The financial sector and capital market have performed exceptionally well even when other sectors were reeling with the sharp economic slowdown. Amidst the pandemic, digitalisation of financial services gained a big momentum. The growth of electronic payment systems has been spectacular. The digitalisation drive has also led the domestic stock market to take a big leap.
The number of demat accounts, which was around 400,000 before the pandemic has now reached to 4.1 million. Similarly, the number of stock investors trading in the secondary market has risen substantially. At present, more than 800,000 investors are in the secondary market and the transaction amount has also increased.
Nevertheless, the crisis has severely impacted the overall economy and the main challenge for the government and the private sector is to keep the wheels of the economy rolling. In this situation, banks and financial institutions need to play a more active role and the government should assist them with policy-level support.
It is important to note that flow of new loans of banks and financial institutions amounted to around Rs 800 billion in the last fiscal year. However, the full impact of the flow of credit on the economy is yet to be seen. Meanwhile, various goods worth Rs 1,500 billion have been imported during the last fiscal year. But some types of imported goods exceeded demand in the country. It indicates that the informal economy and formal economy are getting connected.
With a credit flow of around Rs 800 billion, Nepal's gross domestic product (GDP) should have grown by about 8 percent. Nevertheless, economic growth for the last fiscal year has been estimated to only be 4 percent. In the previous fiscal year, the GDP had declined by 2 percent. It shows the credit flow was not reflected in the economic growth. Where, then, did that money go? It might have gone to the informal economy.
During times like these, it is challenging to maintain the external fiscal balance, meeting the revenue target and managing internal and external debts of the government. Whatever the challenges, the country’s' economy needs to be revitalised and the creation of jobs is important in this regard. At the same time, foreign employment also needs to be made more systematic as it will take another 15-20 years for industrialisation and the abundance of jobs in the country.
Remittances are not used in productive sectors as most of the Nepali migrant workers go abroad to meet the needs of their families. Due to lack of savings, money received as remittances could not be invested in productive sectors. By helping the workers to enhance their skills, their earnings and savings capacity can be increased.
Maintaining fiscal stability and generating employment is important in order to move ahead. To achieve these objectives, Nepal Rastra Bank, Insurance Board and Securities Board of Nepal should also provide the necessary assistance. Then the economy needs to be strengthened and linked to production. One way to do this is to help small, medium and cottage industries and businesses thrive across the country, which can provide employment opportunities to a large number of Nepalis. Bringing in a lot of large scale industries doesn't seem possible at the moment.
Equally important is to focus on large scale industries for the country’s economic development in the long term. Banks are the largest institution in the Nepali economy today. It is also because the assets of a commercial bank operating in the country have started to reach around Rs 400 billion. However, there is no other company or an industrial venture which can match that size. We need at least 50 large scale industries if we really want to make our presence felt in the global market. The size of such ventures should be at least Rs 600 billion. The size of SMEs should also be increased. Many of our medium scale industries are considered as small scale businesses in India. So, the size of medium scale industries should be Rs 5-6 billion. Large industries of Rs 50 billion in size are also needed. So, it has become necessary to bring industrial policy to help small scale industries to grow to medium scale, medium scale industries to large and large scale industries to huge.
(Bhattarai is a Chartered Accountant and is the CEO of NRN Development Fund. This article is based on conversation with him.)