How Nepal can avert an economic crunch

Just diversify the tourism and remittance-based economy and explore commercial agriculture

Motorcyclists queued in front of a petrol pump fearing shortage after businesses stopped transport of petrol. Photo: Amit Machamasi

The Covid-19 pandemic adversely impacted the global production and supply chain. Rising food prices reversed decades-long gains in poverty alleviation, pushing millions around the world into food insecurity.

Global recovery has been uneven with economic growth concentrated in some major economies, and most developing countries and emerging markets lagging behind.

Nepal’s agriculture, infrastructure, construction, industry, tourism, supply chain and other service sectors have been  been hit hard. Hundreds of thousands have lost their jobs, especially daily wage workers, small and medium enterprises, as well as marginalised and economically disadvantaged communities, pushing them deeper into poverty.

And just as the worst of the pandemic and the economic collapse was over, the global economy was shaken off course by Russia’s invasion of Ukraine, with the effects reverberating across the world and in Nepal. Experts are concerned that any economic recovery program, weakened by the global pandemic and war, will be largely ineffective.

A recent research conducted by the Policy Research Institute on the policies, tactics and strategies adopted by developed countries in pandemic management has found that the Ukraine crisis has increased the trade deficit and depleted foreign exchange reserves of developing nations like Nepal. Indeed, Nepal depends heavily on the import of food grains, crude oil, medicine, fossil fuel, motor parts, and other commodities.

Sri Lanka continues to reel under an economic crisis brought on by the country having adopted some of the worst economic policies for decades, and exacerbated by the decline of foreign exchange reserves due to the loss of tourism and remittance during the pandemic.

Sri Lanka’s foreign debt is now 110% of its domestic production, while its revenue only makes up 9% of its GDP. Its fiscal deficit stands at 11%. Almost half of the assigned government spending has gone towards paying off the country’s loans, and it is not in any position to take more loans to pay off what it owes. Increase in agricultural imports has also adversely impacted foreign exchange reserves.

Read also: State-sponsored economic crisis, Editorial

Nepal also has much to learn from the effects of the pandemic, the war in Ukraine, and the Sri Lankan experience to develop a clear roadmap for its economic recovery. Here are some recommendations:

  • Maintaining food security within the country by reducing and replacing agricultural imports.
  • Reducing fossil fuel imports, increasing hydropower production and capacity, and becoming self-reliant in the energy sector.
  • Diversifying foreign currency to improve Nepal’s foreign reserves.

Although the Covid crisis had accelerated the decade-long decline of Nepal’s industry and service sectors, the agricultural sector seems to have some external influences on the economy. This signifies the need for agricultural independence to make Nepal self-sufficient in food, lessen the impact of inflation, reduce the pressure on Nepal’s foreign reserves and strengthen the economy.

The government needs to direct attention to the commercialisation of the agricultural sector. Nepal needs sufficient infrastructure to strengthen the supply of farm produce, the key for this is cooperation between the government and private sector to create competitive markets . Any agricultural  policy must encourage private investment.

It is entirely possible for Nepal to reduce its trade deficit by increasing agricultural productivity.  The government must establish small and medium industries that can capitalise on   comparatively advantageous indigenous products, and facilitate such industries through easy access to agricultural finance and economic aid. As such, agricultural cooperatives also have an important role to play.

To increase agricultural exports, Nepal must fully exploit and expand access to currently available trade concessions and duty-free markets before it is upgraded from the Least Developed Countries in the next five years. It will have to move towards making use of the various concessions and duty-free markets available in its current status.

Nepal must also focus on trade negotiations and economic diplomacy by making maximum use of bilateral and multilateral talks and regional forums.

Nepal’s foreign exchange reserves have also been affected by skyrocketing fossil fuel prices due to global supply chain disruptions caused by the Russian invasion of Ukraine, and the consumer price index is likely to rise as well.

According to the Nepal Rastra Bank, petroleum products accounted for 13.6% of the total imports in the first seven months of the 2021 fiscal year, with prices soaring that much be higher now.

Nepal must now adopt policies to increase the production and use of renewable energy, to reduce fuel consumption, combat climate change, and control air pollution. Initiatives should be taken to facilitate the sale of surplus electricity to energy markets in India and Bangladesh.

An independent energy sector could prove to be an appropriate long-term national security strategy. The use of household electrical appliances and vehicles should be increased to encourage production of renewable energy.

Read also: State-sponsored economic crisis, Editorial

Sunday’s budget speech by the Finance Minister has shown that the government is set to take steps to move into the use of electric infrastructure — beginning with a discontinuation of LPG gas at Singha Darbar, which will consequently be rolled out across Nepal’s major cities.  More than Rs75 billion in the budget has been earmarked for the energy sector.

Attention must also be directed towards necessary infrastructure for power transmission. The maximum utilisation of the recently approved Millennium Challenge Corporation Compact (MCC) must be a way forward. There is also a need for major reforms in existing climate policies.

According to NRB's seven-month data for the current fiscal year, the reserves of the banking sector can support little more than seven months of goods imports, and less than seven months of goods and services imports. It is thus important to divert foreign exchange resources to sectors other than tourism and remittances.

Foreign direct investment can be a sustainable source of foreign exchange for Nepal. A 2021 study conducted by the Policy Research Institute on foreign direct investment had emphasised on the need to integrate and align regulatory mechanisms to create an environment for a sustainable agricultural sector.

Foreign investment would also stimulate domestic capital once Nepal’s credit rating is bumped up after it is upgraded from the list of Least Developed Countries in 2026. That would provide new opportunities for Nepal in resource mobilisation in the international capital market.

It is necessary for Nepal to move forward beyond a remittance and tourism-oriented economy and explore possibilities in the agricultural, energy, and other sectors.  For this, co-operation between the government and private sector is key.

Read more: From a fossil past to an electric future, Om Astha Rai

Kalpana Khanal is the head of the Center for Economic and Infrastructure Development Policy Studies at the Policy Research Institute. Adapted by Shristi Karki from the May issue of Himal monthly magazine.