Annual Analysis: Economy & Development

0 Comments


Nepal’s economy went through a series of changes over the past year. Looking closely at the sectors-agriculture, manufacturing and tourism sector were hit hardest, primarily due to the pandemic (which largely restricted daily operations) and partially due to internal conflicts (between service providers/producers and service buyers) alongside other hurdles inflicted by natural calamities. Macroeconomic indicators painted a gloomy picture of the national economy, owing chiefly to low remittance earnings, widening trade deficit and rising liquidity crunch. Moreover, frequent changes in the ruling government accompanied by absence of ministers at key ministries (both at federal and provincial levels) brought coordination and communication gap, impacting implementation of economic policies and hindering the nation’s growth and development targets.

Timeline of major economic events in 2021

DateEvent
January 01The Supreme Court issued an interim order to sugar mills, directing them to settle outstanding payments to sugarcane farmers.
May 24Finance Minister Bishnu Poudel (under the Oli government) presented an ordinance budget of Nrs. 1,647.57 billion (USD 13.60 billion) for the fiscal year (FY) 2078/79.
June 10All seven provinces presented their annual budget for the next fiscal 2078/79; the combined budget stood at Nrs. 262 billion (USD 2.16 billion).
July 10Nepal and India signed a Letter of Exchange to the India-Nepal Rail Services Agreement 2004.
August 10Finance Minister Janardan Sharma (under the Deuba government) introduced a white paper in the House of Representatives (HoR) depicting a bleak picture of the national economy.
 Nepal Rastra Bank (NRB) unveiled the monetary policy for the fiscal year (FY) 2021/22 with major emphasis on digitization of banking transactions.
September 10  Finance Minister Janardan Sharma (under the Deuba government) presented a replacement bill in the House of Representatives (HoR), making amends to the previous ordinance budget for the fiscal year (FY) 2021/22.
  September 17  Nepal Rastra Bank (NRB) injected Nrs. 20 billion (USD 169 million) in the domestic financial system to ease the growing shortfall of liquidity in the banking system.
October 18    Foreign Minister Dr. Narayan Khadka (under the Deuba government) urged his Chinese counterpart Wang Yi to re-open regular border transactions at Tatopani-Khasa and Rasuwagadhi-Kerung border points.
October 24  The Ministry of Agriculture and Livestock Development (MoALD) reported a loss of Nrs. 8.26 billion (USD 68 million) due to the unseasonal October rainfall.
November 20Nepal Rastra Bank (NRB) launched the highly anticipated National Payment Switch (NPS).
December 12Share investors lost Nrs. 1 trillion (USD 8.25 billion) during the time period between August 2021 to November 2021.

Economic Policies

Context

Finance Minister Janardan Sharma. Photo: RSS

The KP Oli government on 29 May, 2021 presented an annual budget of Nrs. 1,647.57 billion (USD 13.58 billion) through an ordinance, with special focus on controlling the Covid-19 pandemic and accelerating the recovery path for the economy. The government also projected a growth rate of 6.5 percent and a per capita disposable income of Nrs. 180,279 (USD 1,486). However, on 12 July, 2021, the Supreme Court issued a verdict, which stripped Prime Minister Oli of his duties and responsibilities and appointed Sher Bahadur Deuba (leader of the opposition party) as the new prime minister. Following the change in government, the new finance minister- Janardan Sharma presented a white paper on 10 August, 2021 depicting a bleak situation of the national economy. Similarly, Nepal Rastra Bank (NRB) on 13 August 2021, unveiled its monetary policy with major emphasis on helping enterprises and individuals impacted by the pandemic by extending deadline for loan payment. Lastly, Minister Sharma introduced a substitution bill on 10 September, 2021, replacing the previous ordinance budget with a new one of Nrs. 1.623 trillion (USD 13.86 billion.

