Nepali Times Asian Paints
The Maoist war has exposed the government’s most vulnerable flank- the economy.


Even without the war against the Maoists, the economy was in tatters. Now, it needs to be rushed into intensive care. The medium term prognosis looks critical.

Trade was already in turmoil early this year, as exports and imports both tumbled to their lowest levels. Political instability, domestic disturbances and international terrorism destroyed tourism.

Future foreign investment, already hit by Maoist threats and government ineptitude, hinges on peace being restored.
Uncertainty over the duration of the emergency and the outcome of the insurgency mean no positive trends in tourism, investment, trade or development. The war is also costing the exchequer dearly. The government has already overdrawn Rs 3 billion from the Rastra Bank and if present trends hold, it may overshoot its budgetary target of borrowing Rs 9 billion.
While expenses have soared, revenue collection is expected to plummet by Rs 3.5 billion this year. Improvement in collection is tied with a boom in economic activity, and that is again tied up with a restoration of peace.

Finance Minister Ram Sharan Mahat has the unenviable task of trying to work a miracle. He told us: "It is very difficult to foot the bills." The war has already cost Rs 4 billion, and Mahat says the government has approached international donors to bail it out. The government is asking for money to fund priority programmes like rural roads, drinking water, education, health and bridges, and rechanneling money already earmarked for those projects to security.

The donors say they have passed on the requests to their capitals, but admit they are frustrated by the government's lack of focus on poverty-alleviation and corruption control. Increasingly desperate, the government says it will now take any help it can get.

Ministries have already been instructed to slash development budgets by as much as 25 percent. They have been asked to spare counterpart funding for donor-supported projectsm, an exercise expected to free about Rs 3 billion-an amount which officials say would be only enough to keep the army moving. Another Rs 350 million is likely to be freed from savings on recurrent expenditures-excluding of course the cost of Prime Minister Sher Bahadur Deuba's "jumbo" cabinet, which he has kept intact. New expenses like the cost of the SAARC Summit have also neutralised some of the savings. Some donors have used Nepal's new security situation to peddle hardware, and new plans are afoot to purchase telecom equipment and quick-fix Bailey bridges using commercial loans.

Deuba's only consolation is that today's economic woes are not entirely his making, and most donors are sympathetic to his government's needs. But any external support will depend on his ability to prove that the civil authorities are aware of the seriousness of the development challenge.

Two weeks ago the Central Bureau of Statistics revised the country's economic growth estimates downwards, slashing the projection from six percent to three percent. Also last week the central bank loosened monetary policy aiming to restore business confidence. The lower cash reserve ratios held by commercial banks has freed about Rs 2 billion for investment, but that is unlikely to happen as long as long as the security situation remains unchanged. Now that the NRB is issuing bonds worth Rs1.5 billion, that is where the freed cash may end up, effectively crowding out private investment over time.

Even if that were not to happen, it generally takes time for lower cost of the capital in banks to result in interest rates being lowered, and to increase both borrowing by investors and production, an economist explained. The treasury managers face a difficult choice, because the low revenues have forced them to hold bacl on fiscal incentives (tax rebates, etc.), even though such stimuli tend to work faster.

Even more worrying is that there is no sign that anyone is planning a recovery. The private sector and Royal Nepal Airlines have announced a package to stimulate tourist arrivals, but the plan will take time to yield results. In any case, an aggressive tourism promotion may depend on a swift end to the fighting.

Businessmen are worried because distribution channels nationwide have been disrupted by the fighting. Retail sales are slowing because stores close early. One distributor of fast-moving consumer goods told us: "What is more worrying is that we don't see anyone even thinking about what to do after this phase is over."

(11 JAN 2013 - 17 JAN 2013)