Moreover, as Nepal is immune to resist the ills of the global financial crisis that is spreading like a wildfire worldwide, increasing evidences are emerging on the ground to indicate that the fragile economy worth about 12 billion US dollar is sure to face severe adversities in the days to come.
The most alarming warning has come from the foreign employment sector. The recent first-ever 4.6 percent decline in the number of outgoing Nepali workers is a loud and clear warning shot that a time bomb has started to tick, much sooner than many Nepali analysts had predicted.
Worries are high that the slowly escalating jittery in the foreign employment sector can hit anytime the country’s economic backbone – remittances, as the Gulf region’s construction industry that absorbs some two-thirds of Gulf-bound workers has started to squeeze on the back of dipping property values.
Any problem in the foreign employment sector will be a disaster for Nepal, as it has brought many good things to domestic economy. It has helped to address Nepal’s stubbornly high unemployment, anchored to keep general consumption afloat even during the period when economy was shrinking, contributed to healthiest foreign currency reserve even when exports were tumbling. More than that, foreign employment has also played a crucial role in importing a culture of hardworking and entrepreneurship among the youths. Studies have reckoned that three-fourth of foreign employment returnees are now engaged in their own businesses. More than monetary, any severe crisis in the foreign employment sector will have wider psychological impacts in the short-run, fuelling frustrations among the youths vying for foreign employment that can ultimately lead to rise in social unrest.
The second most serious concern facing the economy is a looming burst of the real-estate bubble and its effects in the economy. Indications are already there that over a decade-long boom in the real-estate sector might plunge into rough weather. Slowing demand for real-estate, which bankers estimate at 5 - 10 percent than last year, is probably the most convincing indication till date that serious problem is quietly brewing in the economy. Even Nepal Rastra Bank recently warned banks to take extra precautions while investing in real-estate.
Though closely regulated banks are in better position to weather possible turbulences in the real-estate sector, Urban-centric saving and cooperatives, which have been able to lure huge amount of deposits by offering almost triple the average interest rate of banks and are beyond any effective regulation are in extremely venerable position. The cooperatives, which according to unofficial estimates have invested up to 80 percent of their deposits in real-estate sector without properly assessing possible risks, could spark a financial crisis if real-estate starts losing its shine.
One more pessimistic development of the year came from the industrial sector, as its output shrunk by almost 1.05 percent in the first quarter of the current fiscal year compared to the same period last year. The negative growth is almost sure to accelerate further in the coming months, thanks to thrilling power cuts and widening mistrust between employers and laborers, further suffocating fresh investments to the economy. Industrialists say that if the power shortage further deepens, which is almost sure unless a miracle happens, hundreds of medium-range industries that are running in marginal profits can go bankrupt, vanishing some half a million jobs. If that happens, the country might have to witness an unprecedented level of industrial unrest.
Likewise, whopping inflation rate of over 14 percent, which is more than double the annual target set for the current fiscal year, has posed another big challenge before the government. Interestingly, the domestic economy, unlike the Indian economy, has not been able reap benefits of declining prices of major construction materials and petroleum products. The reason is simple: the government is unable to regulate retail markets, resulting in extraordinary profits for local traders. Continued refusal of transporters to adjust fares in response to dwindling prices of petroleum products in the domestic market is a glaring example how incompetent is the government in enforcing rules and regulations.
Record low capital expenditure that mainly finances development activities is one more indication of thickening black clouds over the already yawning economy. According to central bank, the total capital expenditure by December 19, 2008 was just Rs 5.15 billion, which was 37 percent less than last year’s expenditure. Concerned authorities say low capital expenditure is due to slow works in big projects either due to shortage of power or escalating labor disputes. The year 2009 might be marked as one of the worst years on record for development in peace time, if the situation fails to turnabout though it is less likely.
However, out of all this gloom comes some hope. Astonishing revenue growth, which is well above 30 percent in the first four months, is one of the few things that deserves big words of appreciation. However, risks are there as imports of industrial raw materials are likely to shrink due to sluggish industrial activities.
One more good news in 2008 came from the improvised agriculture sector, with an impressive 5.2 percent rise in the production of paddy, which largely determines the level of purchasing capacity of the majority of farmers. The second consecutive yearly growth in paddy production will bring higher disposable income for farmers thus propelling the demand of goods and services in rural areas of the country. A good monsoon will also help to keep overall economic growth at moderate level at a time when other sectors are less likely to perform satisfactorily.
prem@myrepublica.com
Related story
State of the economy