Analysis

For most of it, the ordinance budget (presented by the Oli administration) was largely aimed at expanding the voter base by the government for the then upcoming November elections. The budget had strategically allowed for an increment in social security and salary hike to please certain sections of the society. The growth target of 6.5 percent too was vaguely ambitious for a country fighting through its brutal second wave of Covid-19 pandemic; accurately reflecting a government guided by unrealistic assumptions and expectations. Considering this, the white paper (presented by the Deuba administration) was a befitting reply to the ordinance budget which was deeply concentrated in approving policies and programmes that suited the CPN-UML government. The paper not only discredited the formulation, finalization and implementation of national policies and programmes by the Oli government but also made public the practice of data manipulation by them; further raising questions regarding their credibility in pursuing clear policies. Similarly, the substitution bill (which replaced the ordinance budget) was more realistic as it focused on policies of transforming the economy from the current import-based model to an income-oriented one alongside addressing the ballooning trade deficit. Yet it too failed in downsizing the public and domestic debt of the country in addition to exerting immense pressure on the collection of revenue without clear state mechanism to do the same. Moreover, the assumptions made in the monetary policy (which was unveiled before the tabling of the substitution bill) remained largely unguided in its projection and assumptions; mirroring the lack of communication and coordination between NRB and the Ministry of Finance (MoF) and hampering the implementation of merits/provisions as stipulated in it.

Dilemma in Agricultural Sector

Context

The year started off with the Supreme Court issuing an interim order to sugar mills to settle outstanding payments to sugarcane farmers within January 2021. The decision came as a relief to the sugarcane farmers who were demanding for their payment from sugar mills including- Shree Ram, Lumbini, Indira and Annapurna Sugar Mill. Moreover, the Ministry of Industry, Commerce and Supplies (MoICS), sugar mills and sugarcane farmers also reached a five-point agreement on 03 January, 2021, mandating sugar mills to make their final payment; however, farmers are yet to receive payment worth Nrs. 410 million (USD 3.38 million) and have continued with their protest throughout the year. Likewise, MoICS’s decision to allow FDI in Nepal’s agricultural sector too was heavily criticized and objected by relevant stakeholders. According to the decision, FDI was allowed in livestock farming, fisheries, bee farming, vegetables and fruits farming, oil, pulses and dairy industry under the condition that they export 75 percent of their total output. However, strong objection was displayed by agro-industries citing the government’s vested interest in introducing the new FDI bill. Furthermore, the devastating October rainfall destroyed agricultural crops (in particular paddy) worth Nrs. 8.26 billion (USD 68.80 million) across the country alongside inflicting immense loss upon livestock and food stored by farmers.

Analysis

Sugarcane is cultivated across more than forty districts of Nepal and engages around 0.1 million farmers; however, sugarcane industries have consistently escaped from making payments to sugarcane farmers. While an agreement was reached between the three parties at the beginning of the year, the government’s failure in binding sugar mills through legal frameworks and delay in announcement of the Minimum Procurement Price (MPP) has risked farmers of postharvest loss, compelling them to sell the product (sugarcane) at below market prices. Likewise, the government amended the Foreign Investment and Technology Transfer Act (FITTA) 1992 this January allowing FDI in the agriculture sector. However, the move received heavy backlash from agro entrepreneurs fearing not being able to compete with multinational companies in terms of technology, investment and market access. While the bill (in earnest) is an outcome of strong political lobbying; allowing FDI in agriculture can ultimately enhance the ability of agro-industries in exploring global markers, attracting more investment (breaking the current cycle of low investment) and harvest of sub-standard agro-produce. However, the government has to be cautious that incidence of land grabbing (alienation of small scale and indigenous farmers from their land), alteration in agricultural practices (change in livelihood and food prices) and FDI’s impact on land use patterns (change in gender and social participation in agriculture) are averted. Lastly, the unusual October rainfall accurately portrayed the government’s priorities regarding the agricultural sector. Even with warnings and cautions from the Department of Hydrology and Meteorology (DHM), concerned authorities remained lax in their approach and preparation regarding the heavy rainfall; rendering paddy farmers with immense harvest destruction.

Concerning Economic Landscape

Context

Nepal Rastra Bank (NRB) published several reports including- the Current Macroeconomic and Financial Situation and Economic Surveys over the year, revealing an alarming state of the Nepali economy. Out of the macroeconomic indicators, rising liquidity crunch, widening trade deficit and reducing remittance earnings were severe. While the central monetary authority injected credit into the financial system several times; banks and financial institutions (BFIs) (as of November 2021) are left with only Nrs. 55 billion (USD 455 million) to be enjoyed throughout the current fiscal. Similarly, with growing population and stagnant domestic production, the country’s dependency on food imports reached a new high, with the country importing staples worth Nrs. 3.23 trillion (USD 2.67 trillion) as of mid-July 2021. Likewise, merchandise imports of Nrs. 650.29 billion (USD 5.38 billion) as compared to merchandise exports of Nrs. 82.12 billion (USD 679 million) (as of mid-November 2021) too widened the trade deficit by 56.8 percent. Looking at the data for foreign direct investment (FDI), a considerable gap between approved FDI and actual FDI inflows was also noticed in Nepal. According to Nepal Rastra Bank (NRB), actual FDI inflows stands at only 30 percent to 40 percent of approved FDI. Furthermore, the impacts imposed by the pandemic drastically reduced remittance earnings for four straight months of the current fiscal. As of latest data, remittance earning has shrunk by 7.5 percent to reach Nrs. 312.42 billion (USD 2.58 billion). This is unsettling for an economy where remittance accounts for 30 percent of the gross domestic product (GDP). Lastly, hotels, restaurants, travel and tourism sectors (for the second year), registered the lowest growth rate owing due to the government’s weak response and recovery policies with regards to Covid-19.

