Rocky road to Nepal’s economic recovery

People were expecting the budget for the upcoming fiscal 2020/21 to give them some relief. There was a hope that the government led by a party with socialist credentials and the agenda of prosperity would come up with a prudent fiscal policy to lift people up from the gloom of Covid-19 pandemic. Dashing the collective hope, the government has announced a budget that offers no reassurance of people’s economic safety.

Finance Minister Dr Yubaraj Khatiwada presented the budget of Rs 1,474.64 billion for the upcoming fiscal in the parliament without clarifying how it would help steer the path to prosperity that the government has promised. Dr. Khatiwada—who has spent most of his time since his retirement from the Nepal Rastra Bank (NRB) drafting election manifestos of Nepal Communist Party (NCP) (then CPN-UML)—has a knack for revenue collection and dealing with development partners.

Unfortunately, he lacks a political constituency, the most critical ingredient a finance minister needs to be bold enough to tell elected MPs how he wants to steer the economy in times of an unprecedented crisis. No surprise then that the new budget is hopelessly traditional, and without any good program to tackle the challenges created by Covid-19 ‘lockdown’ in the economy and in people’s lives.

Dr Khatiwada has projected 7 percent growth for the upcoming fiscal. But the reason behind his optimism is misplaced. He says such a growth is feasible as he is ‘confident’ the economy would again gain its vibrancy when the lockdown is lifted. Unfortunately, people do not share that ‘confidence’ as they are already short of cash to buy two meals a day. Small and medium enterprises (SMEs) or big corporate houses, they are all struggling to provide even minimum pay to their employees. The informal sector, meanwhile, has been decimated by the lockdown.

This Covid-19 crisis could have been exploited a lot better. This time could have been used to initiate bold reform agendas in health, education, and agriculture. Our public health system is already overwhelmed with just over 2,500 corona-infected cases. The government has allocated Rs 90.69 billion for health, which is much more compared to allocations in previous years. Yet there is no clarity on how this money will be spent.

Agriculture has gotten Rs 41.40 billion, along with subsidies in the procurement of chemical fertilizers. Moreover, this sector falls under the government’s flagship ‘Prime Minister Agriculture Modernization Project (PMAMP), which alone is worth some Rs 3.22 billion. The budget has announced ‘one local government, one product’ policy under this project. But there has been no study to find out which local government has a comparative advantage in which product. In this regard, the project may result in haphazard investments of scarce resources in the production of agricultural products that cannot be marketed.

A total of Rs 150 billion has been allocated to support businesses severely affected by the lockdown. Another fund of Rs 50 billion will give them subsidized loans. Since the NRB will manage these funds, an enormous volume of paperwork will be needed to be eligible for them, a big challenge for SMEs. So, there is room for doubt if these funds will really support SMEs. Industries will have to make a significant investment in covering the health of their workers, increasing the cost of production, and making the products less competitive.

Another program projected as a game-changer is the Prime Minister Employment Program (PMEP), which gets Rs 11.60 billion. This program aims to create 200,000 new jobs. But the program has been tainted with allegations of corruption. There is a risk of this money being funneled to local level party cadres.

Overall, most programs are similar to those in previous budgets, as if the pre- and post-corona ground realities are the same. The government could have helped the private sector steer through the crisis through tax policy reforms.

Tourism will suffer in the foreseeable future, as tourists won’t risk travel to a country with a weak health system. As Nepal cannot rely on tourism anymore, it must bank on some other sector as the foundation of the country’s future growth. As most farmers continue to practice subsistence agriculture, this is also not the sector that can support robust growth.

The only other growth avenue is technology. It could have allowed firms registered in other countries to bid for business in Nepal, as there is little chance that a Kathmandu-based firm will win an international bid. That could have set the foundation of a technology-driven, advanced economy.

In a nutshell, this budget’s scope is limited to sustaining the state apparatus and supporting ruling party politics.

This article was first published in The Annapurna Express on June 5, 2020. 

Absent Nepali agriculture jobs

The government has prioritized agriculture in the short-term for economic recovery in light of the Covid-19 pandemic. Agriculture has never really taken off in Nepal even though the sector employs around 66 percent of the total employed population, contributing 27.1 percent to the GDP. Most of the labor force engaged in agriculture doesn’t have regular basic income and other supports such as health insurance.

