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NEPAL: Don’t Forget the Economy

Marty Logan

KATHMANDU , Feb 26 2006 (IPS) - The owner of the small ‘Camera Mart’ in Kathmandu’s Thamel tourist area, Aakash Shrestha has seen business plummet about 60 percent in the last nine years. “I didn’t sell a camera yesterday and I probably won’t sell one today,” the young man said early one recent evening. “Maybe tomorrow,” he added with a smile and a slight shrug that signalled ‘what else can I do?’.

That fatalistic attitude might work for a retail businessman but those entrusted with managing Nepal’s economy should do more than happily count the millions of dollars sent home by the growing number of citizens working overseas, says a recent report. In fact, if the government doesn’t start balancing its books, it could be bankrupt by June, adds the paper by Nepal’s Institute of Development Studies (IfDS).

It is no surprise that this South Asian nation squeezed between India and China has been in political crisis at least since King Gyanendra fired the parliament in October 2002, long before he pushed aside his latest handpicked prime minister in a Feb. 1, 2005 bloodless ‘palace coup’. Despite the king’s promises to restore peace, most people here believe that life has not improved in the past year and the phrase “failing state” is heard more often to describe Nepal.

Fuelling the political instability is a violent Maoist uprising that has left 13,000 dead – most of them innocent villagers caught between the rebels and government forces – chased tens of thousands from their village homes and destroyed millions of dollars worth of infrastructure in a nation where about a third of people live on less than a dollar a day.

A decade of destructive bomb blasts and frequent Maoist-called general strikes have crippled the economy, the only bright spot being the export of Nepali labour overseas. The roughly 130 workers who leave the country daily help boost overseas earnings, which now contribute at least 15 percent of the country’s gross domestic product, says the World Bank.

But a look beyond the influx of workers’ dollars deep into the country’s finances reveals unsettling signs. Even remittances are showing signs of weakening, argues the IfDS report.

It appears that some families whose wage-earners are overseas have decided to invest their dollars in India, where the political situation is stable. “If the available information is any guide, it will lead to a sharp decline in receipts from remittances,” predicts the Institute.

More bad news is that a 4.0-billion-rupee (55.6-million-US-dollar) surplus predicted in the July budget (excluding development spending) will actually be a 3.6 billion-rupee deficit, thanks to tariff cuts announced in January’s supplemental budget, economic activity since July and based on the accuracy of the Ministry of Finance’s past forecasts, adds the report.

“As the World Bank and the International Monetary Fund have decided not to release additional resources under the Poverty Reduction Growth Facility, the government (will have) no independent resources at its disposal,” according to IfDS, and will have no choice but to borrow from the Central Bank.

With inflation soaring, the trade deficit widening and draining reserves of Indian currency, the report predicts: “once the economic problem explodesàwe will not have long to deal with the people in the name of finding alternative programs and measures like, say, in the area of political issues. We will not be surprised if total anarchy prevails in the country.”

IfDS’s predictions were vehemently rejected by junior minister for finance Roop Jyoti, who called two media conferences to repudiate the findings.

“We are not trying to criticise the government,” IfDS executive director Raghab D Pant told IPS. “We are just trying to point out the political implications of the current economic situation.”

Not only the government but the main opposition political parties are also ignoring the risks, he added, in the mistaken belief that once the country’s political problems are solved its economic knots will naturally unravel.

Jyoti dismissed the IfDS report as the product of “political bias”. Revenue in the first sixth months of the fiscal year grew over last year’s figures and “the public expenditure is within the limits and criteria set by the annual budget”, he told journalists earlier this month.

“These figures indicate that the government will be able to achieve its set goals and ensure economic stability,” added the minister.

An IMF report also released this month did not criticise the government’s fiscal policies but it did project a revenue shortfall and predicted the government would need to take domestic loans equal to 1 percent of gross domestic product (GDP). The economy would grow 2.5-3.5 percent, it added.

With political stability, better security conditions and structural reforms, “Nepal could see a gradual return to growth rates of 5-5½ percent through 2009/10,” added the IMF. “But if the conflict persists and the political impasse stalls reform implementationàthe fiscal and external position could deteriorate, and international reserves could be lower.”

This past week brought unsettling economic news. The trade deficit grew by more than 24 percent in the first six months of the fiscal year, as imports rose faster than exports, reported the Central Bank. And in the first seven months, revenue went up just three percent, far from the government target of 15 percent.

The Central Bank also revised its inflation prediction for the year, to seven percent from the previous five percent. “Economic growth is expected to remain modest and less than the target” of 4.5-5 percent, added the bank’s chief of research Keshab P Acharya in the report.

Tourism declined 2.5 percent in 2005, to 375,501 arrivals, reported the Nepal Tourism Board. In 1999, 491,504 people visited Nepal.

Back in Thamel, shopkeepers call from their doorsteps: “Sir, pashmina shawls, please come and take a look.” Others appear too forlorn and simply sit and watch the parade of pedestrians, rickshaws, motorcycles and taxis squeeze past.

“I have no other idea for a business,” says Shrestha in Camera Mart. “I’m waiting, and hoping for peace to come soon – it’s been so long.”