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VOL. 27, NO. 34, May 09, 2008 (Baishakh 27 2065 B.S.) |
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RISING COST; FALLING EXPORTS |
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Twin Tremor
As politicians continue wrangling over the formation of new government after the election and as new constitutional complications have emerged indicating prolonged instability, the economic sector is facing tough problems. Currently, the economy of the country is facing a twin problem – the increasingly accelerating inflation rate and the fast dwindling exports. The inflation rate has surged beyond seven percent while the trade deficit has neared Rs 100 billion. This sorry situation has emerged at a time when Nepal, along with the entire world, is facing the heat generated by the food shortage and shooting costs of essential food stuffs. The rising oil and food prices are set to further affect the economy at this crucial political transitional phase
By SANJAYA DHAKAL
Soon after election results started pouring out indicating victory for his party, Maoist chairman Prachanda held a series of meeting with business community.
It showed that the comrade knew what would be the number one challenge his government – widely expected to be formed – would face immediately after taking the charge over Singhdurbar.
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Rice products: Going up and up |
The implementation of republic, removal of monarchy, sitting down to write constitution and bringing forces that are diagonally opposite together would, indeed, be tough challenges. But the King (no pun, intended) of all challenges his government would face would definitely be the 'economy.'
For years, the economy of the country have been brushed aside as political discourses and disputes have grabbed the center-stage. But, not anymore. Prachanda himself admitted as much saying that his focus would now be to bring about 'economic miracle.'
But miracles do not happen automatically, they have to be manufactured through the application of methodical measures. And for a Maoist party immersed in dogmatic communist doctrine, bringing about economic miracle - through what they themselves have called as initial phase of transforming the relations of forces of production from feudal to capitalist – would be a tall order.
For millions of poor people who have demanded change in their daily life through their votes, such communist jargons would do no good until and unless they start feeling the actual change.
And the problems could not have been worse for the comrades. The economy is in shambles – although the macroeconomic stability is still intact, the underlying fundamentals are crumbling due to absence of conducive socio-politico as well as global atmosphere.
Just as they prepare to take over the reins of affairs of the state, the country's economy is hit by inflation – triggered by international rise in prices of fuel and food. Furthermore, the balance of trade is fast turning on against the economic stability.
Twin Concerns
The acting governor of the central bank – the Nepal Rastra Bank (NRB) – Krishna Bahadur Manandhar is haunted by two concerns these days. The rising inflation and the dwindling exports have hit the economy where it hurts.
"The fall of exports definitely has us concerned. It would be affecting the total Balance of Payment. Likewise, another area of concern is the rising inflation. In the past four-five years, the inflation rate was around three, four percent. Now, it indicates it is rising beyond seven percent," Manandhar said.
Although the Balance of Payment is still positive at Rs 13 billion, the rate of its decline has worried the NRB officials.
"Both these problems are serious. Although the things have not yet gone out of hand, we must be very alert about these issues," Manandhar said.
Coming from the head of the central bank, these words mean a lot.
Falling Exports
According to the latest financial report by the central bank, the state of trade is not at all satisfactory.
In the first eight months of the current fiscal year 2007/08, the total exports have declined by 3 percent compared to the same period previous year to reach Rs 39 billion.
Worse, the trade with India has further suffered. Exports to India – with whom Nepal conducts two-third of its entire foreign trade – have dropped by seven percent to reach Rs 26 billion.
On the other hand, the total imports have increased by 12.5 percent during this period to reach almost Rs 150 billion.
Such a heavily tilted Balance of Trade has hit manifold sectors of economy including the Balance of Payment, the reserve of Indian currency, current account situation and so on.
"In the face of huge trade deficit, current account deficit and balance of payment deficit with India, the continuously sliding exports have increased our problem of management of Indian currency reserves," said Nara Bahadur Thapa, chief of the Research Department of the NRB.
He said that in the first eight months of the current fiscal year, the NRB had to sell hard currency of US$ 1.1 billion to purchase Indian currency. In the entire year of previous fiscal year, the NRB had sold off US$ 930 million to purchase Indian currency.
