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VOL. 28, NO. 08, Oct 24 , 2008 (Kartik 08 2065 B.S.) |
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GLOBAL FINANCIAL MELTDOWN
Cascading
Effect
As the true extent of the global financial meltdown becomes clearer, a least development country (LDC) like Nepal finds itself staring at difficult times ahead. Heavily dependant on foreign aid, tourism, remittance earning, Nepal stands to pay a heavy price of the meltdown, which is causing the developed countries to tighten their belts. And then, there is the big issue of oversight of financial institutions. The meltdown prompted by the collapse of American giant financial companies has led to concerns among Nepali authorities about the need to develop proper oversight on banks and financial institutions. Especially since the property bubble seen in the US have become a grim reminder of how the growth of real estate here, too, could be unreal and lead to similar collapse of financial institutions that have heavily invested in these sectors
By SANJAYA DHAKAL
Sanimaya Tamang has never heard of Lehman Brothers or Merrill Lynch.
But she is feeling the pinch of the global financial meltdown
triggered by the collapse of these American giants.
A worker at a garment factory in Kathmandu, Tamang, a mother of four
children, got a rude shock recently when the factory shut down due to
vanishing demands of readymade garments in the United States.
As the American people suffer from the woes of recession, the people
like Tamang are forced to stare at a dire future.
Nepal's tottering garment industry used to be one of the major foreign
exchange earners till five years ago. But following the termination of
Multi Fiber Agreement in 2005 and end of quota and duty free system,
it was on a free fall.
"And now this financial turmoil in the US has caused a great anxiety.
I was recently in the US and, for the first time in my memory, I
actually heard American importers saying that as they were feeling
uncertain about even feeding and clothing for their families, they
could not think about imports," said Udaya Raj Pandey, vice president
of Garment Association of Nepal (GAN).
"The importers are currently stopping demands and just waiting," he said.
Although Tamang – a native of Dhading district, which borders capital
Kathmandu – does not know the reason or ramifications of the global
financial crisis, she could be facing worse troubles in the days to
come. Her husband works in Malaysia – one of the prime destinations of
Nepal's overseas workers whose remittance earning has helped Nepal's
economy stay afloat during the last turbulent decade of internal
conflict and uncertainty. Experts fear that jobs could be cut in
countries like Malaysia due to the global recession.
Back home, Tamang's family is already suffering from high food prices
also triggered due to global food crisis since past one year. Nepal's
rate of inflation for the month of August/September has already
crossed double digit in the face of rising oil and food prices.
All Round Effect
Not only garments, Nepal's exports like carpet, pashmina, herbal
products and so on could face a dim future if the global recession
prolongs. Thousands of people could be forced to share the fate like
that of Tamang.
Falling exports was already a big problem for Nepal even before the
global financial crisis. In the last one year, Nepal's trade deficit
had dramatically soared. The two-third of Nepal's deficit was with
India alone, which reached Rs 105 billion (approx a little less than
$1.5 billion).
The only saving grace was the increasing earning from remittance. As
over one million Nepalese youths work in foreign countries sending
home over Rs 150 billion a year – through official banking channels
alone – they have helped maintain favorable Balance of Payment.
The current crisis, however, is feared to hit the jobs in foreign
countries, which could, in turn, hit Nepalese workers.
Another victim could be tourism. "If the recession prolongs in the US
and other markets, the people there would tighten their belts and the
tourism could suffer," said Dr. Jagadish Chandra Pokharel, former vice
chairman of National Planning Commission (NPC).
"We are also watching nervously the fall out from the crisis. It could
certainly affect us," said Prasiddha Bahadur Pandey, a hotelier and
president of Nepal America Chamber of Commerce and Industry.
Aid Dependency
Nepal is heavily dependant on foreign aid for carrying out development
projects. In this year's budget presented more than a month ago, the
new Finance Minister of the Maoist-led government has projected to
receive Rs 65 billion of foreign aid – Rs 48 billion as grants and
rest as loans.