The government policies and programs for 2020/21 focus on boosting investment in agriculture with the goal of creating jobs. But there is little hope of the desired outcome due to the lack of technology and other prerequisites such as market access, all-weather transport connectivity, and irrigation.

Productivity and competitiveness of the agriculture sector are low, and adoption of improved technology limited, despite repeated government commitments to improve the sector over the past few decades. Most of the current Nepali migrant workers were once into agriculture in their own country. They could not generate enough income to meet their families’ basic needs such as nutritious food, health, and education for their children.

Employment in agriculture is mostly seasonal, which represents a significant loss of human resources, as the workers are idle for almost half the year. Return on investment in agriculture is much lower compared to the interest rate provided by commercial banks in fixed deposits. Most returning migrant workers would be willing to put their money in fixed deposits in commercials banks rather than make an investment in agriculture.

Nepal has completed the implementation of the Agriculture Perspective Plan 1995-2015 and is now implementing the Agriculture Development Strategy 2015-2035. The sector saw a meager 3.2 percent growth during the 1995/96-2015/16 period, which is why the country’s youth and most productive labor force looked elsewhere for jobs. The new strategy aims to develop a self-reliant, sustainable, competitive, and inclusive agricultural sector that can drive economic growth and contribute to improved livelihoods and nutrition security. Unfortunately, there is little government investment in agriculture and budget allocation in it has been consistently conservative.

There is a dearth of skilled human resources in agriculture in the absence of investment in training people to use improved technology. The government has announced an expansion of the Prime Minister Agriculture Modernization Project (PMAMP) to create jobs across the country. However, that will be insufficient to absorb the workforce that will swell with the return of migrants from different countries.

Additionally, there will be a mismatch in skills required in agriculture because most returning migrant workers won’t be trained in the sector. Hence the government should focus on skills enhancement. Moreover, the project, already tainted by financial irregularities, may not be able to generate much hope among youth and returnee migrants.

Against this backdrop, the hope of the agriculture sector driving the economy out of the crisis seems misplaced. The government’s slogan ‘Consume domestic products, promote internal production’ sounds laughable considering that Nepal imported, among many other vital stuff, fresh vegetables worth of $4.5 million in the first ten months of current fiscal.

The agriculture sector has always had low productivity. There is no possibility of it driving the economy while other sectors are down too. There is thus an urgent need for structural reform in the sector that is aimed at ensuring higher rate of return on investment. Let us hope the government policies and programs for the upcoming fiscal are well-intended and public expenditure will really attract private investment. Only then can we hope that the sector will generate enough jobs.

This article was first published in The Annapurna Express on May 28, 2020. 

Nepal, Lipulekh, and pragmatism

In May 2015, China and India signed an agreement to augment border trade via the Nepali territory of Lipulekh Pass. This was done during Indian Prime Minister Narendra Modi’s state visit to China. Nepal, a Landlocked Least Developed Country (LLDC), was a mere spectator.

Last week, India’s Minister of Defense Rajnath Singh inaugurated an 80-km-long strategic road from Dharchula (Uttarakhand) to Lipulekh, which will serve as the shortest route to Kailash-Mansarobar from New Delhi. Nepal’s Ministry of Foreign Affairs (MoFA) issued a press release ‘regretting’ the inauguration.

India has been deploying its Indo-Tibet Border Police (ITBP) force at Kalapani since 1962, something Nepal has termed an action against the letter and spirit of Sugauli Treaty (1861). In the past 60 years, Nepal’s economic development has progressed at a snail’s pace and the country has lacked an ability to maintain an assertive neighborhood policy with its two giant neighbors.

Beijing enthusiastically welcomed Modi in May 2015, calling him ‘Indian Nixon’, sparking hope of greater collaboration between the two giants. But it was disheartening for Nepalis as the ‘Indian Nixon’ was violating Nepal’s sovereignty by signing a controversial agreement with China without Nepal’s involvement.

