Off the Record 049: Economy in crisis
Issue 049 • 15 April 2022
It’s April 15, 2022, and you’re reading Off the Record, the weekly newsletter from The Record. We are an independent, ad-free, digital news publication out of Kathmandu, Nepal.
I’m Pranaya Rana, editor of The Record, and in this newsletter, we’ll stop, take a deep breath, and dive into one singular issue that defined the past week.
Good morning, good afternoon, and good evening from Kathmandu in 2079. It is the New Year here in Nepal and we at The Record would like to wish all our readers, supporters, and well-wishers a very happy new year.
Unfortunately, this new year begins on a bad note. The Nepali economy is currently in dire straits, with the import bill ballooning and inflation skyrocketing. With local elections just around the corner, this is not a good sign for Nepal, or the ruling coalition for that matter. This is what we’ll be taking a closer look at in this week’s deep dive. But before we get there, a few other matters.
With local elections approaching, the political parties are putting all their energy into electoral alliances. The ruling coalition of the Nepali Congress, Maoist Center, Unified Socialists, Janata Samajbadi, and Rastriya Janamorcha have decided on alliances in all 753 local units, including six metropolises, 11 sub-metropolises, 276 municipalities, and 460 rural municipalities. The coalition hopes to field their strongest candidates in each local unit to combat the organizational strength of the CPN-UML, which has a very strong presence at the local level. The Congress had initially appeared unwilling to ally with the other parties but it has since come around, perhaps sensing that it is still not strong enough to oppose the UML single-handedly.
The UML itself has also decided to tie up with two smaller parties — the Rastriya Prajatantra Party-Nepal (RPP-N) and the Pariwar Dal. The RPP-N is led by Kamal Thapa, who split from the RPP after losing his chairmanship to Rajendra Lingden last year, while the Pariwar Dal is led by Eknath Dhakal. Both RPPs are right-wing parties advocating for a reinstatement of the monarchy and Nepal’s status as a Hindu kingdom while the Pariwar Dal is controversial for its links to the evangelical South Korean Christian church of the Reverend Sun Myung Moon.
Speaking of the UML, the party has put forward five names for Kathmandu mayor — incumbent mayor Bidya Sundar Shakya, Ram Bir Manandhar, Keshab Sthapit, Nirmala Deula, and Indira Pant. Shakya is very unpopular, given his dismal performance these last five years in office, so it is unlikely that the party will field him again. Keshab Sthapit is a former Kathmandu mayor who has been accused of harassment by at least two women. Ram Bir Manandhar was a state minister of urban development in the previous KP Sharma Oli administration and has apparently set a world record for “Longest solo concert by a standing minister”. Quite a specific record there. I’m not quite aware of the two women’s resumes but I believe they are part of the UML party faithful.
The Bibeksheel Sajha party too announced its candidates for mayor and deputy mayor of Kathmandu — Samikshya Baskota and Kirti Tuladhar, respectively. I don’t quite know much about them either, but that’s not surprising given that the party is relatively new and has never really held any major public position in government.
All of them join two young independents — Balen Shah and Sunita Dangol — who’ve already announced their candidacy. We spoke to Shah and Dangol this past week. Click here for that piece.
As elections near, so will spending by the parties. Although the Election Commission has set ceilings for electoral expenses, no one abides by them. Candidates spend hundreds of thousands in order to get elected. Nepali Congress politician and Koirala family scion Shashank Koirala recently landed in hot water for publicly claiming that he had spent Rs 60 million during the last parliamentary elections despite the ceiling having been set at Rs 2.5 million. Koirala has reportedly submitted an expense report of Rs 2.175 million to the Election Commission, leading the electoral body to demand a clarification. I don’t expect anything to come of this as it is pretty common knowledge that almost all party candidates spend tens of millions.
Amidst all of this, there is a very real crisis brewing in the Nepali economy. The news this past week has been filled with reports of the tanking economy, made worse by short-sighted political actions. So this week, let’s look at the flagging state of the economy and if Nepal could go the way of Sri Lanka.
The deep dive: The economy in crisis
Late on Friday, just as my newsletter went out, news began to emerge that the Sher Bahadur Deuba government, under the direction of Finance Minister Janardan Sharma, had suspended Nepal Rastra Bank governor Maha Prasad Adhikari. The government had formed a three-member committee to ‘investigate’ Adhikari’s role in the ‘leaking of sensitive government information’ to the media and to the opposition CPN-UML, thereby automatically suspending him as per the Nepal Rastra Bank Act.