Rising Inflation
The rate of inflation has been creeping up since last many months. But in recent days, this rate has accelerated.
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Froot: Scarcity |
As the price of fuel have surged in the international market – reaching near US$ 120 per barrel of crude oil last week – and as the price of food stuffs have grown by almost 30 percent in recent months, the inflation, it seems, is a global problem.
In the immediate neighborhood, inflation has emerged as the single most damaging problem for both India and China. The sword of inflation is set to cut down the astounding rate of growth attained by these global economic powerhouses.
Nepal is also facing the heat of inflation. "Inflation has become a problem. Few years ago, it used to be around three to four percent but now it is threatening to surge beyond seven percent," Manandhar said.
For a stable economy, the rate of inflation racing past four to five percent is always a big worry.
The inflation eats up economic growth, depletes the wealth and drags people down into poverty. It is one of the most injurious element for any capitalist economy.
Saving Grace
The only saving grace for Nepali economy in these turbulent times have been the constant increase in the remittance income – the earnings sent home by hundreds of thousands of Nepali workers toiling in foreign land.
"In the first eight months of the current fiscal year alone, the remittance income sent by our workers have crossed Rs 82 billion, which is 28 percent more than what they sent previous year," said Thapa.
He added that the remittance income has helped the economy tide over such problems as balance of payment, foreign exchange reserve and so on.
"But remittances are not good for the economic health of the country in the long run. When our workers are compelled to go overseas for work, that does not increase our GDP, it increases the GDP of the countries where they work," said Thapa.
Food Shortage
In last two months the situation of food shortage and their spiraling prices have hit all over the world, particularly in the developing countries.
The United Nations has said that the global food stock have been depleted in what it says as lowest level since 1970.
This has triggered the governments of developing countries to announce ban of exports in essential food items like rice and wheat. This, in turn, has further fueled price rise.
According to Food and Agriculture Organization (FAO), by March-end, prices of wheat and rice doubled compared to a year ago, while those of maize were more than one-third higher. The international price of rice has risen by about 68 percent since the beginning of this year while the prices of soybeans, corn and wheat currently near their all-time high.
The UN has described the situation as a silent tsunami. The UN Secretary General has called for international cooperation to combat this problem, which he fears would derail UN's Millennium Development Goals (MDGs), especially on reduction of poverty and hunger.
"The implication is such that, according to World Bank, if the cost of food increases by 20 percent, 100 million people could be forced back into poverty. A one percent rise in food prices results in a 0.5 percent drop in energy intake among the poor," said Navin Dahal, executive director of South Asia Watch on Trade, Economics and Environment (SAWTEE).
The situation in Nepal, too, is heading for worse. The UN World Food Programme (WFP) had said in March that 3.8 million people in Nepal face food insecurity in the months ahead due to rising prices and Terai strikes. It has said that food stocks in 38 districts (mainly in the west) have fallen by 50 percent over last year due to rising food prices although paddy production was up by 17 percent this year. The WFP estimates that prices will go up by 10 percent every month till the next harvest if India continues its ban on the export of rice and wheat to Nepal.
In a paper he presented recently at an interaction, Dahal has written that Nepal is a net importer of food grains – rice imports from India (Rs 2.3 billion in 2005/06 and Rs 1.5 billion in 2006/07) and wheat imports from India (Rs 50 million in 2005/06 and Rs 100 million in 2006/07). He has stated that Nepal's rice imports from India account for 2 percent of India's total rice exports while Nepal's wheat imports from India account for 0.6 percent of India's total wheat exports.
Due to worsening situation and fear of rapid outflow of food stuffs, the government has already banned export of rice, and wheat.
The rise of food prices is especially hurtful to people of developing countries like Nepal where people spend 50 percent of their expenditure on food. This is also, therefore, directly related with the poverty.
As such, the situation in the socio-economic sector will be posing greater challenges in the coming days – a litmus test for the coming government.
