May Lord Pashupatinath save the economy

Even as political melodrama overwhelms us every day we have failed to take note of the dire state of the economy. If neglected for too long, the economy will slowly but surely overwhelm the politics and politicians. A quick look at the latest economic report (based on figures for the first seven months of the current fiscal year) released by the central bank will show that the economy is in serious distress. Consider these facts.

* Our export earnings during the first seven months of the current fiscal year were just enough to finance our petroleum imports!
* We now import almost six times as much as we export.

Our foreign trade was never in good shape but it has now become so skewed and import-loaded that it is no longer sustainable. Our trade deficit (import minus export) during the review period was Rs 180.68 billion. Dismal economic figures do not fully explain, if they don’t belie, the real weakness of our economy. Let’s, therefore, take a look at what we are exporting and importing.

Our key major export items are readymade garments, woollen carpets, pashmina products, pulses, cardamom, jute sacks and twine. None of these export items are impressive (the glory days of readymade garments and woollen carpets are a thing of the past) and the export volume of none of these exceeds Rs 3 billion.

What are we importing? We are importing petroleum products, gold, automobiles and automobile parts, medicines and all kind of goods that we do not produce or cannot produce efficiently.

But that’s not the story really worthy of our attention. There is something else more interesting, perhaps even distressing. We now import about 90-100 billion rupees worth of food items annually! Last year, we imported more than Rs 15 billion worth of meat and meat products. A county that is so agricultural and rural in its orientation and has an ecological belt suitable for the production of fruits and vegetables, now imports everything from food grains to goats and buffalos and fish to fruits and vegetables in every season.
It is understandable that we do not have the technological know-how or any competitive edge in advanced manufacturing, but given the right policies there is no reason why we cannot excel in animal husbandry or do better farming.

If we have such skewed foreign trade, how are we managing to finance our imports? The answer is mainly through our remittance earnings, foreign grants, pension receipts and earnings from tourism.

So far we have managed to maintain healthy foreign exchange reserves worth Rs 257 billion, which is enough to finance our merchandise import for the next 8.4 months. But there is a caveat: gross foreign exchange reserves declined by 4. 1 percent in the review period and it had declined by over 12 percent during the corresponding period last year. What does that mean? It means our foreign exchange earnings have started to fall short of our foreign exchange spending, and if the trend is not reversed, the foreign exchange reserves will dry up sooner or later.

And the biggest challenge on the foreign exchange horizon now is the vulnerability of remittance inflow. Our fate is intricately linked to the fate of a few despots in the Gulf and the Middle East. Any instability in just two countries—Saudi Arabia and Quatar, where about 800,000 Nepalis work— will wreck havoc with our economy. Should revolutions overtake these countries or should these economies become unstable for any other reason, it will trigger an economic and social tsunami in Nepal.

While we confront these external uncertainties, our internal economic problems are no less serious. In fact, the short-term risk from our internal problems is much greater than the external threat.

The most serious challenge now comes from the banking sector. Nepali banks are currently battling the twin problems of liquidity crunch and loan recovery.

The banks are so cash-strapped that they are already offering 12 percent interest for call deposits (which clients can withdraw at notice) and still the deposits are not coming in. During the review period, Nepal’s 30 commercial banks were able to mobilize deposits worth Rs 7. 64 billion but their loans and advances increased by over 49 billion rupees.

The liquidity problem has now become so severe that the banks have virtually stopped lending. Despite the central bank’s regular injection of liquidity into the market the shortage refuses to subside.

The question here is, where has all the money gone? No one knows for sure. There is a lot of talk about possible capital flight and the massive withdrawal of cash using Nepali ATM cards in India seems to point in that direction. But how much of this is related to the Indian currency crunch in Nepal and how much can be attributed to capital flight is hard to distinguish. If investors and the wealthy in Nepal are wary of the future of the Nepali economy, and are transferring their money to safe havens, that calls for another emergency.

The banking sector, however, seems more nervous for another reason: its failure to recover loans due to the slump in the realty sector. Bankers privately concede that by coming mid-July, when the banks assess their final quarter results, at least some financial institutions will crash and many others will be in serious trouble. Due to slump in land prices and real estate business, loan-default is said to have reached an alarming rate. Many banks are restructuring loans just to avoid additional provisioning for defaulted loans but that’s just a way of aggravating and deferring the current problem.

As these urgent and serious problems in Nepal’s so-called modern, private sector confronts us squarely, the Nepali state’s chronic lack of absorptive capacity—its poor capacity to spend productively— sounds forgivable.

But from the point of view of public spending on development activities, this is no less serious a problem. Our health posts are without trained medical staff, schools are without teachers and there is so much need for investment in roads, in power and in social sectors as vital as drinking water. Yet the government just sits on a cash surplus of over 16 billion rupees!

Who will tackle these monumental headaches? It’s not a good idea to invoke Lord Pashupatinath to solve our economic woes but that seems to be the only option as the lesser creatures— politicians— are too obsessed and preoccupied with their politics.