Aiming high
KATHMANDU, JUN 26 -
Unveiling the draft Three-Year Interim Plan two weeks ago, the finance minister emphasized that Nepal would need to achieve a growth rate of 7 percent annually to rise from the status of a least developed country (LDC) to that of a developing country by the year 2022. The target is almost double the country’s average growth performance for the last 10 years. Considering this pattern, it would be an arduous task to meet the goal for an economy that has been suffering from poor macroeconomic trends for over a decade.
Further, its exposure to external economic shocks has lessened the possibility of achieving the growth target. Thus, the aim to lift our economy from the least developed status to a developing country level within the stipulated timeframe would depend on how well we can manage the macroeconomic variables to boost the growth rate.
Nepal has been experiencing the worst economic slowdown in over a decade. The impressive growth performance of the post-liberalized economy of the 1990s could not last for lack of a clear guideline amid political instability. That has affected various macroeconomic trends—particularly in agriculture, investment, external trade and employment prospects. The worst situation has been in the agriculture sector which is the mainstay of the economy contributing a third of the GDP. It witnessed abysmally low growth rates of around 3 percent annually in recent years. The ratio of investment to GDP lagged behind the requirement of 25 percent which is considered necessary to reach a growth rate of 7 percent as specified in the UN’s Programme of Action for the LDCs, and also as disclosed by our finance minister.
On the external trade front, the staggering trade imbalance, which is equivalent to one-fourth of our GDP and growing, has become worrisome. In course of time, our external trade has been transformed from manufacturing export base to service trade. Today, we earn more foreign exchange from workers’ remittances than from exports of products—comparable to more than one-fifth of our GDP. The money sent back by migrant workers has been compensating for the rapidly growing deficit in our merchandise trade.
Regarding the repercussions for the economy of a massive labour outflow and abrupt inflow of remittance, the unprecedented rise in temporary migration of workers abroad has created labour shortages in almost all the key sectors. Paradoxically, while there is a shortage of workers in the economy, our policy has failed to absorb the increasing workforce entering the labour market, thus intensifying the problem of unemployment in the country. Despite this state of affairs, the government continues to boast about the massive inflow of remittance and disregard the issue of a mounting trade deficit caused by overwhelming remittance-led imports.
The import binge has contributed to the boastful government’s revenue collection drive through growing import duties. But over-emphasis on remittance makes the other sectors of the economy less competitive in the export market and results in higher levels of cheap imports. Ultimately that may lead to deindustrialization or inhibit other sectors of the economy from growing.
Thus the unexpected changes in the economic structure and the mismanagement of the macroeconomic variables seem to have constrained the growth prospects in our economy. If the existing low growth and investment trends continue, it is unlikely that Nepal will be able to achieve the targeted growth rate in the near future. Without that, it will be difficult for us to raise our per capita gross national income (GNI) which is far below the threshold of US$ 1,190 required to climb out of LDC status. Apart from that, we have to perform better in human resource development and make improvements in the economic vulnerability index. But Nepal has been performing poorly in all three areas except for a slight improvement in the social development indicators. Moreover, we will find it more challenging to end economic vulnerability as our economy is faced with instability in agriculture production and severe trade-related shocks.
Given this situation, we have to observe carefully the progress made by recently graduated LDCs as a basis to make our own plans. Out of the 48 LDCs, only three countries have risen to the next level: Botswana in 1994, Cape Verde in 2007 and Maldives in 2011. While Samoa’s graduation has been deferred to 2014 due to losses from the tsunami, a recommendation for Vanuatu’s graduation was made last year.
Although promotion from an LDC is a good sign of increased economic independence, there are short-term costs for Nepal. It should be prepared to face the consequences of non-reliance on preferential treatments granted by the rich countries. For instance, it will lose the advantage of preferential market access for its exports to developed country markets and the facility of relaxation from tough obligations in multilateral systems such as the WTO. Also, it will find itself on the same playing field as the big and fastest growing economies like India and China. Since the global economy may be entering a more turbulent and uncertain phase in the near future, Nepal has to prepare itself to deal with a crisis that originates elsewhere to keep its economy in order. Is Nepal prepared to handle all these contingencies to raise its economy from LDC to developing country status?
(Shakya has been involved in various national and international trade projects and specializes in trade interests of Nepal and LDCs.)
Source: The Kathmandu Post
