How will this crisis affect a small, landlocked country like Nepal? It will not directly affect the Nepali financial system, nor put strains on monetary policy, as Nepal is largely insulated from the toxic assets of big investment like in the West. However, it will indirectly affect economic growth, revenue collection, and development initiatives carried out by Non Government Organizations (NGOs). Potential monetary imbalance may arise from changes in Indian monetary policies and the exchange rate of NRs vs. INRs.
The economy could feel the impact of global financial crisis through four different routes- a slowing down in inflow remittances, a recessionary tourism sector, decline in aid, and a demand-deficient manufacturing sector. While a slowing of the first three components will affect poverty reduction and development initiatives, the decline in global demand for Nepali-manufactured products will put direct downward pressure on growth rate. The rate is expected to hover around 5% during 2009.
A global economic meltdown will decrease demand for products made in India, where a majority of low-skilled Nepali laborers work. 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. This could affect the rate of progress made in poverty alleviation and potentially lower domestic demand, as households will be more hesitant to spend money due to declining income.
Remittances, which currently account for 19% of the Gross Domestic Product (GDP), have been extending the economy a lifeline for almost a decade. It is chiefly due to these remittances that the balance of payments is still in surplus despite a huge balance of trade deficit. Remittances have furthermore helped decrease the poverty rate from 42 percent in 1995/96, to 31 percent in 2003/04. More than 34% of households receive remittances, an increase of more than 80% since 1994/95. Over one million Nepalis working abroad send money directly to their families, a portion of which is generally used to meet regular expenditures, and the remainder saved in domestic financial institutions.
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. By working with the government and launching promotional packages, Hotel Association of Nepal (HAN) is hoping to entice about a million tourists in 2010. If the global economic slow-down continues past 2010, this dream seems unachievable
Meanwhile, the aid industry will also not be spared from the crisis. NGOs operating in Nepal receive funding from corporate donors, governments and large foundations in the West. The global slow-down will limit this funding, forcing the organizations to scale back development initiatives. This will have a negative impact on the fight against poverty and other development challenges. The manufacturing sector will also suffer. Export to major Western countries is expected to slow in the coming years. The Confederation of Nepalese Industries (CNI) recently estimated that the manufacturing sector would incur a loss of $256.16 million as a result of the global economic slow-down.
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