On November 24, 2015, Finance Minister Bishnu Prasad Paudel released the much awaited ‘White Paper on the Current Economic Situation and Immediate Way Forward’. In 113 points, the paper provides the background for the need to release such a paper, summarizes the current economic situation, provides – the impact of the current crisis on the economy, sectoral review on socio-economic situation, details of public finances and plans for the way forward with an abundance of ‘will be/shall be done’ statements.
The section on current economic situation summarizes and collates information largely from the last fiscal year, most of which is already available in the public domain. Following the review of current economic situation, the paper highlights some of the major economic impacts of the current crisis.
CURRENT ECONOMIC SITUATION
Economic growth slowed down: Due to the physical damages and the disruptions in economic activities, economic growth in the last fiscal year stood at a mere 3% as against the estimates of 6% growth
Budget implementation woes: In FY 2014-15, only 84.3% of the total allocated budget was spent. 85% of the budget allocated for recurrent expenditure, 75.9% of the allocated budget for capital expenditure and 91.1% of the allocated budget for fiscal management was spent. Domestic and private investments have been sluggish; capital formation has struggled owing to low capital spending.
Ballooning Trade deficit:In FY 2014-15, trade deficit stood at NPR 689 billion (USD 6.9 billion). Exports declined by 7.3% and imports rose by 8.4%. Balance of payment remained in surplus due to increased remittance flow and current account surplus.
Revenue Target missed: Only 96% of the revenue collection target was met in FY 2014-15. As against the targeted foreign assistance of NPR 123 billion (USD 1.23 billion), only 45% of it was mobilized and just about 80.4% of targeted internal debt could be mobilized. Failure to spend the entire amount as planned left the government treasury at a surplus of NPR 41 billion (USD 410 million).
Debt situation: At present, Nepal’s total debt stands at NPR 539.75 billion (USD 5.1 billion) of which, internal debt and external debt percentages are around 36.4% and 63.5% respectively.
Stagnant funds: Significant amounts of funds from profitable public enterprises, Employees Provident Fund (EPF), Citizens’ Investment Trust (CIT) and other funds have not found their way into productive investments.
IMPACT OF THE CURRENT CRISIS
Growth projection tumbles: The government’s ambitious target for FY 2015-16 of 6% GDP growth has been severely dented by the disruptions in supply and the massive slowdown of economic activities with growth projection down to 2% with further decline likely if situation persists.
Budget implementation woes v2.0: Only 4.1% of the target capital expenditure was spent in the first trimester of this fiscal year and NPR 74 billion (USD 701 million) allocated for reconstruction activities remains unspent in the absence of institutional framework. Consequently, capital formation has been impeded.
Economy-wide impact: Industrial activities are hamstrung due to the disruptions in supply of raw materials and the acute shortage of fuel. Agricultural and industrial produce have not been able to access markets due to difficulties in transportation owing to the strikes and fuel crisis. Hotel, restaurant, tourism, construction, banking, transportation sectors and the like, which contribute more than 50% to the GDP have been adversely affected due to the shortage of fuel and other essential goods.
Rise in poverty likely: The Post Disaster Needs Assessment (PDNA) estimated that around 700,000 people have been pushed below the poverty-line due to earthquake, out of which an estimated 60% belong to mid-hill and Himalayan region. The rise in poverty due to the impact of the earthquake is most likely to be further exacerbated by the current economic crisis eroding Nepal’s hopes of graduating to the status of developing country by 2022 and that of middle-income country by 2030.
Macroeconomic indicators grim: Inflation which stood 6.9% in the first month of the fiscal year rose up to 7.2% and 8.3% in the second and third month respectively. The inflation in food items has been even more pronounced. Rise in price of industrial raw materials and service sector resources is likely put upward pressure on prices. With dwindling imports and low internal production, a further rise in the price of food items seems likely.
Plummeting trade: Total trade has nosedived with a fall of 31% compared to the same period in last fiscal year. While trade deficit has declined owing to reduced imports, the unavailability of essential goods and construction materials for development works has adversely affected the economy. In the first trimester of the current fiscal year, imports and exports have gone down by almost 32% and 25.3% respectively, compared to the same period in the last fiscal year.
Balance of Payment situation: On account of decreased imports, increased remittance, and foreign assistance reimbursement recovery, the balance of payment registered a surplus of NPR 64.15 billion (USD 612.4 million) and foreign exchange reserve stood at NPR 892 billion (USD 8.5 billion) in the first trimester of the current fiscal year. Remittance inflow rose by 24% during this period.
Capital market affected: In anticipation of a better investment climate following the promulgation of the constitution, the NEPSE index had peaked up to 1205.08 points on September 15, 2015. However, with the ongoing crisis it had declined to 1075.8 points as of November 23, 2015.
The prolonged unrest in the Tarai-Madhes region, along with the supply disruptions has had an economy-wide impact. While the white paper projects GDP growth to fall to 2% with the possibility of further decline if the situation persists, Nepal Rastra Bank (NRB) has already projected the possibility negative growth of 0.9% this fiscal year if the impact of the crisis continues till mid-January. The last time Nepal had witnessed negative growth was in FY 1982-83 when the GDP had declined by 3%. Similarly, while the NRB has projected that the current crisis is likely to push 3% of Nepal’s population below the poverty line, the white paper simply mentions that the current crisis will further exacerbate the condition after the earthquake pushed 700,000 people below the poverty line.
A white paper is a document that comprehensively indicates the government’s plans, priorities, and larger policy goals in relation to an important issue or contingency facing the country. It is used by governments to inform their citizens about the magnitude of the issue(s) facing the country and its plans for a solution. Before now, the government of Nepal has on four occasions issued such a document; first, after the political change of 1990, second in 2006 after Jana Andolan II, third in 2008 after the election of the first constituent assembly, and fourth in 2011 after the government failed to present a supplementary budget.
Tejeshwi served as a NEF Fellow during 2015-16. He has a master’s degree in international economic policy from SciencesPo – Paris School of International Affairs and has previously worked at the International Labour Organisation’s Regional Office for Asia and the Pacific covering areas such as labour market policies, wages and employment, future of work, leveraging technology as a driver of formality, and labour force surveys for countries in the Asia Pacific region. At present, he works as an economist at the Embassy of Switzerland in Nepal supporting the employment and income domain of Swiss Cooperation in Nepal with a focus on private sector development, innovative development finance, and SME-led growth. Tejeshwi also serves as the focal point for Swiss-Nepal trade and investment relations promoting greater cross-border economic cooperation.