Saturday, February 11, 2012

Pure hogwash: Improved state of Nepalese economy and the present government’s role

This article is published in today’s Republica. It has generated strong (also interesting) response.

Pure hogwash

Desperate to give a positive message to public that the government is doing the needful to spur growth and job creation, the concerned authorities are echoing a similar line these days: The economy is back on track and investment climate is getting better. The officials at the prime minister’s office, the central bank and the finance ministry argue that growth will be 5 percent this fiscal year and the economy will see a surge in investment. Furthermore, they are asserting that the improvement in select macroeconomic indicators will entice foreign investment and spur jobs creation.

Nonsense. The fact is that the economy is still stuck in the same quagmire of low growth, low job opportunities, fledging industrial sector, high prices, low savings, high imports and consumption, and remittances-fueled impact-less investment cycles. The said rosy outlook is due to favorable exogenous factors. There is hardly any real policy change to induce structural transformation required to put the economy on a high growth path. All we have got is hastily designed grand plans and hollow promises to implement them.

The main source for the claim of 5 percent economic growth, which is likely to be not achieved, comes from the estimation by Ministry of Agriculture and Cooperatives (MoAC) that there will be bumper agriculture production, especially record paddy harvest. Agriculture sector constitutes about 33 percent of GDP and engages 83 percent of the population. Paddy is a major part of daily food consumption and contributes 21 percent to agricultural GDP. The officials have estimated that a 13.7 percent increase in paddy production will be enough to satisfy domestic demand, export surplus, and push up economic growth to 5 percent. Now, looking at the cheerful faces of ministers and policymakers, one wonders about their contribution in all this. Well, it is not because of any substantial policy change that agriculture production has increased; it is due to timely monsoon. The Bhattarai-led government cannot claim credit for this. A blip in agriculture production this year like it happened in 2007/08—when agriculture sector grew by 5.8 percent, leading to GDP growth of 6.1 percent— and its impact on growth does not mean that our economy is set on a track of high growth.

Furthermore, the main source for the claim of a favorable macroeconomic situation is a recently released macroeconomic update of the first five months of this fiscal year, which was misconstrued by leaders who are eager to show that economic indicators are sound during their tenure. The central bank’s figures reveal a huge balance of payments (BoP) surplus—an accounting record of all monetary transaction made between Nepal and all other countries—which reached Rs 61.19 billion. Similarly, current account—which is the aggregate of balance of trade (exports minus imports of both merchandise goods and services), net factor income (such as interests and dividends), and net transfer payments (such as remittances, foreign aid and pensions) — registered a surplus of Rs 24.89 billion. Another noticeable improvement was in foreign exchange reserves, which reached US$ 4.31 billion and is enough to finance imports of up to 9.3 months.

This definitely sends a good message about the state of our macroeconomy to absorb external shocks and repayment ability. Again, it was achieved not because of any sudden miraculous change in policies, but because of external factors. The increase in BoP surplus has to do more with massive increase in remittance inflows and improved services sector earnings. Remittance inflows increased by 37.9 percent between the first five months of this and last fiscal years. Transfers increased by 29.5 percent, including substantial excise refund by India. Services sector earnings increased by 46.4 percent. Some of these transfers are cyclical and some are just flukes in the account sheet. Meanwhile, forex reserves have improved mainly because of the increase in remittance inflows and depreciation of Nepalese currency against the dollar by approximately 17 percent. During the same period, reserves in Nepalese rupee increased by 35.4 percent, but in dollar terms the increase was just by 12.4 percent.

Just by looking at these numbers it defies logic to argue that investment environment has improved and economy is back on track. In fact, quick estimate based on the level of merchandise exports and imports so far this year shows that the total annual figures will hover around Rs 65 billion and Rs 400 billion respectively. Trade deficit will increase more than last year because of massive rise in imports of petroleum products, but it will be countered by rising remittance inflows and transfers, resulting in positive current account.

The very problems that have been plaguing the economy for a decade now are continuing to eat away its strength. There is nothing noteworthy the Maoist-led governments have done to address them after 2006. The average growth rate in the last decade was just 4.1 percent, with agriculture and non-agriculture growth rate averaging 3.18 percent and 2.34 percent respectively. Imports have reached about 32 percent of GDP and exports are merely 9 percent of GDP. Gross domestic savings are just 7 percent of GDP, signaling the dearth of domestic investment needed to launch big infrastructure projects. It is still very much a consumption fuelled economy, where increasing domestic production deficit is comfortably filled in by imports, which is financed by remittances. Development budget is heavily dependent on foreign aid and domestic revenue is inadequate to finance even recurrent expenditure. Many farmers in Terai and Hilly regions are short of adequate fertilizers needed to increase agriculture production, progress in repairing old and completing new irrigation projects has been frustrating, and food insecurity in remote areas remains as problematic as it were before due to weak distribution mechanism.

Meantime, domestic industries are gradually perishing. The power woes are stubbornly persistent and the grand plan of reducing load-shedding by importing power from India and by operating diesel plants never fructified. Rationing of electricity and persistent labor problems have forced industries to operate at barely 45 percent capacity. Labor unions have again started to show indifference and irresponsible attitude towards industrial development by shutting down manufacturing plants owned by both domestic and foreign investors (the latest saga being the closure of Unilever Nepal, one of the few remaining MNCs after 1996). Firms are unable to secure enough fuel to run their generators. Restaurants are pulling their shutter down due to shortage of cooking gas. Following the moderation in prices for a few months, inflation has started to creep up due to rise in prices of petroleum fuel, persistent supply-side constraints, and rise in retail prices of daily consumable goods and services. The threat to private property and forceful land grabbing by Maoist party’s cadres are still there. Safe appropriation of returns to investment is getting increasingly tough. Interest rates are high despite liquidity surplus in the banking sector. Enthusiastic entrepreneurs are dejected due to the lack of appropriate physical and regulatory infrastructure along with a supportive bureaucracy. In such a situation, one wonders how PM Bhattarai is aiming to entice US$1 billion of foreign investment, let alone investment commitment, in six months time when the total FDI in 2010 was barely US$39 million.

The claim of economic revolution by this government is pure hogwash. The economy is stuck in the same mess as it was before. The government has done nothing substantial to put it on the path of high growth, let alone address the short term constraints. The recent good news about bumper agriculture production, improved reserves and BoP surplus has nothing to do with policy changes by this government. Importantly, improvement in these indicators alone does not indicate an improved macroeconomy set to welcome more investment and ready to brace growth rate of over 5 percent.

[Published in Republica, February 11, 2012, p.6]