With Nepalis distracted by slow vote-counting, the government sneaked in another petrol price hike to Rs170 per litre last week. Inflation is going up, as the economy goes down. To prevent depletion of foreign exchange reserves, the government restricted imports, but that has hit tax revenue.
As local election results come out in slow motion, Nepalis face the hard reality of a full-blown economic crisis. There is animated debate among experts about whether Nepal will be next after Sri Lanka to witness a political upheaval.
Sri Lanka’s new Prime Minister Ranil Wickremesinghe has taken over at a difficult time, and has warned that things will get worse before they get better. The country has run out of food, fuel and essentials.
Some experts point out that Nepal does not have the heavy debt burden of Sri Lanka and the country’s relative underdevelopment protects it somewhat from global shocks.
However, while Nepal’s disease may not yet be as severe as Sri Lanka’s, the symptoms are the same. The country’s hard currency reserves can pay only for 6 months of imports. The balance of payments gap is Rs2.68 trillion — the widest ever. Inflation hit 7.28% in April.
On top of this are Nepal’s chronic problems, such as the inability to spend the development budget. The market is cash strapped, banks face a liquidity crisis because of loans to unproductive sectors.
All this is not sudden. It was decades in the making. Successive governments took the easy way out by selling the sweat of Nepali workers in the Gulf to buy oil. They failed to invest in manufacturing and agriculture to create jobs at home, and instead ran the country on revenue from taxes on imports.
What we see today is a cumulative result of historical governance failure. As these elections have shown, the political parties are stuck in the same cycle of illicit campaign finance leading to corruption and patronage.
Few have given priority to raising living standards, creating jobs through sustainable investment, and economic reform. The result is the protest vote going to Balendra (Balen) Shah in Kathmandu, where those who bothered to vote thumbed their noses decisively at the established parties.
The politician-bureaucrat-corporate nexus has entrenched rent-seeking and crony capitalism to turn Nepal into a kleptocracy. And instead of fixing structural problems the politico-bureaucracy is going for band-aid interventions.
Two-thirds of Nepalis are dependent on agriculture, yet it is farmers who are migrating for work. The biggest expenditure item among Nepal’s imports is food.
The reason for this state of affairs is the policy to send Nepalis of productive age abroad, instead of investing in increased productivity at home.
Banks and financial institutions chose to lend in quick-money sectors like import financing and real estate. This made the rich richer, and worsened Nepal’s socio-economic inequities.
At a time like this, politicians without a clue about the economy are setting policy and making ad hoc decisions. Finance Minister Janardan Sharma sacked the Central Bank Governor Maha Prasad Adhikari in the midst of this crisis.
And despite the Supreme Court reinstating him, there is not a peep from Minister Sharma or his boss, Prime Minister Sher Bahadur Deuba.
The 5-party coalition is more interested in keeping its unity for forthcoming provincial and federal elections rather than solving the economic emergency.
It must re-channel investment to select production-oriented sectors to create jobs. Prioritising agriculture would immediately reduce imports in the next crop cycle. Reforming monetary policy should be at the top of the agenda.
These are not medium or long-term goals, they must be done on a war-footing right away. Else we may soon see scenes like ones that unfolded on the streets of Colombo last week in Kathmandu as well.