Haidian district in Beijing, which hosts three world-class universities—Tsinghua, Peking and Renmin—is undoubtedly the most vibrant intellectual hotspot of China. A huge number of Nobel laureates and global leaders visit Haidian on a daily basis to deliver lectures and take classes in these universities. The area is full of debates on China’s past, present and future, including Chinese President Xi Jinping’s potential as ‘China’s Mikhail Gorbachev’.

I brought up the painful topic of the 2015 Joint Statement during one of those debates. The statement had clearly violated Nepal’s sovereignty, and I was disturbed by the actions of our two neighbors. In the end, I and some other friends of Nepal decided to recommend to the Nepali Embassy in China hosting of high-level forums that discussed important topics for Nepal, most importantly those concerning its sovereignty.

Informally, I was told that the Nepali embassies around the world are short of cash to host such forums. “It costs a lot to host such events in Beijing and we don’t have the money,” shared a Beijing-based senior Nepali diplomat. “When we are perpetual guests at tables hosted by other countries, how can we assert our own issues?” he questioned.

Moreover, Nepal rarely appoints ambassadors on merit basis, and that is where the issue gets worse. These ambassadors cannot convince or fight with the MoFA for funds. The flip side is, even the financial resources in the basket of these embassies are poorly managed.

This issue is largely linked to the country’s state capacity. “If the Nepalese government cannot increase state capacity, the state itself could gradually dissolve,” wrote Robert D. Kaplan in his influential book, The Revenge of Geography: What the Map Tells Us About Coming Conflicts and the Battle Against Fate’ (2011). He further writes that China and India could play a new version of the Great Game in the Himalayas.

The only way to manage these Great Game players is to increase our capacity both in economic and military terms. Nepal needs to be economically powerful to give its embassies enough funds for incidental expenditure. Had the Embassy of Nepal in China raised the issue of Lipulekh in Beijing’s high tables in 2015, who knows, perhaps China would have been more careful about stepping on Nepal’s sensitivities in the future.

Nepal saw 15 different prime ministers and 40 governments in the past six decades. But the issue of Kalapani remains unsolved and the country’s economic stagnation continues. This can be attributed among other things to the tendency of our leaders to seek personal favors from abroad, particularly India.

A poor and politically unstable Nepal has only one option out of this three-dimensional problem. That is to enhance its economic power by making its people the most wanted consumers of Indian and Chinese goods. “Above all a pragmatist” when dealing with stronger powers, as Machiavelli would advise. The most pragmatic way is to build a country of 30 million indispensable consumers. If we have to make a small investment for this, for instance in hosting important discussions and debates abroad, it will be well worth it.  

This article was first published in The Annapurna Express on May 13, 2020. 

Political stability no panacea for Nepal

Nepali people cast their votes overwhelmingly in favor of the communist coalition under KP Oli in the 2017 parliamentary elections. The hope was that with a stable, single-party government would come national development. But in a little under three years, their hope on the Oli government looks increasingly misplaced (even as efforts are underway to oust it). In a country that witnessed a change in government every nine months, three years is a long time for any regime.

In 2014, Zahid Hussain, the then lead economist at the World Bank, had highlighted the deep connection between economic development and political stability. However, he added, there are also politically stable autocracies and new and unstable democracies. Hussain wrote, “…political stability can be achieved through oppression or through having a political party in place that does not have to compete to be re-elected. Hence, political stability is a double-edged sword.”

In another paper, “Does Political Stability Accelerate Economic Growth in Tanzania?” published in 2016 in the Global Business Review, authors Abeid Ahmed Ramadhan, Zhi Hong Jian, Kyissima Kelvin Henry, and Yapatake Kossele posit that political stability normally plays an essential role in a country’s economic development. And yet, political stability often blocks change and stifles innovation and ingenuity. Political stability can take the form of complacency and stagnation that undermine competition. As the governing elite faces no effective opposition, it can suppress free voice, which in turn contributes to abuse of power and corruption.

The promulgation of new constitution in 2015 was considered a departure from Nepal’s chronic problem of political instability. People gave the communist coalition the mandate to rule. Yet look at what has happened to the country since.

