Economy faces headwinds but finance minister oblivious to crisis

Last week, Finance Secretary Madhu Kumar Marasini sent out a tweet containing warning signals.

“Boosted consumer demand, chaos in supply chain management, hoarding, hyper credit, rising inflation: boost!!!”, Marasini wrote on the social media platform, attracting quite a bit of attention.

The Finance Secretary’s tweet comes at a time when indicators for both the domestic and external sectors of the economy are not encouraging. Several experts the Post has spoken to in recent weeks have said Nepal’s economy is worsening.

But very little is being done to overcome the crisis.

Finance Minister Janardan Sharma seems oblivious to the headwinds facing the economy. Instead, he belittled those who were skeptical of the government’s 7% growth target.

During a meeting of the Parliamentary Finance Committee on December 9, the Minister of Finance declared that “the conditions are favorable to achieve the growth objective of 7%”.

“We can achieve this and we must achieve this,” he said.

But how?

In the past four months since the start of the fiscal year, remittances have plummeted, imports have surged and foreign exchange reserves have dried up. The country is not seeing tourists due to the pandemic. Much of the paddy crop was destroyed by the unseasonal rains in October. The inflation rate is on the rise with a 19-month high recorded in mid-November. The country is facing a liquidity crisis. Government spending that would help alleviate the cash crunch has been dismal.

It’s time for the government, or the finance minister for that matter, to wake up and look around before disaster strikes the country, experts say.

“The economy is in crisis,” said Achyut Wagle, professor of economics at Kathmandu University, also a columnist for the Post. “An acute liquidity crisis in the banking sector and other economic indicators show that there is indeed a crisis.”

According to Wagle, the government itself recognized that there was a crisis. “This is clear from a recent ruling allowing banks to count most local government reserve funds as a deposit,” he said.

On Monday, Finance Secretary Marasini wrote another Tweeter.

“The government allowed banks to mobilize up to 80%, up from 50% previously, of local government funds deposited in banks,” Marasini wrote. “This will help inject Rs 50 billion into the banking system.”

Wagle was quick to to respondwrongly calling the move.

“By all accounts, this is a misguided, ad hoc, disparate strategy,” Wagle said in a quote tweet. “50 billion rupees is no relief, even for a week. This issue is not an exceptional incident but the result of structural weaknesses and should be addressed accordingly.

Initially, these funds could not be mobilized as deposits by commercial banks, but this option was opened two years ago when the country was facing a shortage of liquidity, according to Chiranjeevi Nepal, former governor of the Nepal Rastra. Bank.

The banking sector is facing severe shortages of loanable funds due to excessive lending in the first quarter of the current fiscal year. Today, most banks and financial institutions have stopped lending more.

“There has been a shortage of liquidity not only in class A, B and C banks and financial institutions, but also in micro-finance institutions and cooperatives,” said Keshav Acharya, an economist who is also a former chief executive of the central bank. “There has never been a liquidity crisis in the entire financial sector in the recent past.”

Experts say the inability of the private sector to obtain loans would slow down economic activities, affecting economic recovery. The need of the hour is to stabilize the economy instead of promising an ambitious growth target, according to them.

“Does it suit a finance minister to talk about 7% growth by spending only 6% of the investment budget in five months?” said Raghu Bir Bista, associate professor of economics at Tribhuvan University.

Low capital expenditure has been the bane of Nepal for years. In the past, successive governments have talked about increasing capital spending, but such spending usually takes place in the last quarter of the fiscal year, as there is a risk of a budget freeze.

Public spending is one of the tools to maintain the vitality of the economy, as this decision injects liquidity into the market.

Government spending hovered around just 24% of the total budget and capital spending was just 6% in the first five months of the current fiscal year.

Initially, the spending plan was affected by the decision of the new government to present a new budget for the current fiscal year.

Even after the introduction of the revised budget through a replacement bill in September to replace the budget ordinance introduced by the KP Sharma Oli government, there has been little progress in public spending.

Government spending covers about 26% of total spending and contributes significantly to economic growth as it also stimulates private sector investment. For example, government spending on infrastructure projects helps to increase the production of building materials by private industries, resulting in a spiraling effect on the economy.

Government spending also results in the availability of money in the banking system, which ultimately helps banks and financial institutions to lend money to the private sector. This cycle has been completely obstructed.

Experts say the finance minister has failed to take proactive action despite the economy facing a headwind.

“And for starters, the government should have removed the bottlenecks that crippled capital spending,” Wagle said. “The government’s decision to allow banks to set aside money on deposit is only an ad hoc measure. Considering the current liquidity crisis, about Rs 50 billion to be injected into the banking sector through this measure is nothing but peanuts. What are the contingency plans if the cash shortage continues? »

National Planning Commission Vice President Biswo Nath Poudel said development project files are not moving quickly, which has hampered capital spending. “We therefore recommended establishing a system that identifies where the relevant files have arrived.”

Finance Minister Sharma, however, does not want to acknowledge the crisis.

During an interaction at the finance ministry with ministers from several ministries on Monday, Sharma admitted that low capital expenditure was a fact. But he refused to accept that the indicators were bad.

“Reports that other economic indicators are in crisis are just rumours,” he said, according to a statement released by his personal secretariat.

Besides the shortage of cash and low capital expenditure, other factors indicate that the economy is not doing well.

There is a fertilizer crisis.

“It’s obviously a big threat given that agriculture has a big contribution to the economy,” said Acharya, the economist.

At the same time, prices have soared. After mid-May 2020, inflation climbed above 5% for the first time in mid-November this year, with the central bank reporting it at 5.32%.

“Inflation is expected to weigh on Nepal as India’s wholesale price index has jumped. Since Nepal imports more than 80% of India’s goods, inflation in the southern neighbor will be transferred to Nepal,” Acharya said.

Inflation has become one of India’s pressing election agendas as it heads to the polls in several states including the border state of Uttar Pradesh. On the other hand, the Nepalese currency has also weakened against the US dollar, which will increase the cost of goods imported from third countries.

“Rising inflation means that people’s purchasing power will decrease,” Acharya said. “The cost of producing Nepalese products will increase, making them unproductive in the domestic market and fueling imports.”

The rise in imports has inflated the balance of payments to a worrying level and led to the depletion of foreign exchange reserves.

“For the first time in many years, the country’s balance of payments deficit has exploded and remittances and foreign exchange reserves have also been declining since the early months of the fiscal year,” former governor Nepal said. of the central bank. “It is a serious situation and without drastic measures, it will be very difficult to stabilize the external sector.”

However, Prakash Kumar Shrestha, head of the economic research department at the central bank, said the current problems seen in foreign exchange reserves and balance of payments are a result of increased economic activities in the country.

“After the second wave of the pandemic, economic activities increased, leading to massive import growth and credit expansion,” he said.

He said he was convinced that this crisis is recoverable.

“We have experience in handling such a crisis and the current issues are temporary and will be resolved in due time,” Shrestha said.

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