Predictably, this did not go down well with the public. Sharma had only just been implicated in a scandal involving one Prithvi Bahadar Shah. Sharma had reportedly pressured the Rastra Bank to release Shah’s Rs 400 million that the bank had held up while investigating its source. Sharma suspending Adhikari was seen by many to be retaliation against Adhikari for the embarrassment.
But it wasn’t just corruption, embezzlement, and abuse of power that irked people. The Finance Minister had sacked the governor of the central bank while the country is in the midst of an economic crisis that only seems to be growing by the day. What began as a liquidity crunch has now snowballed, leading economists to fear stagflation, a situation where inflation continues to rise while the economy remains stagnant. Generally, a low but steady inflation rate is considered a good sign of the economy’s health as it means that more people are employed and are thus driving consumption. Stagflation is when inflation is rising steadily but the economy is not growing in proportion, leading to a crisis where ordinary people must pay more and more for goods and services but do not see a similar increase in wages.
Whether or not Nepal is currently in the midst of a stagflation crisis has not been established yet, but what is evident is that inflation and imports have both increased drastically, foreign reserves are low, and there is a shortage of cash in the market.
According to the latest macroeconomic report from the central bank, consumer price inflation reached 7.14 percent in mid-March, compared to 3.03 percent a year ago. Cooking oil prices rose by as much as 26.3 percent, vegetables by 13.9 percent, and egg and milk by 11.3 percent. Fuel prices are at an all-time high with a liter of petrol costing Rs 160.
In the first eight months of this fiscal year (2021-22), the trade deficit increased by 34.5 percent to Rs.1160.99 billion, compared to an increase of 1.6 percent in the same period last year. Exports increased by 82.9 percent to Rs 147.75 billion but those numbers pale in comparison to imports, which increased by 38.6 percent to Rs 1.3 trillion. Daily imports of petroleum alone have now reached Rs 1 billion.
Foreign exchange reserves also fell 16.3 percent to Rs.1.1 trillion from Rs.1.3 trillion in mid-July 2021. This reserve is enough to cover 7.4 months of imports, which is adequate so Nepal is not facing an import crisis yet.
The causes of the current crisis are multiple. Chief among them is the fallout of the Russia-Ukraine conflict, as a recent World Bank report points out. While Nepal is not directly affected, the increase in commodity prices around the world has impacted costs for Nepal too. Remittance, the biggest source of foreign income, has also slowed — decreasing 1.7 percent to Rs. 631.19 billion in the eight months of this fiscal year against an increase of 8.7 percent in the same period last year. Tourism, another significant source of foreign currency, has yet to recover substantially from the shock of the Covid-19 pandemic which had all but shut down the tourism economy.
All indicators point to an economy in crisis. While Nepal might not be at the tipping point yet, if imports continue at the current rate and remittance and tourism don’t pick up then things will get much worse. The central bank has adopted a number of measures to slow down imports, including a ‘verbal directive’ to banks to not issue letters of credit for the import of luxury goods like automobiles, cosmetics, and gold. This initiative has not been popular among businesses but it seems to be necessary at this point in time. The government is also reportedly mulling over measures to decrease fuel consumption, including a two-day weekend and odd-even license plate restrictions.
These measures, however, are a double-edged sword. Much of the government’s revenue comes from taxes on petroleum, automobiles, and other luxury goods. If it restricts these commodities then its revenue will take a hit; if it doesn’t, imports will bleed the foreign currency reserves dry.
These are all temporary measures though. In the long term, Nepal will have to wean itself off of the remittance economy and decrease imports. That’s easier said than done, though, and it is up to the bigwigs in government and at the National Planning Commission to adopt measures to achieve these ends. I’m no economist but just looking at the current state of things, can anyone really imagine offsetting the import-to-export ratio we currently have? Nepal imports pretty much everything, from fuel to food to packaged goods. Turning the balance of payments on its head will require a wholesale reworking of the economy, and no government seems ready to do that. I’m not even sure how one could go about doing it.
One achievable measure that successive governments could adopt is a more streamlined spending of the national budget. The current liquidity crunch can be partly attributed to a failure to spend the budget. According to Kantipur, governments have only been able to spend 27 percent of the capital expenditure in eight-and-a-half months. And this applies to all levels of government. Of the Rs 336 billion that remains unspent in government accounts, Rs 153 billion is with the federal government while Rs 180 billion is with local governments. It is because so much remains unused in government coffers that there is not enough cash in the economy, leading to the liquidity crunch. As a result, banks have not been able to give out loans, which in turn means that there is less investment in business and in the productive sector. Even the loans that were given out have gone into unproductive sectors, like real estate.
