INTRODUCTION - WordPress.com · 2012. 12. 11. · INTRODUCTION Nepal is a small landlocked country...
Transcript of INTRODUCTION - WordPress.com · 2012. 12. 11. · INTRODUCTION Nepal is a small landlocked country...
INTRODUCTION
Nepal is a small landlocked country in South Asia with the total area of 1,47,181 square
kilometers. Also known as the Himalayan kingdom, this recently declared Republic
kingdom has faced a lot of change ups and downs in economic growth. The geographical
vulnerability along with the political unstability and lack of manpower have a great impact
in the economy. Almost one-quarter of its population is still below poverty line. Agriculture
which covers 1/3 of the total GDP is providing livelihood to 3/4 of its total population.
Though a considerable potential in hydropower with an estimated 42000 MW of feasible
capacity but political instability has played a vital role in hampering foreign investments.
Along with that challenges like frequent strike of natural disasters, brain drain and
landlocked location has been hurdles in the growth of Nepalese economy.
Though it was believed that after the establishment of Democracy Nepalese economy would
make quantum jump but everything was just like in the past and even worse. Fight for
power and rights led to strikes, and demonstrations paralyzing the private as well as public
sectors. Industries were forced to close and the foreign investors withdrew creating a havoc
in the Nepalese market. The government run corporations lacked supervision and Nepalese
market was completely depended on India for imports. Furthermore the global meltdown in
2008 added fuel to the fire.
BACKGROUND
Started from United States this crisis engulfed the economy of both developed and
developing countries which decreased the global output by 0.75 percentages to hit 2.2
percent in 2009 as per the International Monetary Fund's latest World Economic Outlook
update. The primary cause for this crisis is US Sub- Prime Mortgage lending which is
lending to households who have high risks of default as a result of no previous exposure to
housing credit; or not having a condition of financing a long-term loan.
Maintaining low interests in US in order to cope up with 2001 recession led to the housing
boom. So, in this situation the lenders accessed sub- prime borrowers thinking that the real
estate price would rise and the borrowers would be able to refinance and Americans would
place their home beyond everything and would work to any extent in order to save their
castle. When housing market crashed the real estate value tumbled resulting in household
bankruptcy and decline in investment in the sector. Due to the decline in investment and
heavy imposing of interest rates buyers had a tough time refinancing and the housing prices
were down to 30 % of the sales price.
Consequently, banks and financial institutions faced liquidity crisis with the decrement in
cash flows. Now the fear that was confined only to Wall Street was spreading to the main
streets as a result of recession and mass unemployment.
Objectives
The main objective of this research is to study the effect of 2008 global meltdown on
Nepalese economy.
Methodology:
The research started with the search on websites, journals annual report of Nepal Rastra
Bank and other financial institutions.
Limitation:
Due to the difficulties in accessing the journals and newsletters of financial institutions the
research mainly focused on the major setbacks on Nepalese economy.
Effect on Nepalese Economy
Nepal did not face any direct impact from the financial crisis as Nepal is not open to the
global financial market and big investments from abroad. But in the contrary there had been
a drastic fall in the oil prices from $149 to $60 per barrel as the government was incurring
huge losses adding to the fiscal deficit which was Rs 10 billion at its peak. Similarly the
Nepalese banks have more funds than they are required to(in mid-June 2009, the gross
foreign exchange reserves stood at Rs 271.68 billion an increment of 27 % compared to the
level as at mid- July 2008.)
But Nepalese economy wasn't safe from the indirect remarks of the crisis on United States
and Europe. The economy could feel the impact of global financial crisis through four
different routes-
Slowing down in inflow remittances
Unemployment is one of the serious problem in Nepal as most of the youths are deprived of
the employment opportunities due to lack of resources, industries and economic revolution.
It is extremely difficult to describe the actual unemployment situation due to the lack of
reliable sources and most of the data available are skewed. Every year 400,000 Nepalese
enter the market so we can imagine that the unemployment rate is very high.
