Nepal's Economy Faces External Dependency Nightmare

Published On: May 14, 2023 09:30 AM NPT By: Hari Prasad Shrestha

As the preparation for the federal budget for the next fiscal year is under full swing, the Ministry of Finance has concluded deliberations with the line ministries, business and industrial organizations, corporate houses and other concerned stakeholders to include appropriate suggestions to give  final shape to the budget. The pre- budget discussion is underway in the  parliament and thereafter the budget will be presented in the parliament on 29th May 2023 as per the constitutional provision.

As an outcome of the rising food and fuel prices in the international market, Russia-Ukraine war, breakdown in American banking system and layoffs in tech industries, a global recession is stepping up with more challenges to the world economy.

Its upshots are perceptible also in Nepal's current national economic performances. Based on the recent economic growth rate projection of the National Statistics Office, Nepal has entered into a cycle of economic recession. The financial institutions have a liquidity crisis and the commodity and stock markets are in downward trends. Inflation is skyrocketing with declining employment opportunities. Industries are running far below their potential and  other productive sectors  are not performing well due to declining demands in the market. Moreover,  shrinking revenue collection more than two hundred billion rupees below the target, widening import and export gap, record high interest rates, mounting recurrent budget with rising arbitrary expenditures and low capital budget expenditures have aggravated the difficulties in the economy.

As Nepal's economic growth has been controlled by forces outside the national economy, its  role has been limited up to as suppliers of primary products and raw materials, cheap labor, and markets for expensive manufactured goods from industrialized neighbors. Moreover, the rising unauthorized imports through open borders with India have been permanent blows for the economy.

The domestic base and the internal output of the  economy seems to be fragile and frail, which has been surviving mainly through external components such as  remittances and imports. They  are highly risky and uncertain factors of the economy, however they have been the backbone and protective armor of the Nepali economy.

Foreign currency received through remittances are  supporting import of goods and services in the market and  imports are providing necessary resources for the government in the form of revenue to run the state activities.  In reality, the permanent cycle of remittance, foreign currency, import and revenue generation are making the economy functional and operational, which is the wrong model for the economy.

Around half of the Nepali workforce are being employed in foreign countries, who are major sources of remittances and out of another half workforce inside the country, most of them are being employed in the service sectors  followed by agriculture, infrastructures and the industrial sectors.

Based on statistics published by the Department of Customs of Nepal  for the first nine months from mid-July 2022 to mid-April 2023, Nepal imported goods and services worth Rs 1201 billion and exported Rs 118 billion worth of goods and services and the trade deficit stood at a staggering Rs 1083 billion. The payments of the trade deficit was managed either by foreign currencies received through remittances or by loan and grants received from external donors.

India monopolizes vital supplies systems with shares of around 65% imports of goods and services in Nepal caused by Nepal’s inability to produce internally. Nepal imports from India almost everything from sensitive defense materials to petroleum products, medicines, foodstuffs, and other essential items. Not only  import of goods in massive scales but Nepal is also completely dependent on external grants and loans for capital expenditures. The donors are supporting the government with required assistance and the volume of public debts are rising in unprecedented ways. However, the accomplishments of the economy have always been in big question marks. Nepal with long-term aid dependency remains unable to be self-sufficient and is less likely to make meaningful growth and development. Nepal seems to be in a delicate position due to its dependence on foreign loans even for the payment of salaries of government employees.

Some experts on dependency and underdevelopment opined that over-dependency is considered as an externally influenced process which is bolstered by a small but influential domestic elite who form a coalition with the international bourgeois system.

According to a report of the International Monetary Fund on Nepal, global developments have impacted Nepal’s import-dependent economy—particularly through higher commodity prices. The current account weakened and reserves declined in the first half of 2022. Pressure on reserves has subsided since then, thanks in part to monetary policy tightening and cooling domestic demand, but inflation remains elevated. Fiscal policy has been less expansionary than projected, but a recent fall in revenues is adding to near-term fiscal pressures. Non-performing loans are increasing, while capital adequacy ratios remain above regulatory minima. Risks are on the downside.

After the end of the colonization era, developed countries have changed their strategy by entering through market mechanisms and powerful institutions in the internal dynamics of developing countries. In this change of strategy of powerful nations, many poor countries have transformed their economy through right national policies and correct strategies coping with new order of global dynamics.

Only small numbers of countries remained underdeveloped as a result of their excess dependency and faulty economic models and Nepal has been, certainly one among  them. Its landlocked position has been least favorable from a development and stability point of view and overdependence on its neighbors for trade, investment and technological progress has been major causes of its poverty. The government is overloaded by economic and developmental responsibilities and there are strong contradictions between policies and implementations for private and external investors to contribute comfortably in economic development. The government has completely failed to accelerate development activities due to its inability to spend capital expenditures. In such a scenario, the private sector and multinationals must be urgently encouraged with maximum incentives to invest in development activities, which could lessen the debt burden of the government.

Besides, our economy is functioning on obsolete and wither policies. Many provisions of industrial policy,  revenue policy, monetary policy and their non-protective policies toward domestic industries are seen as impediments in generating employment and narrowing down trade imbalances in our international trade.

In the forthcoming budget, Nepal must seriously follow a comprehensive approach that will both boost investment and accelerate productivity by breaking down policy barriers, building new sources for growth in areas of comparative advantages, such as hydropower, revitalizing existing sources in agriculture and industrial sectors with emphasis on the tourism sector. Moreover, Nepal must increase its capacity and capability to properly utilize external loans and grants to make it supportive to national growth and development.

And the coming budget  must be capable of addressing the critical issues of external over-dependence  by breaking the traditional cycle of remittances, foreign currency, imports and revenue from imports, which have been major causes of setbacks in our economy. It is not easy to reverse or change these traditional cycles immediately. However, a proper vision in the budget must be embodied  for the long-term survival of the economy. Lastly, for accelerating towards a self-sustaining economy, a new cycle of  transformations by replacing the traditional model must be under our new vision of budget, which are –  growth in production of sectors of comparative advantages, its massive export, revenue generation from internal resources by breaking the cycle of dependency on import and remittances.

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