Improvement Needed in Most Areas for Economic Recovery

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Improvement Needed in Most Areas for Economic Recovery

Due to the adverse situation created by the pandemic and the working style of the government, the country's economic scenario is not looking encouraging. The ‘white paper’ issued by the coalition government and the latest macroeconomic report of the central bank have also painted a bleak picture.

Looking at the official statistics, Nepal’s economy contracted by 2.9 percent in FY2020/21, which was initially projected to grow by 4.1 percent. The ‘white paper’ has revealed that the country's accumulated loss has reached Rs 34.24 billion in the last fiscal year.

The global impact of the pandemic has been colossal which is the main reason for the economic downturn in our country. At a time when the world is on the brink of the third wave of the pandemic, it can be considered an achievement if we can maintain a growth rate of 2-3 percent this year.

The current economic situation is also due to the activities of the erstwhile KP Sharma Oli government. During his tenure, high credit flow to sectors outside the priority areas, unchecked inflation, and consumption in unproductive sectors increased so much that new capital could not be generated in Nepal.

The government can only spend around 72 percent in capital expenditure annually. It is necessary to end the practice of spending 42-43 percent of the capital expenditure in the last months of the fiscal year. This is the main reason behind the untamed inflation and currency depreciation.

As per the 'white paper', the national coffer has a deficit of Rs 143 billion. The finance ministry is under huge pressure to narrow the deficit and meeting the revenue targets. The amount we have to pay for imports is much higher than the income we earn from exports. This also means that the cost of imports is much higher than exports. The country's internal debt has increased by 21.5 percent. External debt, which was 22.7 percent of GDP four years ago, has increased to 40.5 percent of GDP, an increase of 250 percent. This is a very frightening situation. Nepali currency is depreciating fast against the US Dollar. There are some infrastructure projects that have to be repaid in US dollars, so the obligation to repay the loans seems to have increased a lot due to the high depreciation of Nepali currency.

22 big infrastructure projects have been designated as National Pride Projects. But the physical progress of the projects does not look promising as only 58 percent of the budget allocated for the projects has been spent.  It is unfortunate that some projects that were decided 27-28 years ago have only completed land acquisition and compensation while the development modalities of some projects have not been determined even in two and a half decades.

In a country like Nepal, low employment opportunities are because of the government's inability to spend capital on big projects. Private investors are not allowed to invest in such projects.

For economic stability, there must be a balance of supply and demand. Revenue alone is not enough to sustain Nepal's economy. Foreign aid accounts for 23 percent of the financial source in the budget. While foreign aid is essential to meet our capital and current expenditure needs. But the rising debt level as the expenditure remains sluggish should also be taken into consideration.

With the Covid-19 pandemic escalating this year, the government has to give special focus on the health sector. An important part of the health budget has been allocated for the construction of the physical infrastructure of healthcare institutions and the procurement of medical equipment. But it is necessary to make the health sector expenditures transparent.

So far, the government has invested Rs 654 billion in public enterprises, but the return from the investment has been only 2 percent. Although 24 organisations are said to be in profit, their earnings barely meet operating expenses. This shows the poor state of our government-owned institutions.  

On the other hand, the attraction of foreign investors towards Nepal looks good, primarily due to the ease in the repatriation of profit. Statistics show that Ncell and Surya Nepal repatriated Rs 14 billion and Rs 5.52 billion last year. It indicates the investment environment in Nepal is still satisfactory.

(Dr Pyakuryal is an Economist. This article is based on a conversation with him.)

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