So will Nepal go the way of Sri Lanka? Economists still say no. As long as the Nepali rupee is pegged to the Indian rupee, the Nepali currency will not end up in free fall. India generally bears the brunt of any international shocks with its much larger and more resilient economy, so Nepal usually remains safe. As far as domestic issues go, Sri Lanka’s crisis has a number of factors that are unique to the island country — short-term loans, broad tax cuts, a decline in tourism due to terrorist attacks, the pandemic, and a short-sighted ban on fertilizer imports that led to a steep reduction in agricultural production, necessitating more food imports.
Unlike Sri Lanka, most of Nepal’s foreign exchange reserves go towards imports, not loan repayments. Most of Nepal’s loans are long-term and these too aren’t excessive. As of 2019-20, Nepal’s debt-to-GDP ratio was around 40 percent and it is currently estimated to still be less than 50 percent. For comparison, Sri Lanka’s debt-to-GDP ratio was over 100 percent. So there is still room for Nepal to take loans in order to inject fresh cash into the economy.
Also, Sri Lanka’s crisis was exacerbated by political mismanagement. The Rajapaksa government blundered in prohibiting fertilizer imports and trying to go all organic. This policy was aimed at reducing imports but ultimately led to even more imports — not of fertilizer but of food, as agricultural production fell. The government also embarked on a spree of tax cuts, a populist move that ended up costing it dear.
This is a lesson for Nepali politicians. Short-sighted policies and policies aimed at shoring up short-term political gains can quickly backfire. Any and all moves regarding the economy should be made in consultation with economists and experts, not political cronies. Finance Minister Janardan Sharma would do well to take note. Suspending the central bank’s governor in a period of crisis cannot have been the right decision, no matter the need to settle political scores.
This is an election year and with inflation continuing to rise, the voting public is going to take note. If the economy doesn’t improve soon, the Deuba government will shoulder the blame and pay the price at the hustings.
On The Record this past week:
Nyima Gyaltsen Gurung on alternative justice processes in Dolpa
Tom Robertson takes a look back on a year of Writing Journeys
Shuvam Rizal reviews ‘The Weight of Water’, a documentary about the human costs of climate change
Rubin Ghimire on slowing down for mindful action
Happenings this week:
Sunday - This year’s March was the hottest in 54 years, reported Kantipur daily. Data collected from 1968 onwards showed that the average temperature in Kathmandu this March was 20.4 degrees Celsius, the highest ever. Jomsom too recorded its highest March temperature ever — 24.2 degrees Celsius — when its average March temperature so far has been 15.2 degrees Celsius. Dumkauli in Nawalparasi recorded the highest temperature in the country — 38.9 degrees Celsius. The previous high in Dumkauli was in 1986 when the temperature had reached 38.6 degrees Celsius.
Monday - The Election Commission demanded a letter of clarification from Nepali Congress politician Shashank Koirala over his claim that he had spent Rs 60 million during the last elections within seven days. Koirala had submitted an expense report of just over Rs 2 million to the commission. The expense ceiling in 2017 was Rs 2.5 million.
Tuesday - Police constable Urmila Shrestha’s death in Morang’s Letang was due to a gunshot, an autopsy report concluded. Shrestha was believed to have been stabbed to death in mid-March during a confrontation with locals over the handling of a teacher alleged to have sexually assaulted a minor girl. The police were attempting to take the teacher into custody when locals descended to enact mob justice. The bullet that killed her did not come from a police weapon, the autopsy said.
Wednesday - Nine hundred and sixty-one Nepali students submitted a petition to the Ministry of Education asking that they be allowed to return to China to finish their studies. Most of these students had returned home due to the Covid-19 pandemic and have not been allowed to return.
Thursday - Public transport fares in the Kathmandu Valley were raised from a minimum of Rs 18 to Rs 20 on all mass transit including buses and microbuses. Taxis, meanwhile, are allowed to charge Rs 10 per 200 meters in addition to a base rate of Rs 50. But then again, no taxi in the Valley ever goes anywhere by the meter.
Friday - Gyanendra Bahadur Karki, the government spokesperson, announced that a Cabinet decision had been made to accept $659 million in grant assistance from the United States Agency for International Development (USAID), in addition to $150 million in concessional loans from the World Bank. The grant from USAID is significantly larger than the $500 million that the United States is providing through the Millenium Challenge Corporation.
Article of the week:
‘Getting to know the two young independents running for Kathmandu mayor’ — Prasansha Rimal speaks to 31-year-old Balen Shah and 29-year-old Sunita Dangol about why they’re running for mayor of the capital city and what they hope to accomplish.
That’s all for this week. Off the Record will be back in your inboxes next Friday. I shall see you then, in your emails, for the next edition of Off the Record.
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