Political instability could affect recovery of the economy hit by the pandemicWith elections announced, government policy will not be stable to attract investment and businesses will be pressed for donations for parties’ poll campaigns, experts say.
The dissolution of the House of Representatives and the call for elections has worried economists and investors that political instability will impact the economy already devastated by the Covid-19 pandemic.
President Bidya Devi Bhandari on Sunday dissolved the lower house and announced the dates for midterm elections in April as per the recommendation of Prime Minister KP Sharma Oli, who for long has been embroiled in a bitter dispute with other top leaders within his own party.
“In the short-term, economic recovery will be affected by the government bureaucracy under the caretaker government as it will not be much interested in implementing development projects and policies aimed at helping the businesses hit hard by the pandemic,” said Shankar Sharma, former vice-chairman of the National Planning Commission. “The private sector also will be in wait-and-see mode before making any further investments amid political uncertainties.”
Nepal stock exchange index plunged by 96.88 points on Sunday with the market responding to the shock news that Oli had recommended for dissolution of the House of Representatives although it went up by 30.33 points on Monday.
Even though economic activities have been picking up along with the relaxation in prohibitory orders in a number of sectors, some in the service industry including tourism, education, party palaces have continued to remain largely closed.
It took nearly six months for the government to implement the relief programme announced in the budget in May targeting the small and medium enterprise and tourism industry.
“At a time when the business community is in need of relief and rehabilitation, they will be under increasing pressure to donate to the political parties and leaders for the elections if they are held as announced,” Sharma said. “The government which is struggling to generate resources to fund the rehabilitation of the Covid-19 affected sectors, will have to spend big on holding the elections.”
Elections are becoming increasingly expensive. A study carried out by a domestic election observer group in 2017 had shown that the government, political parties and candidates spent an estimated Rs131.63 billion in total during the three tiers of elections held that year.
The study by the Election Observation Committee, Nepal revealed that the government spent Rs34.72 billion while the candidates and their supporters spent as high as Rs96.91 billion in total.
Former Finance Minister Ram Sharan Mahat said that holding elections has become an expensive proposition in recent years.
“At a time when the priority should have been taking the country out of the current health and economic crisis, the prime minister has sought to spend scarce resources in expensive elections,” the six-time finance minister told the Post.
Critics have been saying that pandemic control measures, relief and rehabilitation of the sectors affected by the pandemic have been undermined by the internal infighting within the ruling party.
“As a result, the government’s focus was on managing internal rift in the ruling party instead of implementing major projects,” said Bishow Poudel, an economist. “With the dissolution of Parliament, politics has become unstable. This will lead to underinvestment which is bad during the time of economic recovery.”
Industrialists say that although supply and consumption of goods and services will continue which will have a role in economic recovery, political instability affects the additional investments.
“When the government changes frequently, the question remains how prepared investors will be to invest,” said Satish Kumar More, president of Confederation of Nepalese Industries, a grouping of medium and large scale industries. “In such an environment, investors usually are in wait-and-see mode.”
Without investment from the government and the private sector, recovery of the economy battered by the pandemic will be a tough task.
As a result of the pandemic, the country’s economy is expected to have grown by just 2.7 percent in the last fiscal year 2019-20 after over six percent growth in the past three years, according to the Central Bureau of Statistics.
The economy is projected to grow by just 0.6 percent in the current fiscal year 2020-21 against the government’s target of seven percent, according to the recent projection of the World Bank.
“Economy will bounce back to some extent after the pandemic is over because the base for the growth will be lower,” said Sharma. “But dreams for sustainable high growth appear to remain dreams for the foreseeable future amid the outlook of political instability.”
There was high hope from this government because it was the most powerful government since restoration of democracy in 1990, enjoying support of almost two-thirds majority in Parliament. The constituent parties of the ruling Nepal Communist Party—CPN-UML and Communist Party of Nepal (Maoist-Centre)—before their merger, had sought votes from people promising political stability and development.
But the infighting within the ruling Nepal Communist Party and now the sudden call for fresh elections have put that stability into question.
“Investors pour money when there is political stability because they think that policy remains stable even if it may not be the right policy,” said Sharma.
It is not immediately clear what happens to dissolution of the house with the legal challenges made against the Prime Minister’s move with over a dozen writ petitions registered at the Supreme Court on Monday.
“The government had earned a huge political capital after sweeping electoral victory in 2017 which was a huge opportunity to take decisive action to boost the economy,” said economist Poudel. “But it allowed the political capital to go to waste which is unfortunate.”
The country’s political instability has been one of the binding constraints to growth.
According to the report, Nepal Growth Diagnostic, jointly prepared by a team of economists working on behalf of the governments of Nepal and the United States to implement projects under Millennium Challenge Corporation in 2014, there are four key constraints to Nepal’s growth—policy implementation uncertainty, the inadequate supply of electricity, the high cost of transportation, and challenging industrial relations and rigid labour regulations.
“The combination of political instability and the resulting policy implementation uncertainty are the foundations of Nepal’s most binding constraints to growth,” the report had concluded.
After a brief period of political stability in early 1990s, the country underwent political upheavals with the Maoists insurgency, royal takeover of the power and prolonged political transition after the end of decade long conflict in 2006.
In the 2000s, the economy grew by less than four percent in most of the years and average economic growth over the last decade has stood at just 4.6 percent despite over six percent growth consecutively since the fiscal year 2016-17, according to the Economic Survey 2019-20.
“When there is political instability, preparation of long-term plans and their implementation cannot be undertaken swiftly which affects the prospect of growth,” said Poudel.
After the latest action by the Prime Minister, the country will see the political instability in the short-term.
“If the elections happen and it gives a clear mandate to one political party, the situation may again be friendly for high economic growth,” said Poudel. “The situation may be as precarious otherwise.”