Dents in macro stability

  • Rapid economic deceleration is reflective of governmental oversights
Gradually withering interests of potential foreign inventors and development partners in Nepal pose a real risk in financial resource management in the long-run

Nov 13, 2018-

The present KP Oli-led communist government, despite holding more than two-thirds majority in parliament, is increasingly failing to deliver dividends. It is quite unbecoming for the government with such a strong popular mandate to have several major economic indicators alarmingly decelerate since it took charge.


Free falls

In the World Bank’s Ease of Doing Business Index, Nepal slipped 5 places down from the last year’s 105th position to 110th.  Two major factors that pulled the ranking down are: tax payments were made more difficult and electricity grid connection to industries still remained cumbersome. This has happened despite our much touted about ‘end of load-shedding’ saga.  Meanwhile, when compared to its two neighbors, India improved  the  ranking by 23 places and China by 19 places within a single year to rise at the 77th and 46th positions out of 190 countries. India’s improvement of whopping 45 places since 2017 is indeed remarkable. Nepal also slipped by a place in 2018 as per The Global Competitive Index published by the Geneva-based World Economic Forum, making it the worst country in South Asia with regards to promoting market competition.

Recent data released by governmental agencies show that over the period of one year since the parliamentary elections last November, which gave the communist alliance (now a united Nepal Communist Party) a thumping parliamentary majority both in federal and six out of seven provincial assemblies, foreign direct investment (FDI) commitment had gone down by 75 percent compared to the prior year. This certainly exacerbates the constraints on the development budget. Since FDI is also considered a barometer to the country’s economic viability, the scenario raises question on the government’s overall economic policy and credibility. The Nepal Stock Exchange (Nepse) Index is limping at around 1200, a drop of almost 400 points since the communist government took over. To repeat here again, the capital expenditure of the government remains precariously low at around five percent of the allocation during the first quarter, primarily because the federal government seemed reluctant to honour the country’s new federal structure and shirked away from working through new political as well as civil service architectures created in the provincial and local levels. Balance of payment, current accounts, trade balances and foreign exchange reserves also follow unfavorable trends.


Parallel risks

These indicators signal to three parallel macroeconomic risks. First, to add to our woes of chronic under-investment, the traditional sources foreign finance might also soon dissipate owing to questionable credentials compounded with the ‘communist’ tag of the government. This will have direct bearing not only on meeting Nepal’s Sustainable Development Goals (SDGs) by 2030 but also on financing Prime Minister Oli’s flimsy projects like waterways, gravitational energy and high-speed rail network projects.

A development finance assessment exercise by the government last year had estimated that average per annum financing requirement to achieve the SDGs by 2030 would be about USD 18 billion. This accounts for approximately 50 percent of GDP over the period 2018-30. Just to provide an indication, this annually-required amount exceeds the annual national budget of USD 13 billion proposed for the 2018/19 fiscal year by USD 5 billion. In fact, the real gap is more than 9 billion dollars as it is a deficit budget expecting to meet the gap of over 4 billion dollars by foreign grant and loan. This explains the gap in investible funding needs hindering Nepal’s development. Against this backdrop, gradually withering interests of potential foreign inventors and development partners in Nepal pose a real risk in financial resource management in the long-run.

Second, the government seems to have failed to recognise the fact that public financial management in a federal polity is entirely different from the mere conventional expenditure decentralisation framework under the unitary system. The fiscal federalism paradigm assigns major economic and developmental functions to sub-national and, corresponding to our constitutional scheme, to the local level governments. 

The responsibilities of sub-national or local governments—to manage its own resources and execute the economy-specific budget, match the development and public goods with the constituents’ preferences, internalise the spillover effects and to ensure financial governance and transparency—are, and in principle should be, independent of federal government interference or mercy. 

However, the federal government should not shy away from its duty that federal grants and allocations are adequate and reached to the targeted levels on stipulated time. Also, the federal government must support to build the capacity of lower level governments for budgetary management and to enhance the capability to absorb the resources. In absence of both, federal policy and institutional initiatives to enable sub-national governments to handle public financial management and the absorption capacity at the local level, runs the risk of pushing the entire federal edifice towards inevitable collapse.

Third, the inflow of foreign funds have not only dwindled, but there have also been reports of massive capital flight. The domestic investors are also not confident about investing due to unnecessary policy experimentation. Effectively, there are very few investment opportunities available in the country. The urban real estate market is already over-heated whereas land in remote areas are not even worth a fodder as the banks do not accept them as security for loans. The lower mark of cost of funds, including the service fee and hidden cost, is at 22 percent which is an apparent disincentive to any enterprise with moderate rate of expected return. Even at that cost, availability of credit facility from the banks and financial institutions has become almost impossible as a severe liquidity crisis, again, looms large.

The most dangerous of all is the government’s failure to acknowledge the fact that these trends and indices are outcomes of its policy or implementation failures, or both. Without such acknowledgement, policy correction is impossible as it only contributes to further deterioration in overall economic activities, particularly, the investment climate. As such, the macroeconomic stability that had been sustained through the  decade-long armed conflict followed by another decade-long political transition now becomes highly shaky in spite of a strong democratically-led government at the helm of state affairs.

The larger question is: even if such a strong government is unable to translate the country’s economic optimism into real opportunity, should one still believe that Nepal as a nation-state has an economic future?


Published: 13-11-2018 07:49

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