Nepal not isolated from economic turmoil in Europe, US
RUPAK D SHARMA
LALITPUR, July 13: Many economists and experts share the view that European debt crisis and the economic slowdown in the US have no impact on Nepali economy. True, it may be, as Nepal is yet to open its secondary market to foreign investors and a huge chunk of foreign direct investments do not come from the two regions.
But then what about the sharp depreciation of Nepali currency vis-à-vis US dollar that has made our imports expensive? Isn´t it the result of economic turmoil going on in the US and Europe?
In the last one year, the value of Nepali currency has dropped by over 23 percent. Experts attribute the fall to the decline in the value of Indian currency given that the Nepali rupee is pegged with southern neighbor´s currency. This argument is valid. But again the Indian currency took a beating because of the capital flight triggered by the euro zone crisis, which ultimately hit Nepali rupee.
“The economic or financial crises faced by the West do affect Nepali economy even if indirectly,” Economist Keshab Acharya said at a symposium jointly organized by the UN Economic and Social Commission for Asia and the Pacific (ESCAP) and South Asia Watch on Trade, Economics and Environment (SAWTEE) in Lalitpur on Thursday.
One of the benefits of currency depreciation is that the flow of workers´ remittance surged 36.5 percent to Rs 282.02 billion in the first ten months of the current fiscal year. This led to the balance of payment registering its highest ever surplus of Rs 100.10 billion in the period.
But on the other hand, weak currency has also made the country´s imports expensive as significant chunk of payments for goods brought from abroad has to be made in the greenbacks. That´s why Nepal was not able to reap maximum benefit when oil prices dropped to 18-month low in the international market last month. And when petroleum prices remain at higher level, prices of most goods also go up as fossil fuels are essential to run everything from factories to public vehicles.
Little wonder that the transport cost surged 18 percent in May, while consumer prices shot past the government target of 7 percent set for this fiscal year to stand at 8.7 percent for the month.
This loss could have been compensated by boosting exports, as Nepali goods automatically become cheaper when the value of currency depreciates. But Nepal is not in a position to do so “as it does not have inventory (of goods to export),” Chandan Sapkota, a reasearch officer at SAWTEE, told the conference.
Nepal exported Rs 60.89 billion worth of merchandise goods in the 10-month period. But the figure gives no reason for joy as this amount was not even enough to pay the import bills of petroleum products, which stood at Rs 77.07 billion. Moreover, the amount generated from merchandise exports pale in front of Rs 383.01 billion worth of goods that the country imported.
“The share of imports, which account for 32.5 percent of the GDP, must be reduced in consumption to create a balance in the economy,” SAWTEE Executive Chairman Dr Posh Raj Pandey said.
However, Nepal Rastra Bank Governor Yuba Raj Khatiwada said imports are going up due to equipment brought in by the services sector, which now contributes 50 percent to the GDP. He was referring to equipment imported by telecom companies.
Yet this does not allow the country to sit back and watch the imports grow which has pushed up trade deficit to Rs 310.15 billion in the 10-month period. Everyone agrees that this gap can only be narrowed by boosting exports, which, unfortunately, is not happening.
Nepal´s merchandise exports have been suffering because manufacturing sector has been hit by a series of problems from deterioration in investment climate and labor-related problems to power shortage and low capital formation, which has made credit expensive. As a result, industrial capacity utilization rate stands at an estimated 60 percent.
This problem can only be addressed by “enhancing production and production capacity, creating investment-friendly environment, designing smart industrial policies, focusing on infrastructure development and giving priority to the agricultural sector”, Dr Pandey said.