Why the private sector is spooked

The Rastra Bank has injected Rs15 billion in new currency notes since mid-February, which is the highest amount ever pumped into the economy in just one month.

But the share market has hit a new low, remittance is down to alarmingly low levels despite migrant workers earning more overseas, and despite the promise of economic upturn.

At the core of the crisis is the new united Communist government’s inability to clearly state what its economic policy is. There is hope for growth and development, but there is also fear for tighter regulations.

On 15 February, when UML Chair KP Oli was sworn in as new prime minister, there was Rs461 billion in circulation, and the Rastra Bank topped it up. But where has the money vanished?

The NRB officials say businessmen and traders here are hoarding currency, because they still don’t trust Indian currency after India’s demonetisation drive in 2016. The demand for Indian bills has plummeted — from INR500 million to INR150 million a day.

But that is not the only reason. Nepali businessmen and traders are dealing more in the informal economy, and even channeling funds into India fearing tighter measures at home.

After the Left Alliance won a landslide in last year’s elections, the share market has crashed 300 points. Big players in this sector are fast divesting, and mutual funds are stagnant.

A trader told Nepali Times: “Those who had been simultaneously running businesses in Nepal and India are slowly withdrawing from here.”

The number of outbound migrant workers has declined, but it is still higher than returnees. Their salaries have increased in most countries in recent months, but remittance inflows have been going down except for a slight growth in January.

Analysts suspect migrant workers’ earnings are coming through illegal channels like ‘hundi’ paying their families here in Nepali currency. Hundi operators are abetting capital flight, and aggravating the credit crunch.

Prime Minister Oli’s party won a landslide in last year’s elections on the promise of economic growth. But he is finding it difficult to reassure investors. At a South Asian business conclave in Kathmandu last week, Oli said his government will partner with the private sector, but looks like there is a lot of nervousness.

Oli’s selection of Finance Minister Yuba Raj Khatiwada and Industry Minister Matrika Yadav did not reassure the private sector. Both are considered market unfriendly. Khatiwada has already upset businessmen by introducing a new measure to fix customs duties to supposedly discourage tax evasion.

Shekhar Golchha, Vice Chair of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), says: “The private sector is suspicious of the Communist government because of its political ideology, but we should wait until it unveils its economic roadmap.”