 KIRAN PANDAY TOURIST TRAP: Tourists in Sauraha on Monday wait to view wildlife at the edge of the Chitwan National Park. There are fears global recession will hurt Nepal's tourism industry. |
Even so, economists warn that indirect effects of the worldwide economic stagnation will soon be felt through a possible downturn in tourism, a slump in Nepali exports to UK and America, shrinking foreign aid and the after-effect of slower growth in India.
"The effect on Nepal will be oblique," economist Biswambhar Pyakurel told Nepali Times, "the huge bailouts of banks in Europe and America will likely reduce their foreign aid budgets."
Charities and NGOs may also be hit because of the huge losses suffered by non-profit foundations in their stock market portfolios. Nepal receives Rs 65 billion in foreign grants, and about Rs 30 billion is channelled through NGOs and charities.
The government's target of bringing in two million tourists by the Visit Nepal Year in 2011 is unlikely to be met. Economist Raghab D Pant says, "We can't expect tourists from countries that will suffer recession."
The global liquidity crisis may also affect big budget projects and foreign direct investment in Nepal. The government aims to generate 10,000 MW electricity in 10 years, much of which was supposed to be financed through foreign direct investment.
Nara Bahadur Thapa, director at the Research Department of Nepal Rastra Bank, says the global financial meltdown is already causing psychological anxiety in domestic financial institutions. "They will be cautious and even discouraged by the global gloom," he says, "although the small size of our economy will reduce impact, we will be affected in indirect ways. Nepal is not an island."
In Washington for the annual meetings of the World Bank and the IMF, Finance Minister Baburam Bhattarai said the pain of world recession may be less for countries like Nepal.
"We are in the periphery, so Nepal is not as integrated with the world economy," he said, adding that there could be a fall in foreign aid to Nepal from international lenders and bilateral donors.
Economists say the only positive impact of the recession may be on remittances. The Gulf region so far appears to come out of the crisis relatively unscathed, and a projected appreciation of the US dollar may increase the Rs1.5 billion that Nepalis send home every year through official channels. Nearly as much comes to Nepal through the hundi system.
However, Pant cautions that the money is probably going right back out. "There is no reason to be happy about remittances going up because the money will be spent in importing more expensive goods," he says. Increased dollar reserves would have helped Nepal shore up its annual Rs107 billion trade deficit with India.
More worrying is how the impact on India of global recession will affect Nepal. India is concerned about inflation and a sagging economic growth rate, which has been double digit for the past three consecutive years. With Indian elections around in May 2009, political parties will be tempted to check inflation rather than spur growth.
"Besides, they are trying to reform their financial sector to compete in the world financial market," says Thapa.
Nepal's financial sector has benefited from being a relatively isolated economy. Nepal's banks are not yet large or developed enough to be global players. "We are relatively less affected by the ongoing crisis for the simple reason that our exposure in the products and markets which are facing the crisis is very limited, if any," says Anil Shah of Nabil Bank.
Nepali banks are insulated from the global crisis and it is local or national challenges that pose a far greater risk. Nepali banks have also diversified investments by reducing concentration on any one sector or region.
Shah says the real challenge for Nepal is to see how the economy can be made less India-dependent. "I do not mean lessening our trade or economic ties with India, for we must in fact ensure even greater growth in this respect. But we also have to look to other export, import and investment partners so that the shock suffered by one market won't resonate so strongly through our economy," Shah told Nepali Times.
The global crisis may have another silver lining for Nepal: by arresting capital flight, especially to India. Some well-known Nepali investors are rumoured to have suffered big losses in the Indian stock market fall last week.
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