Analysis

Nepal’s economic indicators have been ominous for quite some years now, however, in the recent fiscal, it has been more alarming. For an economy highly dependent on remittance, the fall in foreign earnings has severely impacted the nation’s ability to pay its import bills and has widened its trade deficit. Moreover, with the country chiefly exporting products like refined palm and soybean oil (products that aren’t produced domestically), the asymmetry between imports and exports (as of November 2021) has further soared to Nrs. 83.4 billion (USD 690 million). Similarly, the difference between approved FDI and actual FDI inflows has delayed the implementation of anticipated projects. The soft economic embargo along Nepal’s northern transit points (since January 2020) has resulted in immense loss to local and national businessmen, who have been paying exorbitant price for trading goods via Indian ports. Likewise, the liquidity volatility in the financial market has chronically impacted the economy. With a meager capital spending of 4.53 percent (as of November 2021), cash released by the treasury in the economy has been below the expected average. Similarly, the recent asymmetry in bank deposits and bank loans has made it more difficult for the central bank in managing monetary authority. Lastly, slow vaccination drive, travel restrictions and prolonged recession in the travel and hospitality business has heavily impacted the sector. With 17 percent of hotels across the country shut (including- Hotel Annapurna and Shangri La) and fluctuations in the foreign exchange rate, the country’s tourism infrastructure has severely collapsed; with little signs of improvement.

Share Market and its Anomalies

Context

Nepal Rastra Bank’s (NRB) tightening on share collateral, an impending liquidity crisis and the revival of alternative investment options post lifting of lockdown measures has contributed towards a sharp decline in Nepal Stock Exchange (NEPSE). Moreover, the market was also plagued by a series of controversies including insider trading which resulted in the resignation of CEO of NEPSE, an investigation into the chief of SEBON (Securities Board of Nepal) and a probe for delayed disclosure of key financial details of 51 high risk companies; ultimately reducing traders and customers confidence regarding the market and their investments.

Analysis

While the tightening of stock pledges by NRB definitely contributed towards the market’s decline; risky investments made by investors on hydropower projects, development banks and financial institutions based on market rumors rather than realistic predictions further pulled down the market. Moreover, involvement of top-level officials (from NEPSE and SEBON) in insider trading raised ethical questions regarding the functioning of the regulatory bodies; crushing investors and trader’s faith in them. Considering this, NRB needs to reconsider its policies and amend its restrictions on pledging one’s own assets for trading. Similarly, investors too need to adopt careful share-trading practices. Furthermore, incidents of insider trading also must be dealt with strict prosecution to prevent such anomalies and events in the near future.

Outlook for the Year Ahead

According to the Asian Development Outlook (ADO) 2021 Update, Nepal’s economy is anticipated to grow by 4.1 percent (at market prices) in the upcoming year 2022. This growth is largely anticipated to be driven by the ongoing vaccination drive and increased agricultural and industrial output. However, paddy plantation is predicted to be heavily impacted by future natural hazards including erratic monsoon and floods. Similarly, with weak domestic production, imports are expected to surge more than exports, further adding to asymmetry in balance of payments. Likewise, with forecast of future pandemic waves (owing to new variants of Covid-19) economic sectors including- tourism, construction and manufacturing is anticipated to record weak performance. Remittance earnings, FDI inflows and foreign currency reserves too is expected to fall. Considering this, the government’s fiscal and monetary policy must bring in concrete refinancing facilities and investment policies to assist the economy in its growth target. Moreover, recovery plan for banking and financial sector (with regards to the current liquidity crisis) must also be prioritized.

Leave a Reply

Your email address will not be published.