Nepal’s trade deficit in the first half of the current fiscal year crossed the $4-billion mark, according to data released by government-owned Trade and Export Promotion Centre (TEPC). Imports account for 93percent and exports 7 percent of the country’s total foreign trade at nominal value. The government has spent barely 10 percent of its total capital expenditure budget of approximately $3 billion, resulting in a snowball effect on the entire economy. The banking system is facing an acute liquidity crisis that has constrained loan disbursement and raised interest rates which, in turn, is adversely impacting productivity and employment. The decline in productivity will further exacerbate the trade deficit.

The Nepal Stock Exchange (Nepse) index is rapidly sliding, thanks to instant margin calls and truncating of credit lines to share trading owing to the liquidity crisis. The government has $2.5 billion dollars lying idle largely due to its institutional inefficiency. But that didn’t stop Finance Minister Krishna Bahadur Mahara from publicly claiming that people’s hardships could not be lessened due to lack of funds.” We have an annual budget of merely $10 billion dollars while we need another $35 billion dollars,” he reportedly said. He was trying to justify a supplementary budget for this fiscal year.

The budget statement for the current fiscal year was presented by the previous government led by the CPN-UML. A supplementary budget for the remaining four months of the fiscal year is not a magic wand to augment public expenditure and ‘accelerate’ the development process. If a supplementary budget was necessary at all, why wasn’t it prepared at least at the beginning of the second half of the fiscal year? These actions of the finance minister explain how divorced policymaking is from the ground realities in Nepal.

Root of the problem

As the liquidity crisis worsened, the Nepse plunged and capital expenditure fell far short of the target, the regulatory authorities appear to have panicked. The Ministry of Finance, Nepal Rastra Bank (NRB), and the Securities Board of Nepal (Sebon), among others, have been trying to show that the situation is under control and wear a brave face after a series of apparent policy failures. The Finance Ministry is busy issuing warning orders to the implementing ministries to speed up public expenditure, NRB is tightening the screw on banks and financial institutions (BFIs) to curb lending to ‘unproductive’ sectors, and Sebon is cautiously admonishing BFIs on capital market-related deals. In fact, the regulators have been repeating these unimaginative steps year after year without even a little success. 

Expectedly, these bland ‘rituals’ were unable to change the ominous course of Nepal’s economy. The trade deficit is ever increasing, the contribution of the manufacturing/productive sector to the Gross Domestic Product (GDP) is dwindling, employment opportunities are shrinking, and the overall growth rate has stagnated at an effective 3 percent for decades now. As such, it is not difficult to conclude that the root of the problem lies somewhere outside these regulatory spheres, and that it is certainly deeper than they would have us believe.

At the macroeconomic level, the government’s credibility has been at rock bottom for more than two decades. International development partners have by now become utterly indifferent to Nepal’s concerns and needs. Stability in government is certainly an issue. More than that, the absolute lacklustre performance of the public sector in the post-Gorkha earthquake rescue, rehabilitation, and reconstruction work exposed grave vulnerabilities in Nepal’s public sector management. We seem to be unable even to utilise humanitarian emergency grants timely, let alone make optimal use of project financing that comes as loan or equity participation.

The economic policy has lost direction and focus. Without doing a due cost-benefit analysis, the government is again devoting a lot of effort, resources, and time to revive several dilapidated and continuously loss-making public enterprises. Meanwhile, progress in ambitious national projects like Kathmandu-Tarai fast track, Budhi Gandaki hydropower, Nijgadh, Bhairahawa and Pokhara airports, and Kathmandu Ring Road expansion has been slow. Private investment has not been encouraging either. Strategies to reduce the trade deficit through import substitution and export promotion are not being reflected in government policies and plans. Successive administrations have not realised the importance of maintaining a reasonable degree of trust with Nepal’s international development partners. After Nepal Development Forum 2002, there has not been any comprehensive interaction of that scale with donors. 

Overarching and cross-cutting agenda

On the monetary front, recurring liquidity crises and other anomalies in the financial system have been mainly attributed to the requirement for BFIs to increase their paid-up capital fourfold by the end of this fiscal year. It has been hard particularly for class A commercial banks to increase the paid-up capital from Rs2 billion to Rs8 billion within the stipulated timeframe. It has been said that such an increase is necessary for risk reduction and system stability. But the amount of the increase and the time given to achieve it has led to several unforeseen anomalies. The move which was announced in July 2015 has definitely compelled several smaller BFIs to merge. But, again, it has created a new set of problems reminding one of stories about ‘big shark swallowing small fish’ and ‘solution of sand and sugar’. The tendency of centralisation through mergers has an enduring impact on access to the finance domain.

In light of the recurrence of the same problems again and again—liquidity crisis, low capital expenditure and ever ballooning trade deficit, to name a few—it is high time Nepal considered a thorough review of both its fiscal and monetary policy regimes. Instead of making uncoordinated, fragmented and ad hoc policy responses to crises of a grave nature with potentially long-lasting impact, Nepal should focus on selected priorities like productivity with comparative advantage, gainful employment generation and infrastructure development. Enhancing the efficiency of public institutions should be an immediate, overarching and cross-cutting agenda. The political class should realise that Nepal’s economy is heading towards a disaster, and we need to change its course now. 

Wagle, a founding editor of the economic daily Arthik Abhiyan, is an eco-political analyst