Some African countries have been able to achieve high growth with stable governments and some are performing badly even with regime stability. Hence, for political stability to translate into economic gain, it should be accompanied by rule of law, strong institutions, an efficient bureaucracy, low corruption, and a favorable environment for investment. This distinction is critical in understanding why Nepal could not make an economic leapfrog even with a relatively stable government in place.

The Oli government’s credibility has steadily eroded. As public trust has been lost, efforts to topple the government are underway. Nepal will enter another cycle of political instability if this government goes away. Yet that may not be Nepal’s biggest problem. The bottom line is, as Hussain argues, not all forms of political stability are equally development-friendly; much depends on the extent to which stability translates into accountability and good-governance.

This article was first published in The Annapurna Express on May 2, 2020. 

Preventing losses and preparing for recovery

This is a ‘crisis like no other’ as Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF) has been repeatedly saying. The reason this has become such a crisis in human history is for following reasons: 

• More complex, with interlinked shocks to our health and our economies that have brought our way of life to an-almost complete stop. 
• More uncertain, as we are learning only gradually how to treat the novel virus, make containment most effective, and restart our economies; and
• Truly global. Pandemics don’t respect borders, neither do the economic shocks they cause.

The economic outlook is dire globally and even more painful for small and underdeveloped countries like Nepal. Economic activities are expected to decline on a scale we have not seen since Great Depression. IMF has projected that 170 countries will see income per-capita going down. Only months ago, 160 economies were aiming to register positive per-capita income growth.

Exceptional times call for exceptional action!
Governments all over the world have taken unprecedented action to fight the pandemic – to save lives, to protect their societies and economies. Fiscal measures so far have amounted about US$8 trillion and Central Banks have undertaken massive (in some cases, unlimited) liquidity injections.IMF has said that it has US$1 trillion lending capacity – four times more than at the outset of the Global Financial Crisis – at the service of its 189 member countries. Recognizing the characteristics of this crisis – global and fast-moving such that early action is far more valuable and impact-ful- IMF has sought to maximize the capacity to provide financial resources quickly, especially for low-income countries. IMF has strengthened its arsenal and has taken some critical measures in last two months. In this regard, we have strengthened our arsenal and taken exceptional measures in just these two months.These actions include: 

• Doubling the IMF’s emergency, rapid disbursing capacity to meet expected demand of about US$100 billion. 103 counties have approached IMF for emergency financing, and IMF’s Executive Board will have considered about half of these requests by the end of the month.

• Reforming IMF’s Catastrophe Containment and Relief Trust, to help 29 of the poorest and most vulnerable members, of which 23 are in Africa – through rapid debt service relief, and it is working with donors to increase IMF’s debt relief resources by US$1.4 billion. Countries like UK, Japan, Germany, the Netherlands, Singapore, and China have supported IMF to make this immediate relief possible.

• IMF is aiming to triple concessional funding via its Poverty Reduction and Growth Trust for the most vulnerable countries. IMF is seeking US$17 billion in new loan resources and, in this respect, Japan, France, UK, Canada and Australia have committed totaling US$11.7 billion, helping IMF to secure about 70% of the resources needed towards this goal.

• Supporting a suspension of official debt repayments for the poorest countries through end 2020 – a ground-breaking accord among G20 countries. This is worth about US$12 billion to nations in need. IMF also has called for private sector to creditors to participate on comparable terms – which could add a further US$8 billion of relief.

• IMF is establishing a new short-term liquidity line that can help countries strengthen economic stability and confidence.

Preventing a protracted recession
But there is much more to be done and now is the time to look ahead. To quote a great Canadian, Wayne Gretzky: “Skate to where the puck is going, not where it has been.” Here are some of the thoughts from Managing Director: 

• Need to think hard about where this crisis is headed and how we can be ready to help countries in need being mindful of both risks and opportunities. Just as we responded strongly in the initial phase of the crisis to avoid lasting scars for the global economy, we will be relentless in our efforts to avoid a painful, protracted recession.

• Concerns about emerging markets and developing countries. They have experienced the sharpest portfolio flow reversal on record, of about $100 billion. Those dependent on commodities have been further shocked by plummeting export prices. Tourism-dependent countries are experiencing a collapse of revenues, as are those relying on remittances for income support.

