Thursday, September 12, 2013

A host of hurdles to journey to Developing Country status

KATHMANDU, Sept 12: "The 5.5 percent target for Gross Domestic Product (GDP) growth is ambitious, the 8 percent inflation target is conservative," the Asian Development Bank said in its ´Macro-economic Update 2013´ commenting on the targets set in current budget on the back of various factors that do look unfavorable to guiding the already country’s already slow economy back on track.

Skyrocketing imports, prolonging power cuts, frequent labor unrest, slowing exports, declining shares of industries in economy and depreciation of the Nepali rupee against the US dollar have consequently jacked up the cost of production for domestic industries and fueled inflation in the domestic market.

Though the timely announcement of a full-fledged budget and subsequent approval of the budget programs on time have rekindled hope for better progress in capital expenditures, the upcoming election slated for November 19 may affect development work.

Over one and a half months, value of Nepali rupee lost its strength by over 15 percent to hit a new low of 109.3 against the greenback on September 3. The adverse impact of a weakening Indian rupee, to which the Nepali rupee is pegged, amid concern over a slowing Indian economy and increase in current account deficits amid better prospects of the US economy has been witnessed in Nepali economy.

Increasing import prices have threatened to drive up inflation to 10.5 percent, well above the budgetary target of containing price hikes at 8 percent.
The ADB´s report indicated weaker financial health of Nepal Oil Corporation due to a persisting gap between its import costs and selling prices, increased overall import bill leading to wider trade deficit, increased inflation as higher import prices get reflected in retail prices, increase in Nepal Electricity Authority´s payments to independent power producers whose prices are denominated in foreign currency and increase in debt service payments.

"A significant decline in the value of the Nepali rupee against the US dollar is bound to jack up implementation costs of development projects making the allocated budget insufficient for achieving the targeted progress," Finance Secretary Shanta Raj Subedi said.

Echoing the Subedi’s view, Chiranjibi Khanal, the Chief Economic Advisor to the Ministry of Finance, also said that a stronger dollar can drive up export receipts and remittance, higher cost of imports can increase inflation hitting domestic industries which are dependent on imports for raw materials.
The host of challenges in implementing the budget in the first year of the Three Year Plan 2013/14- 2015/16 has also threatened to disrupt Nepal´s journey to Developing Country status from Least Developed Country (LDC).

The government´s recently approved approach paper for the three year plan has envisaged Nepal graduating to Developing Country by 2022 with an annual growth of six percent.
Any nation qualifying for the Developing Country status has to have a minimum per capita Gross National Income (GNI) of US $1,190, a Human Asset Index (HAI) score of 66 or more, an Economic Vulnerability Index (EVI) score of 32 or less. In another condition, GNI per capita worth US$ 2,380 or more should be achieved even if HAI and EVI scores are not met.
"Although Nepal has already met the EVI criterion, it still has to either increase its per capita GNI by US$ 770 or HAI score by 6.17 before 2015 to be eligible for consideration for graduation," said the ADB´s report.
Nepal also has an alternative route to graduate to Developing Country status. For that per capita GNI has to be increased by US$ 1,960 before 2022 even when the threshold set for HAI and EVI are met.
"Overall, it will be challenging for Nepal to graduate from the LDC category by 2022. However, an encouraging certainty is that it will be making clear and substantial progress towards graduation," said the report.
Even the post-graduation period will not be easy even if Nepal did it. Loss of privilege now being enjoyed as an LDC -- such as hefty development assistance and preferential treatment in international trade -- will be major challenge for Nepal.
"Concessional lending as well as market entry preferences accorded to Nepali exports in several developed and emerging economies will most likely erode," said the report.
At a time when the industrial sector´s growth has been slowing, attaining higher contribution in GDP is next to impossible.
Similarly, improvement in agriculture through promotion of high-value products and enhancement of service activities, political stability and good governance to ensure better economic performance of the country, are required to ensure better growth.
However, Nepal has been confronting the lack of quality human resources, weak market infrastructure of domestic goods, negligible investment for research and development, high minimum wage and low productivity, policy inconsistency of the government, supply side constraints to bring down trade deficit, power deficit and transport bottleneck.
The report also suggests that Nepal needs to develop necessary the infrastructure for economic development and improve the social condition by taking up different measures for high growth. Mainly, amid slowing economic growth and ballooning trade deficit, Nepal has to boost exports strengthening supply side constraints and has to effective utilize the external assistance and available trade privileges. Similarly, the country has to enhance the industrial contribution in GDP for higher growth rate, raised income of people and creation high paying jobs.

Due to delay in announcing the budget, growth of both recurrent and capital expenditures slowed during the previous fiscal year which limited the growth of total expenditure marginally 3 percent.
"A higher quantum as well as quality of capital spending is essential to address the country´s severe infrastructure bottlenecks, to achieve other social development objectives, and to lay the foundation for high and inclusive growth," the report says.
In what is an uncommon economic phenomenon, the country witnessed budget surplus equal to 0.4 percent of GDP last year due to lower performance in the expenditure front compared to revenue growth. However, such surplus is not preferable to the economy.

"While budget surplus and low levels of borrowing are desirable from the macroeconomic stability standpoint, this may not be optimal for the country given the need for increased capital investment to support higher growth," the report adds.
The manufacturing sector which has long been witnessing slowing growth is not expected to report higher growth. Growth of the manufacturing sector declined last fiscal year to 1.8 percent from 3.6 percent reported a year earlier. Contribution of the manufacturing sector to GDP also marginally declined to 6.7 percent last year from 6.8 percent the previous year. The agriculture sector, contributor of 34.4 percent of total GDP, also suffered decline in growth to 1.3 percent last year from 5 percent a year earlier.
Overall the industrial sector, which contributes 15 percent of total GDP, has suffered a decline in growth over the last few years. Industrial growth was registered at 1.6 percent last year down from 3 percent a year earlier.

"Manufacturing activities -- which are relatively high paying, employment-centric, high productivity and high value added -- are not expected to recover from the recent years of downward slide," the report said.

Published on 2013-09-13 02:35:41

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