Risk of Systemic Failure

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Risk of Systemic Failure

The Nepali economy has now entered the danger zone where the risk is not just limited to the financial system. The entire economic system including the underlying assumptions held sacrosanct as principles and values are at high risk. 

The situation now is such that by the time the ongoing blockade on the major trading points is lifted and the supply constraints are removed, the entire economy will already be in the total control of black marketers, smugglers and corrupt government bureaucrats. Though the First Amendment to the Constitution has been approved by the Parliament, the agitating Madhesi parties are still not happy and India has said that it expects more amendments to satisfy the Madhesis.  

There is only one solution to the problem and that is to bring the black economy under the purview of the regulators, such as the tax authority and the central bank. But the sad part is that neither these regulators nor the government are showing any indication of taking such an initiative. So much so that Deputy Prime Minister Kamal Thapa, who is in charge of the Foreign Ministry as well, went on record praising the black marketers and smugglers who he said helped the government supply the essentials. In the same breath, he also chastised the business community for not providing similar help. 

Meanwhile, the central bank has, in its latest update on the country’s macroeconomic situation, expressed satisfaction that the trade balance of the country has improved due to reduced imports. It has shamelessly avoided accepting the fact that though the official books show reduced imports, smuggling has skyrocketed. The reality is such that due to rampant smuggling and black marketing, the economy is getting out of the control of the government. The monetary situation depicted by the central bank in the report represents only a small fraction of what really exists. 

Such an attitude on the part of the regulators and government ministers smacks of their own vested interests. This is how the wealth is increasingly concentrating in the hands of such public officials. Worse still, part of this ill-gotten wealth is concentrating in the hands of anti-social elements, i.e. criminals including terrorists. Gone are the days when the wealth was thought to be concentrating in the hands of some big business houses.

With the black market and smuggling on the rise, the formal economy is being forced into the black economy. Businesses are running with the supplies procured from the black market and they are finding it difficult to record these transactions in their books. 

That means a quick readjustment mechanism is required urgently. And that can be possible only with some announcements by the government amending some laws, at least for some time. One such amendment should be on the customs rules so that the demurrage and detention charges are not added to the cost of the goods while calculating the import duty. Second, the Inland Revenue Department should recognise the cost of petroleum that the businesses purchased without an invoice by paying higher than the rate fixed by the Nepal Oil Corporation (NOC). Third, as the problem was mainly due to the failure of the NOC to arrange the supply of petroleum, the recent announcement of the government allowing some big consumers to directly import petroleum should be given a permanent status. 

Yes, only, these steps may not be enough to bring the economy back on track. But they will be some right initiatives.

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