• Engage through regular lending instruments, including those of a precautionary nature in case of emerging markets. This may require considerable resources if further market pressures arise. To prevent them from spreading, we stand ready to deploy full lending capacity and to mobilize all layers of the global financial safety net, including whether the use of SDRs could be more helpful.

• Need much more concessional financing for poorest countries. With the peak of the outbreak still ahead, many economies will require significant fiscal outlays to tackle the health crisis and minimize bankruptcies and job losses, while facing mounting external financing needs.

• But more lending may not always be the best solution for every country. The crisis is adding to high debt burdens and many could find themselves on an unsustainable path. 

• Need to contemplate new approaches, working closely with other international institutions, as well as the private sector, to help countries steer through this crisis and emerge more resilient.

• Need to venture even further outside the comfort zone to consider whether exceptional measures might be needed in this exceptional crisis.

Preparing for recovery

• To help lay the foundations for a strong recovery, policy advice will need to adapt to evolving realities. We need to have a better understanding of the specific challenges, risks and trade-offs facing every country as they gradually restart their economies.

• Key questions include how long to maintain the extraordinary stimulus and unconventional policy measures, and how to unwind them; dealing with high unemployment and ‘lower-for-longer’ interest rates; preserving financial stability; and, where needed, facilitating sector-al adjustment and private sector debt workouts.

• Not forget about long-standing challenges that require a collective response, such as reigniting trade as an engine for growth; sharing the benefits of fin-tech and digital transformation which have demonstrated their usefulness during this crisis; and combating climate change—where stimulus to reinforce the recovery could also be guided to advance a green and climate resilient economy.

Finally, in the new post-COVID-19 world, we simply cannot take social cohesion for granted. So, we must support countries’ efforts in calibrating their social policies to reduce inequality, protect vulnerable people, and promote access to opportunities for all. This is a moment that tests our humanity. It must be met with solidarity. There is much uncertainty about the shape of our future. But we can also embrace this crisis as an opportunity—to craft a different and better future together.

Source: Kristalina Georgieva, 2020. 

Nepal on Precipice of Poverty

This article was first published in The Annapurna Express. 

Covid-19 has made the world pause. Nepalis stayed home on the eve of New Year 2077 and started the first morning of the new year with no idea of when they would get back to normal life. New cases of the novel coronavirus continue to appear, adding to the widespread fear. Meanwhile, the government is taking ad hoc measures instead of coming up with a firm strategy to support the poor and sustain the national economy.

The Ministry of Finance, which is supposed to come forward aggressively with plans that can be adjusted each day depending on the scenario, doesn’t seem to have a clue of what’s happening in the economy, let alone be bothered of the impending poverty and privation. Finance Minister Dr. Yubaraj Khatiwada, who seems intent on sidelining private sector and entrepreneurship, doesn’t know what holds the economy together. If he did, the situation today would be much different.

His statements before the World Bank Group Nepal Office representatives exemplified the stupidity, insensitivity, and recklessness of his leadership at this time of crisis. He talked about vague issues that had nothing to do with fighting the broad economic impact of the pandemic.

Likewise, Prime Minister KP Sharma Oli addressed the nation last week. But he too had no message of hope for the panicked public. Rather he spent his time explaining why it’s futile to question the procurement process of health materials from China. Estimates show that globally, around 600 million people will be pushed into poverty and that certainly includes people from Nepal. Those at the bottom of the income and wealth ladder have harder days ahead. But the government is silent on what can be done to help them survive this ‘man-made crisis’.

A recent World Bank update shows South Asia sub-region’s growth falling to between 1.8 and 2.8 percent in 2020, down from 6.3 percent projected just six months ago. Although Nepal’s share in sub-regional GDP is minimal, the country’s economic growth is expected to significant slow down in 2020.

The national economy, including the agriculture sector, has come to a halt. There is no preparation to ensure availability of agriculture inputs as planation time closes in. In the event of the country’s inability to control the crisis in agriculture, the economy will be in a free-fall, driving vast numbers of farmers into absolute poverty. The government doesn’t seem to be paying attention to this critical issue.