By Gender
Employment Unemployment Inactive Total
Male 73.3 3.1 19.6 100
Female 71.7 2.7 25.6 100
By Development region
Eastern 74.9 2.9 22.2 100
Central 72.4 3.3 24.3 100
Western 73.2 2.7 24.1 100
Mid Western 77.0 2.8 20.2 100
Far Western 80.4 1.4 18.2 100
By Geographic Region
Mountain 86.7 1.3 12.0 100
Hills 76.0 2.1 21.9 100
Tarai 71.1 3.8 25.1 100
Nepal 74.3 2.9 22,8 100
Because of lack of opportunities in Nepal foreign countries have been a lucrative alternative
for many of the Nepalese youths. The trend of going abroad has provided a great help to
boost Nepalese economy through the remittances. The number of people who left for
overseas employment has been rising significantly until it dropped from 249,051 to 217, 164
mainly due to the global economic meltdown. While most of the immigrant workers are
uneducated and unskilled the major destinations for them have been Malaysia, Qatar and
other Middle-East Countries. Meanwhile, a slowing down of the construction and service
sectors in the Middle East, the other major source of remittances, and in countries such as
South Korea, Malaysia, and Japan, will result in lowering demand for Nepali labor abroad.
Put simply, fewer workers leaving the country in days ahead will decrease remittances
inflow in a number of ways. According to figures for fiscal year 2009-10, the global
economic meltdown is having its impact on Nepali migrant workers. This is indicated by (a)
the declining number of people leaving for foreign employment, and (b) a substantial
number of migrants are returning home before the termination of their job contracts. Data
from the Department of Foreign Employment reveal that the number of Nepali migrant
workers going to Malaysia has declined from 50,554 in fiscal year 2007-08 to 35,070 in
2008-09. Similarly, the number of Nepali migrant workers leaving for the United Arab
Emirates declined from 45,342 to 31,688 during the same period. This declining trend is
also substantiated by a decline in the demand for Nepali passports, a major indicator of
migrant labor movements. In Mahottari district, for example, a 25% drop in the application
for passport was reported.
The remittance which accounts for 19 % of the Gross Domestic Product declined in the year
2008 by a massive 12 % as a result of economic slowdown in most of the developing
countries. There is still the process of returning of immigrant workers which has a
significant impact on the inflow of remittance in the coming years. It will consequently have
an impact on household income and poverty reduction.
Impact on Service Industry:
A global slow-down and recession in Western economies will also affect the Nepali service
industry, which contributed 50.9% of GDP in 2007. Global recovery is not expected any
time soon as the Western financial crisis steadily worsens. This means potential tourists are
likely to postpone or cancel travel plans. One may expect long haul, inter-continental
tourism to decline significantly given the financial distress being faced by the global
aviation industry. It should be underscored the high revenue yielding tourists are either
India- or China-bound with Nepal as a stopover destination rather than a direct one. So, the
huge effect of meltdown in these countries has ultimately decreased the amount of tourist in
Nepal. Similarly, recently we celebrated Nepal Tourism Year 2011 in which the 1 million
tourists were expect to visit Nepal but it may be due the financial crisis and no signs of
recovery the expectation was not met.
Impact on aid and manufacturing Industry:
A lot of NGOs/INGOs have been working on Nepal since a lot time. Most of the donations
come from the rich Western countries and United States. The global slow-down limited this
funding forcing the organizations to scale back the development initiatives. This had an
adverse effect on the fight against poverty and other development challenges. Many
development initiatives were in halt to the lack of funding and skilled resources.
Similarly the manufacturing industry was also affected. Nepal exports carpets, garments and
other household products to Western countries and due to the financial crisis there has been
decreased in the exports. Manufacturing industry covers the 8 % of the total GDP of Nepal
so it is estimated that Nepalese economy suffered a loss of about Rs 256 million due to the
global meltdown Similarly Nepal imports the machinery goods and other products due to
which a loss has been suffered due to the tumbling of exchange rates. Nepalese currency
policy is linked with the Indian Rupees due to which the indirect remark of the financial
crisis has been faced due to the overwhelming increase in the dollar exchange rate.
Present situation of Nepal
The whole nation is going through transitional phase and we believe that it is the best
excuse for the present economic condition in Nepal. With the success in overthrowing more
2 centuries long monarchy Nepalese population has proved that they are capable of
revolution of any kind. But in case of economy neither the government nor the people seem
to be serious. The vulnerability of present economic crisis hasn't grabbed the attention of
political parties, government and individuals and have been left somewhere between
increasing inflation and diminishing economic growth rate.
