Nepal: Figuratively richer

The World Bank Group has now categorized Nepal as a Lower-Middle Income Country (LMIC). The classification based on the country’s per capita Gross National Income (GNI) is useful for the bank’s operational lending policy but it does not quite capture Nepal’s level of development or measure of welfare.

A country labeled an LMIC may not even be so as if it has a large informal economy and subsistence level of economic activities. This is also not the best way to measure wealth distribution to reduce income inequality. Thus, Nepal’s ‘graduation’ does not have anything to do with the lifestyles of those under extreme poverty.

Zambia, Africa’s second-largest copper producer, achieved middle-income country (MIC) status in 2011 after a decade of impressive growth that averaged 7.4 percent a year. But the growth benefited only a small segment of the urban population and had a limited impact on poverty. Zambia still ranks among the countries with highest levels of inequality. Over 58 percent of Zambians earn less than $1.90 a day and three-fourths of them live in rural areas with no access to quality health, education, and electricity. The country’s elite now has easy access to both natural and financial resources, but the poor have seen no change in their fortunes after their country was declared an MIC.

Like Nepal, Zambia too is landlocked. But unlike Nepal—which lies between two big and prospering countries India and China—it is surrounded by many big and small countries like the Democratic Republic of Congo, Angola, Botswana, Mozambique, and Malawi. Yet Nepal and Zambia face similar problems. Zambia’s debt-financed connectivity infrastructures have supported the economy but also created a big financial burden. Persistent fiscal deficits have increased general government debt to 88 percent of GDP in 2019. Regrettably, the debt-fueled growth took place in the absence of a well-designed wealth distribution system. Moreover, Zambia’s debt composition is shifting toward commercial and Non-Paris Club bilateral creditors such as China.

The case of Zambia is worth considering for Nepal if it is to avoid being lulled into a false sense of security brought about by high growth figures and better country status based on GNI. They only highlight the country’s ability to process loans with bilateral and multilateral creditors. And these loans eventually leave the country vulnerable to high debt and low performance in terms of multi-dimensional poverty. In Nepal, approximately 50 percent population lives under the poverty line, as per the multidimensional poverty index.

The World Bank’s new classification of Nepal based on 2019 data does not consider the impact of Covid-19. Nepal’s remittance-driven economy may face severe challenges if the number of returnee migrant workers continues to go up. Nepal has made significant progress in the past few decades in poverty reduction in terms of the single dimension of income. But there is no clarity whether that is linked to growth or to job creation. Remittance-based poverty reduction is unsustainable.

In Zambia, as rising debt burden has hampered resource allocation in other important public spending areas, the priority is on fiscal consolidation. Covid-19 will only make things worse. In our case, there is still some space for public debt. But we must be careful about debt-financed growth, and it has no clear linkage with bringing about meaningful changes in the lives of those who suffer from multi-dimensional poverty.

It seems like we as a country are getting richer. But is this wealth being generated and distributed evenly? The sole focus on getting more and more loans on the back of our better income classification could prove disastrous.

This article was first published in The Annapurna Express.