There will be severe food insecurity in the country due to supply shock. The World Bank has warned that a rapid spread of the virus could reverse the recent positive trends in poverty and result in high levels of food insecurity and widespread malnutrition among children.

Investment, both domestic and foreign, will fall, leading to lower job creation. A large fiscal deficit will be added to public debt, directly affecting Nepal’s fiscal sustainability. Daily wage earners will be hit the hardest. Remittances will significantly decrease, impacting both forex reserve and the livelihood of those who rely on it. The informal sector, which makes up nearly 70 percent of the national economy according to same estimates, has stopped functioning.

Against this bleak backdrop, the government seems the least concerned and ill prepared to handle the corona fallout. Worryingly, the Ministry of Finance does not seem to have a clue about how to move ahead. It is not having necessary dialogues with development partners, it lacks detailed analysis and insights on what’s happening, and it has failed to undertake a rapid assessment of the economic impact of Covid-19.

Dr. Khatiwada can always argue that even the best of government plans failed in tackling the virus, just as has happened in far more developed countries. But this will be a lame excuse even as the economy teeters on the edge. Let’s hope people won’t have to start dying for the government to come to its senses.

Asia to See Lowest Growth in Sixty Years

Growth in Asia Pacific is expected to stall at zero percent in 2020. This is the worst growth performance in almost 60 years, including during the Global Financial Crisis (4.7 percent) and the Asian Financial Crisis (1.3 percent). That said, Asia still looks to fare better than other regions in terms of activity.

• Thailand and New Zealand = Hit by global tourism slowdown. 
• Australia = Hit by lower commodity prices 
• Pacific Island Countries = Vulnerable due to the limited fiscal space as well as comparatively underdeveloped health infrastructure 

In addition to the impact from domestic containment measures and social distancing two key factors are shaping the outlook for Asia:

• The Global slowdown: The global economy is expected to contract in 2020 by 3 percent—the worst recession since the Great Depression. This is a synchronized contraction, a sudden global shutdown. Asia’s key trading partners are expected to contract sharply, including the United States by 6.0 percent and Europe by 6.6 percent.
• China slowdown: China’s growth is projected to decline from 6.1 percent in 2019 to 1.2 percent 2020. This sharply contrasts with China’s growth performance during the Global Financial Crisis, which was little changed at 9.4 percent in 2009 thanks to the important fiscal stimulus of about 8 percent of GDP. We cannot expect that magnitude of stimulus this time, and China won’t help Asia’s growth as it did in 2009.

Policy priorities

This is a crisis like no other. It requires a comprehensive and coordinated policy response.

1. Support and protect the health sector to contain the virus and introduce measures that slow contagion. If there is not enough space within countries’ budgets, they will need to re-prioritize other spending.
2. Targeted support to hardest-hit households and firms is needed. This is a real economic shock—unlike the Global Financial Crisis—and requires protecting people, jobs, and industries directly, not just through financial institutions.
3. Monetary policy should be used wisely to provide ample liquidity, ease financial stress of industries and small and medium-sized enterprises, and, if necessary, relax macro-prudential regulations temporarily.
4. External pressures need to be contained. Where needed, bilateral and multilateral swap lines and financial support from the multilateral institutions should be sought. In the absence of swap lines, foreign-exchange market interventions and capital controls may be the alternatives.
5. Targeted support, combined with domestic demand stimulus in a recovery, will help to reduce scarring, but it needs to reach people and smaller firms.
6. Additional actions may be needed for emerging-market Asian economies that have limited space for increased spending in their budgets. If the situation deteriorates, many emerging economies may to be forced to adopt a “whatever it takes” approach, despite their budget constraints and non-internationalized currencies. In many cases, they will face policy trade-offs. For example, central bankers are considering buying government bonds in the primary market to support critical financial lifelines to smaller firms and households to avoid mass layoffs and defaults. An alternative to direct monetization could be to use the central bank’s balance sheet more flexibly and aggressively to support bank lending to small and medium-sized enterprises through risk-sharing with the government. In doing so, there can be a role for temporary outflow capital controls to help ensure stability in the face of large capital flows, balance sheet mismatches, and limited scope to use other policy tools.

Source: Chang Yong Rhee, 2020.