It was not a phase of economic growth for the South Asian economies, including Nepal, right before the Covid-19 pandemic made an unprecedented contraction that was termed by India’s Central Bank Reserve Bank of India as ‘historic technical recession’. A trend of shrinking consumption and investment entered further into the downward spiral with the global pandemic halting the normal business operations and letting lives and livelihoods suffer unimaginable losses.

The new growing trend’s structural weakness is ensuring calls for an urgent intervention of significant fiscal support to the industry and people facing desperate situations. The third wave is projected to escalate another round of severe disruptions. Nepal’s excessive reliance on import, remittance and tourism make it even more precarious as the global convergence is imminently chartering towards difficulty. As the economy tailspins into chaos, a possibility of worse or windfall depends on the economic rebounding exercise the government in Nepal finally opts for.

Fiscal policy intervention

With growing economic distress and moving across the frontiers getting increasingly tricky for employment, it’s time the policies be made for absorbing the surplus labourers productively by expanding the base of the domestic economy. While experts can offer a varied number of suggestions, the need of the hour is to prioritise some of the essential action plans for immediate implementation. As per the International Monetary Fund (IMF) findings, the world economy is facing a global liquidity trap. In a nutshell, it implies that any economy with global exposure has to rely primarily on corrective fiscal measures to boost demand and finally attain normalcy. In particular, Nepal’s industries need empathetic policy support from the government to end the liquidity crunch in the short run.

With Nepal’s typical development profile, the pandemic has not left much room for entering into the structural-versus-cyclical debate for now. The pressing concern to save lives and livelihoods should drive the action. For that matter, it is imperative to have a broad-based plan to save the national income or Gross Domestic Product (GDP) consisting of private consumption, government consumption and net export. The aggregate demand level in the economy is determined through these factors; on the lower side, it causes lower output (supply) and thus economic depression. Looking back at the economic history of economies in crisis and their struggle for reviving the demand, the role of fiscal policy intervention appears as the only way out on the macroeconomic front.

Regulatory corrections

The Monetary Policy background (2021-22) of Nepal Rastra Bank (NRB) reassures in words, “Refinancing and subsidised loan facilities, together with monetary and regulatory easing, aimed to support economic recovery by minimising the impact of Covid-19, have expanded the flow of credit in the economy. The business operating cost has remained at a lower level even during the pandemic because of the low lending rate at a single digit.” However, the situation on the ground juxtaposes it with the country’s leading businesses in jittery while coping with the most basic working capital requirements.

The base rate of commercial banks remained 6.86 percent in mid-June to mid-July 2021 compared to 8.50 percent in the corresponding month of the previous year. Likewise, commercial banks’ weighted average deposit and lending rate stood 4.65 percent and 8.43 percent, respectively, in mid-June to mid-July 2021. Such rates were 6.01 percent and 10.11 percent, respectively, in the corresponding months a year ago. NRB’s monetary policy orientation is praiseworthy though it doesn’t trickle down in terms of benefits as the banks are wary of lending even the collateralised institutional loans.

The banks must come forward and lend to deserving entities. NRB should also keep an eye on the growing inflationary trend and monopolistic practices besides the precarious Balance of Payment (BOP) situation. NRB should double-check its estimate of average consumer inflation (3.60 percent in 2020/21 compared to the target of 7.0 percent; on a year-on-year basis, inflation is believed to be at 4.19 percent in mid-June to mid-July 2021) as the end consumers are certainly paying the higher price on the ground.

The Central Bureau of Statistics (CBS) has estimated the Nepali economy to grow by 4.01 percent in 2020/21 compared to 2.09 percent in 2019/20. However, CBS believes that maintaining this level of growth rate is challenging due to the second wave of the pandemic that reappeared in the fourth quarter of the year. Now, as the pandemic is hammering hard on the economy with a third wave, a longing for healthy growth will be desirable but not attainable if the counter-response to the crisis does not come promptly.

According to the IMF, the world economy contracted by 3.2 percent in 2020 and is projected to expand by 6 percent in 2021. The world economy expanded by 2.8 percent in 2019. The figures are not encouraging. Even more alarming is their fallout, and such phenomenon can’t be summed up in data and analysis alone. The remittance from outbound migration and tourism have been the most critical contributors to Nepal’s economy in the last two decades. Now under a cloud in an increasingly uncertain world, Nepal is at a crossroad where it needs a serious push for economic reforms, thus strengthening its domestic economy and retaining the talents.

In the 21st century, like any modern economy, Nepal, too, can’t choose to be isolated. It should continue its interface with the world and reap the benefits of convergence, that too, even at the greater scale. Notwithstanding such practical compulsion and efforts, Nepal deserves to get a calibrated economy with the capacity to generate sufficient employment in formal sectors and help in the burgeoning middle-class population.

The industrial revival is indispensable for Nepal. Equally important is creating a robust ecosystem for output and demand. As Victor Hugo said, “Nothing is more powerful than an idea whose time has come.” In the quest of finding a new development paradigm, this is an idea whose time has indeed come for Nepal.