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Policy Reforms & Protection from Shocks
By Dilli Raj Khanal and Nav Raj Kandel
Publisher: Institute for Policy Research and Development (IPRAD), Kathmandu
Pages: 75+ix
Price: Rs. 125 (US$ 5)
After the final analysis of the information contained in the second Nepal Living Standard Survey (NLSS) showed a sharp decrease in poverty incidence in Nepal during the period 1996-2004 (from 42 percent to 31 percent), a debate has started whether this remarkable achievement is sustainable in the long run. The analysis that confirmed the massive poverty reduction has attributed it to the growth in urbanisation, growth in income from foreign employment, growth in the wage rate in the agriculture sector, growth in non-farm employment and a decline in the dependency ratio. While the optimists received the results as proof of the success of the economic reforms introduced during and before the survey period, they have given a warning that these are not the things to rejoice over. The reason? All these indicate that the underlying contributor for poverty reduction during this period was the ongoing conflict that displaced people from the rural areas to urban centres and out of the country, thus triggering the five factors that are cited as the contributors to poverty reduction. The conclusion is that once peace is restored and people start going back to their villages, the poverty incidence too may move up to the original level.
While the final report of the NLSS was being prepared and the data collected was being analysed to assess the poverty level, there was a simulation-based quantitative analysis being conducted by IPRAD with assistance from Global Development Network (GDN) to check whether the reforms introduced in Nepal over the last two decades have enough strengths to absorb the policy-induced and other exogenous shocks in the economy.
The findings as reported in the book Macroeconomic Policies, Shocks and Poverty Reduction in Nepal, show that while deregulation in agriculture has not encouraged increase in agricultural production, weather is still an important factor contributing to increase in production. As the effect of the financial sector reforms, the ratio of deposits and lending to GDP has increased, but the non-performing assets increased, and the spread (difference between the interest rates offered on deposits and charged on loans) widened. Similarly, as a result of the exchange rate regime under which the Nepali rupee is pegged to the Indian rupee, Nepal is subsidising imports from India and discouraging exports to India as the rate of inflation has been observed to be higher in Nepal as compared to India.
According to another finding, the rate of growth in government revenue has been higher than the growth in GDP, indicating elasticity in the tax system. But additional resources are diverted to consumptive uses, not on development expenditure, thus squeezing the future development potential though maintaining a fiscal balance.
Similarly, it is found that the remittance inflows that jumped up since 2000 helped to contain the worsening capital account balance while simultaneously helping to increase revenue through increased consumption imports. This was the key to minimise the vulnerability of the economy during the period under review.
The information collected from the secondary sources were analysed in the study by developing a macro-model with 20 equations and 26 identities. With these, a comprehensive macroeconomic framework was developed for simulation. Three alternative runs were carried out to see growth and poverty implications. The result was a forecast of 3.6 percent GDP growth for 2004-13 against a historical average of 4.4 percent for the period 1985-2003. The final conclusion was that the ongoing reforms would be ineffective in nullifying the effect of the ongoing petroleum price hike in the global market and frequent weather shocks in the Nepali economy. The reasons for this are partial reforms and wrong sequencing. The authors have also concluded that if the conflict comes to an end in 2007 bringing in political stability and, remittance inflow as well as tourists arrival too will continue to increase, the GDP growth would then be 5 percent per annum in the 2004-13 period. The findings also show that foreign aid would be very useful in preventing the destabilising effects of the shocks – both internal and external.
Details of Nepal’s WTO Accession
By Surendra Bhandari
Suresh Man Shrestha and Yamuna Ghale Upreti
Published by Action Aid Nepal and Law Associates Nepal
Price Rs. 200
Pages: 268 + vii
As the publishers’ note in the preface of this book states, Nepal’s accession process to the WTO was quite opaque though there were some public debates only towards the end of the process. Therefore, many commitments made by the government while joining this global trading club and the logic for making these commitments are still not clear to major stakeholders.
Action Aid Nepal and Law Associates Nepal have brought out this book chronicling the step-by-step process of the negotiations carried out by Nepal, and the analysis of the commitments made. More importantly, it has analysed the threats posed as well as the opportunities opened for the country because of this membership. The analysis of weaknesses and strengths noticed in the Nepali negotiation team presented in this book will certainly help improve this capacity in the future. As the book is an outcome of an extensive interaction of the authors with the members of Nepal’s negotiation team, individually as well as in a public forum, the presentation has been balanced and comprehensive.
The book is expected to be a valuable reference material for academics, entrepreneurs, managers and all those who should lobby the government to fulfil the commitments without compromising Nepal’s interests and concerns and find a space for themselves to turn challenges into opportunities.
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