Print Edition - 2017-09-10  |  Free the Words

Achieving targets

  • Monetary policy reforms and using remittance towards capital gain a must to achieve economic growth target

Sep 10, 2017-

Nepal is striving to achieve an economic growth target of 7.2 percent. Central Bureau of Statistics had estimated that the economy would grow by 6.9 percent in the fiscal year (FY) 2016/17. Lack of capacity to spend the allocated budget effectively and efficiently has been a hurdle over the years. The incessant practice of lower capital expenditure has had a negative effect on investment by private sectors towards development activities. Domestic industries have contributed significantly to the growth of development processes, but the annual budget has not emphasised the promotion of domestic industries and local businesses. Local or domestic companies have been able to produce many goods that the consumers require but similar goods are being imported from other nations. The priority of consumers should shift towards purchasing local products manufactured by domestic industries, thus contributing to the economy of the country. The government should focus on enacting policies to ban the imports of similar goods from other countries and prioritise domestically manufactured products. Likewise, the government should support productive sectors, which include agriculture, hydropower, tourism, and cottage and small scale industries in order to achieve the economic growth target. 

Complacency towards the earners

Nepal’s leaders have been complacent about economic policies over the years as the country has not had to face a serious economic crisis. Macroeconomic and Balance of Payments (BOPs) situations have been stable largely because of remittances sent by tens of thousands of migrant workers working in foreign lands. As per the Nepal Rastra Bank (NRB) statistics, the country received a total of Rs695.45 billion in the last FY2016/17 through remittance. According to a study, around 30 percent of the total remittance comes into the country through informal channels, which means that the total would have amounted to around Rs900 billion. The fees charged by informal or illegal mediums are comparatively less, so the migrant workers prefer to send the money through these channels. In addition, they prefer to send money via these channels because of poor access to banking. The government has not given serious attention to labour migration and considers it a natural order of things since the government officials and the politicians are able to enjoy benefits as a result of these remittances. The primary focus of the government should be to create employment opportunities in the country and minimise the issuance of foreign labour permits. Recently, there has been a continuous decline in the remittance inflow due to diplomatic tussles and slow economic growth of the gulf countries, largely due to the fall in oil prices. This decline could seriously impact Nepal; high reliance on remittance has been one of the major pitfalls in Nepal’s economy.    

The interest rates on loans charged by banks and financial institutions are high, and the monetary policy by NRB has not been successful in reducing it. In order to sustain economic growth, there should be a provision for loans at lower interest rates. Credit is likely to become more expensive, and that credit crunch can have an adverse effect on economic growth. When reviewing FY2016/17, retail interest rates have risen, which indicates that liquidity is not efficiently managed. Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) need to be revised so that excess liquidity gets mobilised in productive sectors. There is a need to increase investment and resources in productive sectors. The central bank’s strategy to maintain 18 percent growth in broad money supply with a view to achieve the economic growth target gives cause for skepticism. NRB needs to revise its strategies and policies. 

Free market or flunk market?

Nepal has been following the doctrine of free market economy since the early 90s, but the gains have been achieved at a high social cost. Along with this, trade deficit has been widening ever since and ceaseless corruption has dampened the growth potential. Free market economies can deliver the best results only if the country is politically stable and has sound infrastructure. In addition, private sectors, non-governmental organisations, cooperatives and communities have a significant and effective role to play in order to gain maximum benefits from the free market economy model. Likewise, agricultural yields should not largely depend on monsoon; an alternative needs to be figured out in this regard. Private investments in development activities should increase over time and productivity should improve—only then do the growth targets seem feasible.

Being a landlocked country, Nepal, has faced some major economic blockades in the past. In order to prevent such issues in the near future, policies need to be formulated to maintain a balance between economic self-sufficiency and economic liberalisation. To minimise internal and external shocks, there should be efficient use of resources along with effective management. Likewise, the policy on productive sector lending needs to be redefined with critical assessment. There have been several debates and discussions on whether or not to let banks act as brokerage firms. A cost-benefit analysis regarding this idea has to be conducted. Also, the idea of increasing the profit percentage contribution of banks to corporate social responsibility activities could further contribute to society. For the FY2016/17, inflation remained at 4.5 percent. Low inflation in India, high agricultural yields due to a favourable monsoon (something we probably won’t see in FY2017/18), stable fuel prices and improved energy supply helped moderate inflation. Both food and non-food inflation dropped in the last fiscal year. There should be policy reforms to increase investment, lower inflation and wangle suitable investments instruments to channel remittance deposits into infrastructure financing. Moreover, there is a dire need to revise and devise policies based on geopolitical strengths.

- Dhital is a graduate from the University of Delhi

Published: 10-09-2017 07:58

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