Tuesday, January 5, 2016

Nepalese economy in 2015: Triple whammy of earthquake, blockade and bad politics

Triple whammy2015 was a notably bad year for the economy on three fronts

The April earthquake destroyed physical infrastructure and livelihoods, the trade embargo has disrupted economic activities, and finally Prime Minister Oil-led government is undermining already weak institutions of the country. Among these natural, economic and governance shocks inflicted on the Nepali people and the battered economy, the impact of tinkering with institutions for political gains may potentially turn out to be more debilitating for the nation in the long term.

Catastrophic earthquake

The earthquake and its subsequent aftershocks killed more than 9,000 people, damaged property and public infrastructure, lowered economic growth and per capita income, and thus, increased poverty. Gross Domestic Product (GDP) growth of Nepal dropped by over 1.5 percentage points to 3.0 percent from an estimated 4.6 percent in a no-earthquake scenario. Similarly, nominal per capita income was lowered by about $23. An additional 700,000 to 982,000 people were pushed below the poverty line. The monetary value of the damage was estimated to be about $6.7 billion, almost half of it attributed to housing and human settlement. This natural disaster disrupted and dislocated production networks and distribution systems, whose impact on the economy will linger for years to come unless they are quickly rebuilt following more resilient standards.

The international community liberally launched an unprecedented scale of humanitarian assistance, most notably led by India, Japan, China, and the United States. Equally generous were the financial commitments for reconstruction—to the tune of $4 billion—by bilateral donors and multilateral institutions like Asian Development Bank, World Bank and International Monetary Fund. The 2016 budget anchored on these financial commitments and appropriated about $910 million (3.8 percent  of GDP) for rehabilitation and reconstruction work.

Understandably, expectations were high and there was consensus on accelerating reconstruction with the accepted ‘build back better’ principles. However, the delay in decision making by the government, the seemingly sluggish bureaucracy, and the egotistic political infighting for the National Reconstruction Authority (NRA) frustrated the quake victims and international community. The NRA bill was passed eight months after the earthquake and key decisions of the previous government overturned to suit political interests. While the political apparatus appeared colder and callous than expected when it came to accelerating the reconstruction, the increasingly lethargic bureaucracy seemed inept in swiftly handling normal bureaucratic assignments. Consequently, actual public capital spending is barely above 75 percent of planned spending. Worse, despite the availability of resources, relief distribution and reconstruction are slow and painful.

The blockade

The blockade came immediately after the promulgation of the constitution on September 20. Given that almost 60 percent of Nepal’s trade is with India and it is the only supplier of petroleum fuel and cooking gas, the disruptions at major custom points are virtually stalling and derailing economic activities. It will have far-reaching consequences on the economic potential, production linkages within and among sectors, employment generation, and stability of capital flows.

The Tarai region accounts for about 51 percent of agricultural output, 52 percent of industrial output and 40 percent of services output. It houses about half of the population, which is quite heterogeneous in terms of ethnicity, class, culture, language, literacy, income profile, and employment opportunities. The trade and transportation disruptions in this region have a knock-on effect on production and distribution networks throughout the country. The lack of fuel and cooking gas is crippling household as well as business activities. The uncertainty over market demand and supply has either delayed or destroyed agricultural harvesting, depleting an important source of employment and income source for about 75 percent of the population who depend on agriculture for livelihood.

The blockade-induced shortage of chemical fertilisers is turning fertile agricultural fields into barren lands, and the lack of raw materials and fuel has delayed almost all development projects that are critical to not only accelerate existing economic growth, but also to expand the boundaries of potential growth and employment opportunities. Consequently, for the first time in over two-and-a-half decades, the economy may probably grow at a negative rate. Meantime, prices of general goods and services will stay high, public capital spending may be even lower, more youths may seek employment opportunities overseas, and more households will be pushed below the poverty line.

Political gains

Finally, there is an institutional shock inflicted by the present government that will probably have far reaching financial and operational consequences. The government is scrambling to contain the fallout of the delayed reconstruction and blockade on the economy and the population. However, without political resolution to the Tarai issue and easing of the blockade, economic recovery is almost impossible. So far, the government’s steps to address these are not up to the mark.

The rhetoric does not match the unfolding reality. First, the supplies blockade has abetted black market transactions, and distorted household and business incentives. Smuggling and black marketing of goods and fuel are now considered more lucrative than farming and other productive means of livelihood. Cartels, syndicates, unions and lobbyists are running the show more freely than before, affecting decision-making and operations at key state-owned enterprises and in almost all sectors.

Meantime, the prime minister is expanding the Cabinet and hastily dividing ministries in a way that defies logic. These institutionally damaging steps are taken for political survival, which unfortunately has again superseded concerns about the economy, employment and development. Normally, in order to add one more office, a detailed organisation and management survey is conducted and properly vetted at various layers of bureaucracy and government. By ignoring this process and creating confusion in an already lethargic bureaucracy, the government is further weakening its performance, eroding bureaucratic capacity, creating more layers of bureaucratic maze, and affecting public spending and services delivery. It does not bode well for the economy.

Overall, it was a year of triple whammy of delayed reconstruction, supplies blockade and a bad precedent of tinkering institutions for political gains.

It was published in The Kathmandu Post on 04 January 2015.