by 31 percent between 2000 and 2020, compared to about 60 percent in the preceding 20 years. Given the failure in formulating policies for absorbing additional workforce, the problem of social inclusion will accelerate. At present, a number of policies are in operation, including enhancement of employment opportunities through the expansion of economic and social development activities, promotion of labor-intensive businesses for increasing access of the poor to employment opportunities, implementation of income generation and employment programs targeting the backward class and geographical regions, increasing professional efficiency and ensuring basic rights of laborers in a balanced way, and maximizing foreign employment opportunities by producing skilled human resources. Information as to how many jobs were created as a result of implementation of these policies during the plan period is, however, not yet available.

By definition, depression is also a loss of trade. From this perspective, the third enemy seems to becoming more influential in hurting Nepal’s external sector. In 2008/09, as against 13.5 percent rise in exports, imports soared by 28.2 percent in comparison to an increase of 14 percent in the previous year. It is sad that this sector has exhibited a dismal picture in the first four months of FY 2009/10. Exports declined by 23.7 percent against the upsurge of 38.1 percent in the corresponding period of the previous year. Exports to India alone fell by 19.1 percent but imports rose by 28.9 percent compared to its growth of 23.7 percent last year during the review period. An upsurge in the import of vehicles, electrical equipment, machineries, medical equipment, aircraft and communication equipment, their spare parts and tools, etc. were responsible for the rise in total imports. The continuing deterioration in external sector justifies Nepal wrestling with depression.

No doubt, there is persistent poverty (households remain in poverty over time due to their low asset base) and chronic poverty (households fall in poverty due to their inability to protect themselves from shocks), which demands both the promotional role of the state to reduce poverty by enhancing the assets base of the households and protective role that prevents vulnerable households from adverse shocks. Even though South Asia is found to have given too much emphasis on macroeconomic reforms, the study shows that liberalization efforts in this region failed in bringing about a shift of labor and other resources from low-productivity primary sector to high-productivity manufacturing sector. A modest liberalization can have significant impact on economic performance whereas piecemeal reform in many countries as a result of complex political bargaining has a greater chance of constraining the growth.

The aforementioned reasons have created a regime of uncertainty and unpredictability to guarantee acceptable level of consumption, savings and investment. Therefore, Nepal, in recent months, has considered a policy that uses higher interest rates to control the bubble created from real estate business. Similarly, as countries have experienced that substantial hikes in policy rates damage the real economy by affecting growth and employment, Nepal has to wait and see the likely impact of tight monetary policy recently announced by Nepal Rastra Bank. However, the challenge in Nepal is to understand properly if there could be any relationship between monetary policy and asset prices since the inherent contradiction in our policy could be damaging as the government has adopted expansionary fiscal policy. To conclude, the macroeconomic difficulties are certain to give birth to livelihood shocks at the household level unless the short-, medium- (Three Year Plan under preparation) and long-term policies are prepared based on professionally-acceptable economic forecasting.