Macro-economic indicators of Nepal for the last five years; where are we headed?

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Mon, Feb 11, 2019 6:25 AM on Economy, Exclusive, Latest,
Macro-econ...

Aakriti Thakali

Human Beings are by nature growth/progress oriented. Unlike animals, we seek logic in things we do and we orient our activities towards certain goal. Thus, in pursuit of those goals we prepare plans and we execute them. However, as long as we are in the implementation phase, we can't know the end results and if we don't know the results we can't tell if the plan is working. Therefore, we depend on indicators that helps us analyze the effectiveness of our plans and its execution.

In the same manner, an economy or a country is also guided by some end goal and long term objectives. So, in order to find out our current stature and performance level there are certain Macroeconomic indicators that we depend on for inference.

These macroeconomic indicators are:

  1. Economic growth rate
  2. Gross Domestic Product (GDP)
  3. Consumer price index (CPI)
  4. Balance of Payments (BOP)
  5. Current Account Balance
  6. Trade Balance
  7. Government Expenditure
  8. Government Revenue
  9. Remittance

Each of these indicators and Nepal's performance in each of them is discussed further below:

Economic growth rate:

It gives the rate at which an economy is growing in percentage terms. As we can see in the figure below, the growth rate of Nepal has higher volatility than the world economic growth rate. This is primarily because of the fact that the highest contributor in our GDP is the agriculture sector. Despite the huge weight, the agricultural sector hasn't developed commercially because of which the natural conditions heavily dominate the production possibility. Therefore, if we have timely and ample rainfall the growth rate surges and plunges if not.

The other reason for high volatility is the method of calculation. The Growth rate is calculated as the percentage of GDP growth relative to previous years' GDP. So if GDP this year is low, then the increment in next year will report higher percentage.

The lowest growth rate we've experienced was in the year of the devastating earthquake in 2015 followed by economic embargo from India. Since the GDP was very low that year, the growth rate next year shows higher value, which in a way is slightly distorted. We have grown but not in the same magnitude as shown.

GDP:

Gross Domestic Product (GDP) of a nation can be defined as the total output produced by the country in terms of the monetary value of goods and services. The GDP is usually calculated annually to inspect the overall performance of that country in that year.

Basically, GDP is calculated in two ways vis-à-vis:

  1. GDP at current price
  2. GDP at constant price

Since GDP is the monetary value of the final goods and services produced in an economy, we need "price" to multiply the output with. In the GDP at current price, the output is measured at the price levels of the same year. However, in GDP at constant price, the output is multiplied by a base price. In this case, the prices of year 2000/01 has been used to determine the GDP.

As see in the figure above, the GDP at current price is consistently moving upwards, but seeing the GDP at constant price we can say with maximum confidence that the GDP at current price has been influenced by the inflation rate. The GDP at constant price shows that the GDP has been growing but in a slower pace.

Consumer Price Index (CPI):

CPI measures the changes in general price levels in an economy by examining the weighted average price changes of a basket of goods and services. Although CPI and inflation both measure the changes in price levels, they can't be used synonymously. CPI is an index i.e. it uses a base year/price to determine the change in prices of consumer goods/services. Whereas, inflation is the percentage change in CPI.

As we can see in the figure above, prior to 2015/16 the inflation rate was in a declining trend. However, in 2015/16, the earthquake and economic blockade caused misbalance in the market. The supply went down, while the demand kept increasing and thus the prices increased rapidly. In the same year, the black market also flourished as people preferred paying extra rather than to stay in queue for entire day just to get a few liters of petrol.

However, as the problems got solved the market regained equilibrium. The other important issue to take note of is our dependency on India for imports and the currency peg with them. Because of these two factors, our inflation rate always hovers around the inflation rate of India.

Balance of Payments (BOP):

BOP gives the flow of money into or out of the country. It includes money paid for imports, money received through exports, money spent by tourists on different programs and money exchanged by buying and selling foreign currency.

The BOP comprises two significant factors:

  1. Current account
  2. Capital account

The current account deals with exports and imports of goods and services along with the unilateral transfers. Similarly, capital account deals with the purchase and sale transactions of foreign assets and liabilities. So in basic terms, Current account is for the short-term transactions and capital account is for the capital flows.

As we can see in the above figure, both BOP and current account deficits were in increasing trend till 2015/16. However, after that the BOP deficit has been declining whereas the same can't be said for current account deficit.

The prime reason is the inclusion of capital account in BOP. Post the earthquake a lot of help came from abroad as foreign aid and the remittance also grew. However, in case of current account we are still heavily import based economy because of which the deficits are in a rising trend.

Trade Balance:

Trade balance or balance of trade is the economic value of all products a country exports minus the economic value of all products it imports.

As shown in the graph, the trade deficit of Nepal is in increasing trend. It had slowed down a bit during the blockade by India, but picked up again when the issue was stabilized. From the overall trade deficit, 65.7% is with India, based on the figures of FY 2017/18.

Government revenue and expenditure:

Like a business or a household, the government also earns and then spends it. If a business spends more than it earns, it goes bankrupt. If a household spends more than they earn, they become homeless. Yes, in between there can be loans but eventually they also need to get repaid and for that businesses and household will have to earn.

In a similar manner, the government also needs to plan its earning and spending in order to stay in the safe side. However, in case of Nepal that looks very far-fetching.

As seen in the figure, government expenditure is always higher than the revenue and what is even more alarming is the increasing discrepancy.

Remittance

Remittance is the total amount transferred by the foreign workers to his/her home country. The number of people flying abroad for foreign employment is in increasing trend and so is the amount of remittance that is received.

If one day the remittance just stops, then our economy will find it very hard to stand back up again. If it was something that we produced here then we would have control over it and depend on it. But our dependence on remittance is as fragile as standing on a glass table.

An even more painful fact is that, eventhough our BOP is being sustained by remittance we haven't been able to fully capitalize it. A huge chunk of it goes to India and other countries for imports.

As seen in the figure above, the remittance flow is in increasing trend, where the rate may vary. It is good to know that we receiving money from abroad but it would be sheer foolishness to completely depend on it.

Overall:

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