Meltdown to breakdown

Nepal is one of the few countries in the world that seems to want to stay poor. The government officially requested the UN ahead of a meeting this month to not upgrade it just yet from the list of Least Developed Countries because of fears of losing foreign aid. The reason may have been legitimate self-interest, but the way it came across in the media was that we want to remain beggars.

Now that the new government has been (partially) formed under the new federal constitution, the worry is not so much about political instability but economic bankruptcy. There have been enough warning signs along the way during the country’s long economic downhill slide which we never heeded because our rulers were preoccupied with politics. Now that the politics has been largely fixed, there are no more excuses left to delay fixing the economy with a Marshall Plan for infrastructure-led growth.

The realisation seems to have sunk in with Prime Minister K P Oli who last week announced the second tranche of cabinet ministers. Its composition represented a compromise of interests and egos to placate the Maoists as well as to balance factions and aspirants within his own UML. Among the fairly predictable choices, one stood out: Yuba Raj Khatiwada for the post of finance minister.

In his previous tenures in office, especially as the governor of the Central Bank, Khatiwada showed he could take bold decisions even though they angered special interest groups like real estate speculators. Khatiwada’s appointment is still iffy because he is not an elected MP. Still, his selection was widely hailed within Nepal and abroad.

Khatiwada faces a tough challenge. Remittances, the mainstay of the economy, is in decline even though the total number of overseas workers has not come down. This could either be because the dollar has weakened, or that most money is being remitted through non-banking channels, or both. Whatever the case, remittances are not going into formal channels to be invested into productive sectors. Imports have risen dramatically, especially of petroleum products. Last week, in a Himalmedia roundtable, CEOs of banks also pointed to the Rs 300 billion which the government has not spent on development that was stifling money supply.

As Siddhant Raj Pandey of Business Oxygen argues in the Guest Editorial monetary policy is in chaos, the combination of BoP and current account deficits is a double whammy. Khatiwada’s first order of business would be to inject credit, promote investment and cut imports.

As we in Nepal know all too well: economic meltdown will ultimately lead to political breakdown. Which means the United Left’s electoral promise of strong government and development will quickly unravel.