After 1990 the hype of privatization grew like forest fire. But again the feeble and unstable
government couldn't determine the fate of ill-stricken public enterprises with extreme
inefficiency and rampant corruption. It is estimated that the irregularity in government
owned enterprises in FY 2011/12 was massive 162 billion. In fact according to
Transparency International Nepal grabbed 27th position in corruption among the 180
countries.
Due to the ongoing political crisis economy has been jeopardize due to lack of
simplified, transparent and competitive tax system. But it seems like government is in no
mood to address these severe problems. Even the government is turning out to be
incompetent . Nepalese government came up with diminutive budget of Rs 385 billion
and it is also being underspent due to lack of peace and stability along with poor
investment friendly environment. Talking about the industrial sector most of the
industries' operation has been halted due to energy crisis, feeble labor law, problems
caused by Labor unions and lack of tax regulation supporting manufacturing. In 2011
more than 32 industries along with Bhrikuti Paper Mill were compelled to leave the
market. Due to this there has been increasing fear in the mind and heart of investors.
Private sector is the main body whereas government is just a moderator. Nepalese
economy can't support the policy of privatizing the profit and nationalizing the loss to
government. So, there seems the requirement of a good initiation from the private
sector. But in today's scenario both of them are extremely vulnerable in terms of
capacity and governance. Prolonged liquidity crisis is still prevailing due to the lack of
financial discipline and effective corporate management along with poor supervision
of Nepal Rastra Bank. Private sector stills lack institutionalization and
professionalism. Most of the
Enterprises are owned by a small group of people and controlled by family and
friends. Due to this professionals are merely assistants and are not provided with real
responsibility. Nepalese stock exchange Index NEPSE crashed from 814 in mid
February 2008 to anywhere between 200-300 now. This is the indication diminutive
investment and improper regulation of enterprises. Nepalese economy is just limited to
establishment of some multinational companies and expansion of few family owned
businesses. Still 40% of the total population is under the poverty line and 67 % of the
independent age group is unemployed or underemployed.
Though our location prevents us from having quantum jump in economy we can still
benefit a lot from our neighboring power blocks. Implementing a zero tariff zone would
certainly decrease the custom earnings but will help to globalize our trade which will
have prolonged effect in our developing economy. Everyone's eye is on our national
resources. Though we have immense natural resources we must be ashamed that we
couldn't utilize it properly. Hydropower and tourism are the building blocks of Nepalese
economy. First of all it is our priority to develop investment friendly environment and
lure the investors. For this political parties and government should be directed. I would
request the government for proper negotiations with India for Pancheshwor Project which
I believe would boost our economy
and energy level. And of course the tourism sector should be managed in a better way.
Though the government's goal to attract 1 million tourists was not fulfilled but still we
were very close to that mark. But still there needs improvisation in traditional tourist
management. We should go beyond the regular destinations like Pokhara, Kathmandu
and Chitwan and try to find possibilities in various places of Nepal. And obviously
there is need of competitiveness in the market. This will enable the production of high
quality goods and will certainly increase the economy. Along with that local people and
investors should be encouraged in small and medium scaled industries as these will
help in making ourselves
independent and decrease the amount of
import.
Lastly most of the Nepalese population depends on agriculture for livelihood.
Nepalese traditional subsistence farming should be discouraged and we should try to
get maximum profit from crops. For farming on small fragmented land won't help and
we should try to manage big estates and help in the rapid growth.
Conclusion:
Though there has been a significant decrement and downfall in Nepalese economy the
economic backwardness is due to the political instability prevalent in Nepal. Unless the
Maoist led government veers away from it populist economic policies and produce some
concrete measures to cope up with this problem Nepal is still in the dark side. Nepal has
been isolated economically due to which big investments aren't on the door to uplift the
economic bar. Moreover the closure of public and private enterprises due to lack of
leadership and the labor unions has ultimately supported the vulnerability. Nepal produces
unskilled labor and relies completely on foreign countries for importing most of the goods
consumed and the weakness of Indian currency to US dollar has halted the way of economic
development. This will put the whole burden on the flow of remittances and service
industry. Most of the middle class families depend on the cash flows from abroad and
Nepal’s financial services sector will be forced to reduce its margins because of the crisis.
Nepalese stock market has been equally affected by the crisis. The lack of regulation and
ongoing insider trading has an adverse impact on the economy due to the lack of capital and
cash flows in the market.
So, it's all on the hand of government and Nepal Rastra Bank to implement the policies in
order to cope up with these problems.
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