image

business forward

Economy faces headwinds but finance minister is oblivious to the crisis - The Kathmandu Post

Last week, Finance Secretary Madhu Kumar Marasini sent out a tweet that carried some warning signals.

“Hyped consumer demand, supply chain management chaos, hoarding, hyper credit, rising inflation: bullwhip!!!,” Marasini wrote on the social media platform, drawing quite some attention.

The finance secretary’s tweet comes at a time when indicators of both domestic and external sectors of the economy are not encouraging. Multiple experts the Post spoke to over the past few weeks say Nepal’s economy is taking a turn for the worse.

But precious little is being done to overcome the crisis.

Finance Minister Janardan Sharma appears oblivious to the headwinds the economy is facing. Instead, he has been belittling those who have been sceptical of the government’s 7 percent growth target.

During a meeting of the parliamentary Finance Committee on December 9, the finance minister said “conditions are favourable for achieving the targeted 7 percent growth.”

“We can achieve it and we should achieve it,” he said.

But how?

In the last four months since the start of the fiscal year, remittances have dropped, imports have surged and foreign exchange reserves have depleted. The country is not seeing tourists due to the pandemic. A large amount of paddy crop was destroyed by October’s unseasonal rainfall. Inflation rate is rising with a 19-month high recorded in mid-November. The country is facing a liquidity crunch. The government spending which would help ease the liquidity crunch has been dismal.

It’s time the government, or the finance minister for that matter, woke up and looked around before a disaster befalls the country, experts say.

“The economy is in a crisis,” said Achyut Wagle, a professor of economics at Kathmandu University who is also a columnist for the Post. “An acute liquidity crunch in the banking sector and other economic indicators show that there indeed is a crisis.”

According to Wagle, the government itself has acknowledged that there is a crisis. “This is evident from a recent move to allow the banks to count most of the reserve funds of the local governments as deposit,” he said.

On Monday, Finance Secretary Marasini wrote yet another tweet.

“The government has allowed the banks to mobilise upto 80 percent, up from 50 percent, of funds of local governments deposited at the banks,” wrote Marasini. “This will help inject Rs50 billion to the banking system.”

Wagle was quick to respond, calling the move out and out wrong.

“From all perspectives, this is a wrong, ad hoc and patchwork strategy,” Wagle said in a quote tweet. “Rs50 billion is not a relief even for one week. This problem is not an exceptional incident but a result of structural weaknesses and this should be addressed accordingly.”

Initially, such funds could not be mobilised as deposits by commercial banks but this option was opened two years ago when the country was facing a liquidity crunch, according to Chiranjeevi Nepal, a former governor of Nepal Rastra Bank.

The banking sector is facing severe shortages of loanable funds due to excessive lending during the first quarter of the current fiscal year. Now, most of the banks and financial institutions have halted further lending.

“There has been a liquidity crunch not only in A, B and C class banks and financial institutions but also in micro-finance institutions and cooperatives,” said Keshav Acharya, an economist who is also a former executive director of the central bank. “There has never been a liquidity crunch in the entire financial sector in the recent past.”

Experts say the private sector’s failure to get loans would slow down economic activities, affecting the economic recovery. The need of the hour is stabilising the economy instead of promising an ambitious growth target, according to them.

“Does it suit a finance minister to talk about 7 percent growth by spending just six percent of the capital budget in five months?” said Raghu Bir Bista, an associate professor of economics at the Tribhuvan University.

Low capital spending has been the bane of Nepal for years. Successive governments in the past have talked about increasing the capital spending, but such expenditures usually take place in the last quarter of the fiscal year, as there is a risk of the budget getting frozen.

Government spending is one of the tools to keep the economy vibrant, as the move injects cash into the market.

Government spending hovered around just 24 percent of the total budget and capital expenditure stood at just 6 percent as of the first five months of the current fiscal year.

Initially, the spending plan was affected by the new government’s move to introduce a new budget for the current fiscal year.

Even after the introduction of the revised budget through a replacement bill in September to replace the budget ordinance introduced by then KP Sharma Oli government, there has been little progress in government spending.

The government's spending covers around 26 percent of total spending and is an important contributor to economic growth as it also stimulates private sector investment. For example, the government spending on infrastructure projects help increase the production of construction materials from the private industries leading to a spiral effect on the economy.

Government spending also results in availability of money in the banking system which eventually helps banks and financial institutions to lend money to the private sector. This cycle has been completely obstructed.

Experts say the finance minister has failed to take proactive measures despite the economy facing a headwind.

“And to start with, the government should have removed the bottlenecks that have hamstrung capital spending,” said Wagle. “The government's decision to allow banks to reserve money as deposit is just an ad hoc measure. Considering the current liquidity crunch, about Rs50 billion to be pumped into the banking sector through this measure is but peanuts. What are the contingency plans if the liquidity crunch continues?”

National Planning Commission Vice-chairperson Biswo Nath Poudel said that files related to development projects are not moving forward fast, which has hindered capital spending. “So we have recommended establishing a system that identifies where the relevant files have reached.”

Finance Minister Sharma, however, does not want to acknowledge the crisis.

During an interaction at the Finance Ministry with ministers from several ministries on Monday, Sharma admitted that low capital spending was a fact. But he refused to accept that indicators are bad.

“Reports that other economic indicators are in a crisis are just rumours,” he said, according to a statement issued by his personal secretariat.

Besides liquidity crunch and low capital spending, there are other factors that say the economy is not doing good.

There is a fertiliser crisis.

“It is obviously a big threat considering that agriculture has a sizable contribution to the economy,” said Acharya, the economist.

At the same time, prices have been soaring. After mid-May 2020, inflation climbed above 5 percent for the first time in mid-November this year as the central bank reported it to be at 5.32 percent.

“Inflation is set to bite Nepal as the wholesale price index in India has surged. Since Nepal imports over 80 percent of goods from India, inflation in the southern neighbour will be transferred to Nepal,” said Acharya.

Inflation has become one of the pressing electoral agendas in India as it goes to polls in several states, including the bordering state of Uttar Pradesh. On the other hand, Nepali currency has also weakened against the US dollar which will increase the cost of imported goods from third countries.

“Increased inflation means people's purchasing power will diminish,” said Acharya. “Cost of production of Nepali goods will increase, making them unproductive in the domestic market and fueling the imports.”

Rising imports have caused the balance of payment to balloon at a disturbing level and led to depletion in foreign exchange reserves.

“For the first time in many years, the country’s balance of payment deficit has ballooned and remittance and foreign exchange reserves are also decreasing from the early months of the fiscal year,” said Nepal, the former central bank governor. “This is a serious situation and without drastic measures, it will be very difficult to stabilise the external sector.”

However, Prakash Kumar Shrestha, chief of the economic research department at the central bank, said the current problems seen in foreign exchange reserves and balance of payment are the result of the increased economic activities in the country.

“After the second wave of the pandemic, economic activities grew, leading to massive growth in imports and expansion of credit,” he said.

He said he is confident that this crisis is recoverable.

“We have the experience of handling such a crisis and current problems are temporary and they will be resolved in due course,” said Shrestha.