Although G-20 (which represents 80 percent of the world’s economic output) finance officials during their meeting on September 4, 2009, in London committed to maintain economic stimulus measures, they agreed to look into the excessive payouts and curb hefty banker’s bonuses. The US and Britain are against imposing the cap though. The continuation of extra government spending and low interest rates was aimed mainly to boost global economy in the hope that global financial system was exhibiting signs of repair. IMF’s assertion of the beginning of ‘sluggish recovery’ has necessitated increased public expenditure. This is an important issue to reinitiate public debate on Nepal’s current expansionary state policy. Even developed economies suffered from creating operational governance system. The challenge Nepali planners have to face is designing appropriate mechanisms to strengthen institutions and prevent second stage crisis from recurring.
Nepal continues to be politically unstable and economically fragile. The threat is, therefore, the continuation of macroeconomic policy measures based on the estimates of international financial institutions.
Nepal continues to be politically unstable and economically fragile. The threat is, therefore, the continuation of macroeconomic policy measures based on the estimates of international financial institutions. IMF estimates 2.5 percent (from an April projection of 1.9 percent) global economic growth in 2010. The projection from the same institution about business cycle contraction adds confusion when it downgrades forecasts by saying it would shrink by 1.4 percent as against an earlier projection of 1.3 percent. Before Nepal decides to continue imported policy prescriptions by enlarging the size of the budget, it is important to understand the confusions created by global financial players. The September meetings of G-20 finance ministers and central bankers became extremely complicated, where leaders created confusions by making contradictory statements on recovery and stimulus. There were contradictions on the statement made by the individuals from the same country.
Policymakers must be aware that in theory, the government can increase demand in the economy through expansionary fiscal policy by reducing tax rates, increasing expenditure by tolerating higher budget deficit and increasing loans from banking institutions. But the scenario is totally different in Nepal. There is a decline in the aggregate demand in the real sector and weakening consumer spending because of the decline in purchasing power. Isn’t this a gross policy failure for not being able to overcome the unique situation of increasing interest rate and decelerating growth? CBS reports, the manufacturing production index declined by 1.4 percent in 2007/08 compared to a growth of 2.6 percent in the previous year. The challenge Nepal faces is to balance between inflation and growth.
The Nepali economy has suffered as a result of sustained mistrust and allegations among major political parties. ‘People’s Sovereignty’ has been interpreted according to party-specific strategies. To justify the commitment on peoples’ welfare, unjustified compromises have been made by making inefficient allocation of capital. The result of increased policy autonomy has thus resulted into the execution of expansionary macroeconomic policies. The countries who have adopted such policy use different policy measures based on the ground economic reality of respective countries. For instance, the case of Brazil and China in terms of discretionary policy measures is interesting. The Chinese measures focus on raising public investment in infrastructure. Brazil, on the other hand, relies heavily on encouraging consumption. It is true that in the short run, these policies seem to have been working. But economists suggest if the agenda is sustainable development, Brazil should raise public investment and China should encourage increasing domestic consumption. It shows need-based policy instruments.
China’s savings ratio is 50 percent of GDP and investment ratio stands at 40 percent of GDP. Therefore, to safeguard the economy from global turmoil, either domestic investment can be raised or savings rate reduced to increase consumption. But what option does Nepal has? Even a country like China with excess savings and huge current account surplus (10-11 percent of GDP) should not feel secure in the future as they finance consumption in rich countries to get financial assets but deprive domestic consumption. In Nepal’s case, capital adequacy has not been a problem. If we assess the current scenario, Nepal’s banks are found to possess excess liquidity. In mid-June 2009, the gross foreign exchange reserves stood at Rs. 271.68 billion, an increment of 27.8 percent compared to the level as of mid-July 2008. However, from the perspective of productive utilization of resources, government machinery at the domestic front is not capable of increasing investments through additional spending. Additionally, low level of investment, slower growth and an unacceptable rate of inflation limits Nepal to even go for consumption-increasing fiscal measures. Similarly, increasing foreign investment does not seem encouraging either, largely because of the policy uncertainties, political instability and creditworthiness of the state.
The Global Economic Outlook Update (GEO), 2009 projects world growth to fall by 0.5 percent. If the growth is measured in terms of market exchange rates, it will even turn negative. As the timing and pace of economic recovery depends on sound regulatory measures and macroeconomic fundamentals of respective countries, the Outlook remains uncertain. The projections have not been accurate most of the times after November, 2007. The recession has taken a longer time interval than envisaged in GEO 2008. The uncertainty is still with actual losses in the global financial system and restructuring modality. Such unpredictability of market behavior has deteriorated equity markets. The pessimism has grown to such an extent that French Finance Minister Christine Lagarde states “things will not go back to business as usual ... that there are no dark areas anymore to hide.”
The G-20 leaders have reached an agreement on the need for continuing growth-boosting measures and regulatory reform by focusing on bankers’ bonuses. Some countries strongly felt the need for curtailing bankers’ pay and bonuses because of the crisis created by risk-promoting payment culture. In Nepal, although this problem in particular has not been broadly recognized, the debate to reassess the strengths and weaknesses of wider variations in the remuneration system between top executives and others has just begun. Without any serious homework about the impact assessment, the consideration of enforcing an official cap on both individual payouts and collective bonus pots at financial institutions may be a hot topic and matter of considerable controversy.
To conclude, the expansionary policy adopted by crisis-hit countries should be taken as a short-term policy as a part of economic management. Many countries have now serious concerns to reverse it. Even governor of Reserve Bank of India has recently said ‘the RBI will reverse the expansionary policies at the appropriate time’. Nepal’s adoption of expansionary fiscal measures is not in response to reducing the possibility of double-dip recession. It is an effort to simply exhibit generosity of the ruling party to continue to increase public spending on priority sectors. So think about it.
bishwambher@yahoo.com
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