But economists and experts have said that this money might not
materialize due to the global meltdown, which has forced developed
countries to adopt austerity measures.
"The global crisis will definitely affect the bilateral aid
commitments if not the multilateral ones," said Dr. Pokharel.
Former finance minister Mahesh Acharya also feels that foreign aid to
Nepal could dwindle in the face of such crisis.
But the government appears confident. "All of these aid amounts have
been calculated after receiving concrete commitments from donors. And
from time to time they have expressed readiness to support. So I do
not think it will affect the aid volume," said Secretary at Finance
Ministry Krishna Hari Baskota.
He, however, admitted that aid commitments next year could be affected
if the crisis prolongs.
In any case, the effect on aid volume will have serious consequences
affecting education, health, infrastructure development and other
projects. It will be particularly painful for Nepal as it begins to
carry out the phase of reconstruction after a decade of violent
conflict, which was a major setback to its development efforts.
Oversight Issues
The global crisis has opened the eyes of many countries around the
world about the dangers of poor oversight of banks and financial
institutions.
The US government was forced to come out with a bail out package of
US$ 700 billion due to the collapse of its financial institutions.
Many countries in the Europe scrambled to guarantee bank deposits to
soothe the sentiments of shaken investors.
The panic-stricken investors dragged down stock markets from New York
to London and from Hong Kong to Mumbai.
Nepalese officials have said that the global financial meltdown has
had no direct impact on the country's infant stock market.
"Since there is no presence of Foreign Institutional Investors (FII)
in the Nepal Stock Exchange, it did not have any direct impact," said
Rewat Bahadur Karki, general manager of Nepal Stock Exchange (Nepse).
Acting governor of Nepal's central bank, Nepal Rastra Bank (NRB)
Krishna Bahadur Manandhar has said that none of the banks of Nepal
have any financial link with the companies that collapsed in the US."We inquired with all the 25 commercial banks and found that none of
them have any link with Lehmann, Merrill Lynch or Washington Mutual or
any other such troubled institutions," Manandhar said.
But the officials have said that the meltdown does offer lessons for
Nepal to have better oversight on country's financial institutions to
prevent such crisis.
"There is a need to pay attention to real estate and share market,"
said Alexander Pitt, resident representative of International Monetary
Fund (IMF) in Nepal. According to him, the prices of properties and
shares are not based on reality, which has given grounds for
suspicion.
Pitt called for better oversight of the banks and financial
institutions to prevent any disaster in future.
The commercial banks in Nepal, currently, have the total deposits of
Rs 400 billion of which they have lent Rs 300 billion in various
sectors. Bankers claim that their investment is quite safe.
"Although banks have invested in real estate and stock market, they
are, in total, less than 20 percent of our total lending portfolio.
Likewise, the total lending in hire purchase sector, too, is less than
Rs 20 billion or six to seven percent of our total lending," said
Sashin Joshi, vice president of Nepal Bankers' Association.
NRB governor Manandhar also feels that the fundamental financial
situation of Nepalese banks and institutions are good. "A few years
ago the two big banks Nepal Bank Limited and Rastriya Banijya Bank had
non performing loans between 40 to 60 percent. Now the situation has
improved and the level has come to just below 15 percent. The NPL in
most of the private banks stand at one or two percent. There were
three private banks Nepal Bangladesh, Lumbini and NCC, which had big
problems. But after intervention by NRB, their situation has now
stabilized," Manandhar said.
He, however, admitted the need for better oversight to prevent
disasters like the ones that happened in the US. "We have to be very
careful," he said.
Former governor of NRB, Dr. Tilak Rawal also pointed at the need for
NRB to apply strict financial prudential norms and check the safety of
the investments of banks and financial institutions.
In this age of globalization, the problems erupting in far away
countries can travel at the speed of light to haunt us. As shown by
the experiences of Tamang, Nepal cannot remain isolated from the
global troubles. But it can, at least, take steps to insulate itself
from worst consequences from such troubles.
