If the current economic crisis in Nepal continues, it could lead to a Sri Lanka-like crisis
Nepal wants to reach middle-income status in the next three years and the government has been projecting the picture of a reviving economy based on certain figures of growing remittances and improvement in the tourism sector. But the economic condition of the country, overall, is deteriorating every day. It is for the first time that the government has accepted that the country is under recession as it is mainly hit by a reduction in industrial production, lower investment, liquidity crisis, high-interest rates, burgeoning trade deficit, lower capital expenditure, and a decline in revenue collection.
The overall growth rate of the economy is negative. Construction, mining, and quarrying sectors are in the doldrums. Crash in the stock market, real estate, and credit crunch have rattled the economy. Buyers hardly show up in major markets to buy cars, furniture, gold, and clothes. The presence of customers at restaurants and hotels is dwindling day by day.
As of 5 March, the government was able to generate revenue worth NPR. 554 billion; but its expenditure was to the tune of NPR. 748.5 billion. Thus, the revenue collection was less than the expenditure by nearly NPR. 200 billion. Until mid-February in the current fiscal year (2022-23), the debt liability of the government shot up to NPR. 2 trillion. Public debt during the last five years has nearly doubled from NPR. 1.43 trillion in 2018-19 to NRs. 2.013 trillion in 2021-22. In 2022-23, the share of external debt to the country’s Gross Domestic Product (GDP) reached nearly 42 percent.
Unemployment is growing because of the slowed economy and lack of job opportunities, forcing youth to leave the country for jobs in foreign countries.Nepal’s foreign direct investment fell from NPR 16.30 billion during the first eight months of 2021-22 to 1.17 billion in the same period in the current fiscal year. The inflation rate reached 7.44 percent. Unemployment is growing because of the slowed economy and lack of job opportunities, forcing youth to leave the country for jobs in foreign countries. According to the Department of Foreign Employment in Nepal, each day 3,000 youth are leaving the country for this purpose. Business, in general, is down by 10 to 50 percent. Industrial production has reduced to 30 percent. The private sector, which contributes 81 percent of the GDP and accounts for 85 percent of the jobs, is spending the least. The government has failed to pay NPR 125 billion to the contractors, though they have completed their work/projects. Last year, the contractors were compelled to halt works on 3,500 of the 5,000 projects in the country as they were not paid. This led to a decline in construction activities, which account for 7 percent of the GDP and employs about NPR. 2 trillion, apart from 500,000 skilled Indian labourers. The situation is so vulnerable that even the pension payments to many of the teachers and civil servants have been stalled. There is a delay in paying the social security allowance and loan servicing. Due to this crisis, the federal government cut the equalisation grants to the provincial and local governments by 50 percent. Even though the country is facing a financial crisis, there is hardly any measures taken by the government to recover the unsettled accounts. Of Nepal’s total budget of NPR 17.9 trillion in 2022-23, the unsettled accounts turned out to be almost half.
There is a delay in paying the social security allowance and loan servicing. Due to this crisis, the federal government cut the equalisation grants to the provincial and local governments by 50 percent.To add to the difficulties of the government, certain forces in the country have started a campaign for waiving the loans of borrowers up to NPR 2 million. Being influenced by such a campaign, many borrowers of microfinance institutions (MFIs) and cooperatives even tend to think that they would not have to pay the interest along with the principal amount of the MFIs. So, each day they show their strengths on the streets of Kathmandu. In the meantime, the cases of involvement of certain groups in printing and disseminating fake Nepali currency notes are growing. Police have arrested several persons indulging in the transaction of fake currency notes in the denomination of NPR. 1,000. To make matters worse, the Nepal government itself has decided to pay NPR 200,000 to 4,008 former Maoist combatants who were disqualified from being integrated into the Nepal Army on account of being either underage or late recruits in 2007. It will cost the nation nearly NPR 800 million to pay the cash relief. It is feared that compensation is used as a political tool. Therefore, many parliament members have demanded that the government should stop giving cash relief to the disqualified former Maoist combatants. On this issue, both the ruling Nepali Congress lawmakers and the Opposition CPN-UML lawmakers, apart from the lawmakers of different other political parties, are critical of the government’s plan to distribute such cash relief to the ex-Maoist fighters at a time when the nation is facing a severe financial crisis. Though too late, the government of Nepal provided certain reliefs to low-business firms. It waived the penalty fee on the tax dues of those business houses that failed to pay taxes for a long period. Also, it forced banks to reduce interest rates so that the business houses could pay loans. Accordingly, the interest rate on the fixed deposits has been slashed down to 9.99 from 11 percent; while the interest rate on the deposits has been slashed to 7.99 percent from 9 percent.
Both the ruling Nepali Congress lawmakers and the Opposition CPN-UML lawmakers, apart from the lawmakers of different other political parties, are critical of the government’s plan to distribute such cash relief to the ex-Maoist fighters at a time when the nation is facing a severe financial crisis.However, it is largely believed that the government’s response to address the present economic crisis is so minimal that it might not have any desired positive result. In the fluid political situation, there have been three prime ministers in just two years. It is the survival of the government rather than the issue of resolving the economic crisis that is currently more important. So, there is hardly any prospect, at least in the short term, for resolving the present economic crisis in the country. In certain quarters, speculation prevails that Nepal could be another Sri Lanka in South Asia in terms of economic crisis. Though this remains uncertain, it can be safely said that the country is heading for a far larger economic crisis if the present situation continues.
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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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