A 7.9-magnitude earthquake on April 25 and its aftershocks have caused immense damage to our nascent republic. More than 8,600 people died and about 21,000 got wounded. Physical collateral of about US$ 10 billion were damaged. The devastating earthquake has posed major challenge on various fronts.
Economists have different opinions regarding the impact of this disaster on economic development, due to conflicting empirical evidence. Despite immediate downsizing of GDP by a catastrophe, economic growth is generally achieved in advanced economies because of increase in demand and speedy capital accumulation. However, in case of Nepal, the reverse is true because of low economic development, poorly developed capital market, weak institutions and ineffective government. Thus there is economic shrinkage both in immediate- and long-run.The economic growth for current fiscal will be limited to around three percent instead of the targeted 4.5 percent. High inflationary pressure due to cost-pull inflation of construction materials, food price inflation due to low growth in agriculture, low growth in service sector due to adverse tourism environment, soaring trade deficit and the resultant current account imbalance are a few other problems. Due to human and physical collateral damage, about 800,000 people have fallen into poverty.
Even before the quake, economic growth had been sluggish for decades. After the restoration of democracy in 1990, a number of economic reforms have been tried but desirable growth has not been achieved. The Maoist insurgency halted economic development for almost a decade. Even when Maoist rebels joined government, it did not spur economic recovery post-conflict. Afghanistan and Sri Lanka, unlike Nepal, as data suggest, have experienced higher economic growth of about 21 percent and 8.5 percent (or more) respectively post-conflict. However, Nepal has achieved only 4.5 percent growth post-conflict.
Economists and business communities blame protracted transition and misplaced priority in drafting new constitution. However, delay in constitution is not an excuse for slow growth. The country's economic progress was always woeful, despite our economic liberalization and structural adjustment programs.
As figures suggest, Nepali economy needs investment of over 10 percent of its GDP but this figure has stood at only 3.3 percent in recent times. A huge 'resource gap' has been seen for a long time. Nepal is one of the lowest Foreign Direct Investment recipient countries. To meet the investment demand, it has depended heavily on foreign loan and grant and domestic borrowing.
Public revenue merely meets our recurrent expenditure. Trade deficit is soaring—for every Rs 100 of transition, we import goods worth Rs 89 while we export goods worth Rs 11. Thus, according to the Asian Development Bank, Nepal is one of the least competitive economies in the world. As a result the country's manufacturing sector contributes only six percent to GDP. This shows that private sector is also inefficient and unproductive. Moreover, huge power cuts for the last seven years combined with an anarchist labor market have created other hurdles to growth.
Thanks to remittance flow from migrant labor, a favorable balance of payment has been maintained, keeping current accounts positive. More than 60 percent of households have been receiving remittances commensurate with more than 25 percent of national income.
The public sector contributes 34 percent to GDP but its performance tells a very depressing tale. The public sector economy can be best described as 'fiscal paradox'. The economy has huge resource gap but at the same time quality of capital expenditure is worrisome. Even during normal times, public sector consumption of development budget was less than 40 percent.
Besides, 40 percent of the population is jobless. Agriculture sector contributes 34 percent of GDP and more than 70 percent people rely on it. Low productivity in agriculture leads to low income distribution which in turn leads to mass poverty. The recent earthquake has added another in the pile of challenges for the politically and economically fragile nation.
Around US$ 15 billion and 10 year's time have been allocated for reconstruction. The country needs to stand on its own feet and take a new growth path to future prosperity. Most impressive, though, was how this unfortunate calamity opened doors to spur recovery. The government should use this opportunity not only to recover but also to escape the poverty trap. The quake can be a precursor for economic advancement. The nation is in much need of every bit of support the world can provide. The bilateral and multilateral donors and INGOs will continue to play an important role in providing financial resources and other technical know-how. But no country has developed with donor money.
The government wants to channel all support through one door to avoid duplication, high administrative costs and to optimize scarce resources. However, many international development partners want to invest money for reconstruction and recovery as they wish, through their own INGOs and contractors. They claim the government is inefficient, incompetent and corrupt and bundled up in red tape. They fear administrative delays, red tape, poor leadership, poor governance and mismanagement of reconstruction and recovery, as happened after the 2010 Haiti earthquake, could be repeated.
Some concerns of donors may be justified but allegations that the government is corrupt, opaque and unaccountable are fallacious. The claims that donors and the international development agencies and others INGOs are honest, transparent and accountable are equally misleading.
The fact is that the Public Account Committee (PAC) of Parliament, Auditor General's Office, and Commission for Investigation of Abuse of Authority (CIAA), Public Procurement Office and National Vigilance Center are in place to legally and constitutionally ensure transparency, accountability and to combat corruption. Besides civil society and media act as watchdogs. But there are no institutions to oversee the conduct of international donors and development agencies. The donors themselves fail to comply with their leaders' international commitments such as Rome and Paris Declarations to make development mutually accountable and transparent. The donors' operations in Nepal are more opaque than the government's.
To address the concerns of international donors and partners and to avoid delay and administrative hassles, the government should apply fast track to recovery. For this, a 'Reconstruction Authority' can be formed by an ordinance to implement reconstruction and address international community's concerns. The government must show leadership and administrative efficiency. It should not allow international donors to undertake reconstruction themselves.
The author is an economist