Despite the growing political instability in Nepal, the government needs to take bold steps to revamp the economy
Even though Prime Minister Pushpa Kamal Dahal recently painted a rosy picture of the Nepalese economy based on some positive trends in the hydropower sector, foreign exchange reserve and increased inflow of foreign tourists in the country, the people hardly feel their impact in their day-to-day life. The country is facing a severe economic crisis as agricultural and industrial production is falling, the trade deficit along with the unemployment problem is growing, the stock market is tumbling, the real estate business is sputtering, and restaurants and hotels apart from several other business activities are declining. On top of this, the inflation rate of 8.19 percent is fast eroding the purchasing power of the people.
The agricultural sector, the major driving force of the economy, is in trouble. The country that exported rice has started importing it for some years. In 2021-22, Nepal imported 1.4 million tonnes of rice from India worth US$473.43 million. Later, India imposed a ban on exports of non-basmati white rice to Nepal along with other countries on 20 July 2023, but after some time it allowed Nepal to import 95,000 tonnes of non-basmati rice.
The country is facing a severe economic crisis as agricultural and industrial production is falling, the trade deficit along with the unemployment problem is growing, the stock market is tumbling, the real estate business is sputtering, and restaurants and hotels apart from several other business activities are declining.
Industries are either getting closed or are running far below their capacity. The cement industry, for example, which is one of the prime industries in Nepal is running below 30 percent of its capacity. Of late, the Government of Nepal has given certain incentives to the export industries. It approved a new customs bill that waives customs duty to the export industries on the import of industrial raw materials. This bill also makes provision for tax exemptions on fuel consumed on international flights, aircraft, spare parts, equipment and in-flight food and beverages. It is, however, not known how such provisions would address the problems in the industrial sector.
On account of the lower demand for credits, the profits of the Nepalese commercial banks dropped by 18.61 percent to INR 8.41 billion during the first three months of 2023-24. Several banks have been merged to save them from liquidation. In such a situation, to reassure the general public about the safety of their deposits, Nepal Rastra Bank, the country's central bank, has made a provision whereby the banks and financial institutions would have to deposit certain amounts in the Deposit and Credit Guarantee Fund. Such a step is intended to ensure that in the case of a bank or financial institution facing liquidation, the Deposit and Credit Guarantee Fund would cover the losses of the depositor up to the amount of INR 312,500.
Furthermore, Nepal’s exports as compared to the imports continue to decline year by year. Between mid-July to mid-December, Nepal exported goods amounting to INR 39.5 billion and imported goods worth INR 401.37 billion, which created a trade deficit of INR 361.87 billion. The exports formed merely 8.96 percent of Nepal’s overall trade.
To reassure the general public about the safety of their deposits, Nepal Rastra Bank, the country's central bank, has made a provision whereby the banks and financial institutions would have to deposit certain amounts in the Deposit and Credit Guarantee Fund.
Besides, the Nepali rupee is gradually losing its value against the US dollar. In the 2022-23 fiscal year, one US dollar was equivalent to NRs. 128 (INR 80.0) on July 17, 2022, which shot up to NRs. 131.68 (IRs. 82.3) on 16 July 2023. Due to this change in the exchange rate between the US dollar and the Nepalese rupees, Nepal incurred a foreign exchange loss worth INR 37.5 billion in the fiscal year 2022-23 as the country had to pay more to foreign creditors in domestic currency.
Over and above, the Nepalese youth, including the women are fleeing from the country in the same way the bees sometimes have to leave their hives when they develop the feeling of insecurity. Over a million young people are fleeing the country each year in search of job opportunities in foreign countries. Many of the youth are even forced to work in foreign countries in areas in which their life is endangered. Recently, of the 200 Nepalese youth who joined the Russian army as mercenaries against the policy of the Nepal government, 7 youths were killed and about 100 are feared missing and injured in their fight with the Ukrainian armies.
The exodus of youth on a large scale to foreign countries has resulted in a decline in the demand for goods and services, like smartphones, restaurants, alcohol, food, and beverages, bikes and other items in the country. This not only eroded the trust of the private sector in the government, but it also negatively affected the investment climate in the country. Observing some of these developments in the Nepalese economy, Chandra Prasad Dhakal, President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) said “Nepal’s economy is in a sensitive mode...The shutters of small and medium businesses have been closed. Agricultural products are losing more markets. Demand is shrinking. There is extreme frustration among businessmen and they are planning to escape instead of investing.”
Observing some of these developments in the Nepalese economy, Chandra Prasad Dhakal, President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) said “Nepal’s economy is in a sensitive mode...
Recently, the World Bank has projected that Nepal’s economic growth in the current fiscal year is not likely to exceed 3.9 per cent against the government’s target of achieving six per cent economic growth. However, experts believe that the government will not be able to achieve even a 3-percent growth rate this fiscal year because the agricultural sector, the major driver of economic growth, is not responding positively.
Amidst this economic crisis, Nepal is facing the risk of getting greylisted by FATF, the global anti-corruption body. It has found that the country is not so serious about checking money laundering and terrorist financing. Also, the International Monetary Fund (IMF) has warned Nepal about a severe financial crisis if due measures are not taken to improve the economy.
Before it is too late, Nepal needs to restructure its economy on a war footing to ensure that job opportunities are created, domestic production of goods and services is boosted, the trade deficit is reduced, and the purchasing power of people is increased through business promotion. But it is yet to be seen as to how the government amidst the growing political instability in the country can take bold steps in its attempt to revamp the economy.
Hari Bansh Jha is a Visiting Fellow at the Observer Research Foundation
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Hari Bansh Jha is a Visiting Fellow at ORF. Formerly a professor of economics at Nepal's Tribhuvan University, Hari Bansh’s areas of interest include, Nepal-China-India strategic ...
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