Monday, October 27, 2008

Nepal at a loss of $256 million due to financial crisis

$256.16 million is the amount of loss the Nepali manufacturing sector will have to incur because of the global financial crisis (and ensuing economic slowdown). This estimate comes from the Confederation of Nepalese Industries (CNI). Though not a huge sum in terms of the scale of bail out package in the West, this means a lot to an economy with GDP amounting to US$ 42 billion. Also, this number accounts for just the manufacturing sector. The main sectors to be hit hard will be tourism sector, and possible hydropower—the two most prioritized sectors that could lead to stimulation of economic growth in the short and medium term. Moreover, melting purchasing power of customers in the West mean less demand for exportable products from Nepal. This loss will be much more higher and severe than the number CNI came up with. In Nepal, the effect will be seen in full scale in late 2009/early 2010 if the financial meltdown in the West reaches its nadir by this end of this year.

The industries that are hit hard now are iron, plastic, edible oil, metals an other manufacturing industries. It is also expected to affect tourism sector, FDI, housing and financial transactions and remittance inflow. This will pose a challenge in meeting the expected revenue for the current fiscal years, as was outlined by the Finance Minister in his budget speech.

The recent decision by the central bank to increase reserve ratio from 10 to 20% has worried investors because of potential tightening of credit market. Due to series of collapse of banks in recent months in the US and EU, the Nepali government increased reserve ratio by 10 percentage point to avert bank failures in Nepal. However, it seems that it comes with high opportunity cost of high cost of borrowing/finance for the private sector, the engine of growth for the economy.