Looking at Nepal’s current economic situation, people seem inquisitive to know if Nepal is already a failed state. Additional information may be required before answering this question. The prolonged transition and questions about government’s legitimacy has stalled economic activities. We have not merely suffered from serious structural fault lines, but have also failed to maintain traditional relationships with development partners and communicate explicit government stance with UN agencies. As a result, it has increased external pressures and renewed Western interest. No surprise if disequilibrium is also created in balancing country’s relationship with two giant neighbors, India and China.
The FSI separates countries under four different categories (Alert, Warning, Moderate and Sustainable). Out of 37 countries, under the first category ‘Alert’, Somalia is placed at No 1 as a worst case consecutively for the third year. In South Asia, Afghanistan, Pakistan, Bangladesh, Sri Lanka and Nepal fall under this category. Nepal ranks 26th indicating a nation with one of the highest failing intensity since it is included in the topmost warning zone.
The prolonged political instability has virtually limited the scope to capture distortions and huge parallel open border economy in its official data. The estimates are not, therefore, reliable to develop safeguard measures. The government´s Gross Domestic Product (GDP) growth projection remains at 3.5 percent in 2010. The World Bank South Asia Economic Update estimates Nepal’s GDP growth to remain respectively at 3 percent in 2010, 4 percent in 2011 and 4.2 percent in 2012. Under really favorable circumstances, World Bank estimates 5.5 percent to 6 percent growth in 2012. Such growth is linked, however, to the improvements made in managing state fragility by reducing structural impediments.
In responding to this question, I presume, based on the brief review of the characteristics that qualifies a country to be deemed as a failed state, Nepal is not yet a failed state, but can become one at any time, any day.
Asian Development Bank’s Asian Development Outlook has also estimated Nepal’s GDP growth to remain at 4.5 percent in 2011 provided that there is continued recovery in the global economy and a domestic political landscape becomes conducive for economic activities. Furthermore, Nepal´s medium-term growth and development prospects hinge on progress in political transition, macroeconomic stability, and sustained global economic recovery. But this has not happened as desired. Let us have a look at the annual macro-economic state of the Nepali economy.
The inflation rate is 10.5 percent. The item under food and beverages group has increased by a whopping rate of 45.6 percent. Merchandise trade has declined by almost 10 percent in 2009/10 against the increase of 14.2 percent during 2008/09. The merchandise imports grew by 33.2 percent to Rs 378.80 billion against 28.2 percent to Rs 284.47 billion last year. Imports from India alone grew by 33.2 percent against a growth of only 14.1 percent last year. Total trade deficit thus expanded by 47 percent to Rs 317.67 billion and Balance of Payments posted a loss of Rs 2.62 billion. The gross foreign exchange reserves dropped by 7 percent to Rs 266.57 billion, which threatens the possibility of external debt becoming unsustainable if Forex reserves continues to decline.
Although revenue increased by 24.4 percent, it is alarming to note that the recurrent expenditure increased to Rs 144.38 billion compared to capital expenditure of Rs 75.38 billion only. These anomalies compelled Nepal Rastra Bank to purchase Indian Currency (IC) equal to Rs 102.1 billion by selling US$ 2.2 billion. Excessive demand for IC has raised doubts among individuals and institutions both at home and abroad. The Reserve Bank of India has recently completed the study to justify the escalation of demand for IC. Informal discussions reveal that there is not much problem at the moment but uncontrolled open border trade may create difficulties in the future.
The short-term prospects for the Nepali economy are not very encouraging. One of the structural fault lines is the growth rate of younger but unemployed population whose growth rate is higher than the average rate of growth of total population. Fragilities are also evident in Nepal’s agricultural sector, which is likely to come under duress over the next decades due to land and water scarcity. Unpredictable monsoon has already reduced cultivated area and productivity by reducing the share of agriculture in GDP.
Nepal has not yet lost control of its territory. But the state is without control and being ineffective in governance because there is a clear erosion of legitimate authority to make collective decisions. Macroeconomic difficulties are sustained. People complain about increased corruption and criminality. There is an uncontrolled movement of population. The red signal of state failure is also the inability of the state to provide basic services to the people. This problem is clearly visible because of the continued economic stress and civil disobedience. The state has continued to mismanage the economy. Escalating defense expenditure over the last one decade has made Nepal’s poor defenseless.
To conclude, the case of handling fragility by sectors has been forgotten in Nepal. The task of policymakers has been to make unrealistic growth estimates and blow their trumpet while denouncing any warnings on the possibility of state failure in Nepal. Therefore, in responding to the initial question raised, I presume, based on the brief review of the characteristics that qualifies a country to be deemed as a failed state, Nepal is not yet a failed state, but can become one at any time, any day.
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