Thursday, December 31, 2015

A year of disaster and depression

Massive disasters, lop-sided development strategy and economic depression are the buzz words for remembering the year 2015. The year will go down in history as the year that exposed policy makers, politicians and bureaucrats for their incompetency and visionlessness. The year again proved that Nepali political parties are 'economically illiterate', despite their tall talk of economic revolution.
The year 2015 was punctuated by the devastating earthquakes of April 25 and May 12 – that flattened over a million houses, including public and private – and the subsequent aftershocks.
The government prepared a Post-Disaster Needs Assessment (PDNA) and organised the International Conference on Nepal's Reconstruction (ICNR), where development partners generously committed Rs 401 billion for the country's reconstruction. The PDNA estimated a need of Rs 669.5 billion for funding reconstruction of damaged public infrastructure, including roads, health posts, government schools and utilities; historical and cultural heritage sites; and private sector infrastructure; and for compensation and other forms of support to the public. The devastating earthquake damaged Rs 517 billion worth of assets, the report stated, projecting economic growth to drop to around half the government's target of 6 per cent.
Though the formation of Nepal Reconstruction Authority (NRA) was expected to create huge employment and kick-start the economy through massive capital expenditure, political wrangling delayed the formation. Nine months after the quakes, the year is going to end without having seen a single physical infrastructure being reconstructed.
Moreover, the economy that was slowly recuperating from the earthquakes started crumbling again after the promulgation of the new Constitution on September 20. Against the popular expectation that the Constitution would pave the way for a prosperous Nepal, unrest in the Tarai-Madhes – supported by the Indian blockade – shook the economy to its foundations.
Agitations by the Tarai-Madhes centric political parties and the fallout on the economy not only exposed the successive governments and the political parties for their lop-sided development planning and lack of vision but also pulled economic growth down into negative territory.
The central bank, in its report, 'Impact of India's unofficial blockade on Nepal's economy', projected that economic growth would be negative or at best remain below 2 per cent. The Finance Ministry, in its White Paper on the current economic status, seconded the central bank's projection.
Likewise, the central bank also warned of stagflation, as consumer prices shot up by more than 10 per cent in the fourth month of the current fiscal year of 2015-16, while economic growth is expected to drop to its lowest in around one-and-a-half decades, coupled with a high level of unemployment.
But, according to senior economist Prof Dr Bishwhambher Pyakuryal, the country is heading towards hyperinflation. "Hyperinflation occurs when a country experiences very high and usually accelerating rates of inflation, like the current market prices, rapidly eroding the real value of the local currency and causing the populace to minimise their holdings of local money," he said, adding that people normally switch to holding relatively stable foreign currencies. "Under such conditions, the general price level within an economy increases rapidly as the official currency quickly loses real value."
Similarly, the Tarai-Madhes unrest has forced some 2,200 industries to close and some 220,000 people have become unemployment, according to the Federation of Nepalese Chambers of Commerce and Industry (FNCCI). People lost their incomes in the last four months – which is severe – due to the Tarai-Madhes unrest, unlike the earthquakes that has destroyed assets.
The prolonged strikes in the Tarai-Madhes supported by the Indian embargo have not only created shortages of essential supplies including petroleum products but also encouraged the black market and hoarding, making the lives of the people more difficult still. The central bank has already admitted that it cannot crack the whip on inflation as this is not increasing due to any monetary cause.
Low production and falling imports have pushed the market prices up to double digit, exposing weak governance, he added.
Government inefficiency has also been exposed in the failure to spend the development budget. According to the Finance Ministry, the government has been able to spend only 6 percent of the capital expenditure in five months of the current fiscal year, which is going to hit the performance of the national pride projects not only because they are going to be delayed but costs also will escalate, according to Pyakuryal.
Time and cost overruns will hit the social sectors like health and education, he said, adding that the resource allocations for these sectors will also decline due to low revenue generation. "It will also hit the government's target of graduating Nepal from the current status of Least Developed Country (LDC) to a developing country by 2020."
According to the Finance Ministry, the government has lost Rs 50 billion in revenue in the last three months.
The government has also made the year 2015 more memorable as the poverty head count is going to increase and the government-promoted black economy will further expands weakening democracy in the coming years.

Black economy expands
The year 2015 will also be remembered for the black economy and market distortion with the direct involvement of the government. Weak governance and lack of willpower to enforce the law are encouraging the black economy. There is growing criminalisation in society since almost the entire official machinery is involved in illegalities. Businessmen and politicians use the police and the bureaucracy to engage in illegality. When the latter get the license to commit illegality, they do it for their own ends also, that is, for making money. The result is that the force responsible for maintaining law and order, i.e., the police, is often a party to the illegality. The nexus among entrepreneurs, bureaucrats and politicians has promoted the black economy in recent months.
Police arrested Nepal Oil Corporation (NOC) Thankot depot chief Rabin Sharma and joint secretary at the Ministry of Environment Ram Adhar Shah – who is also former chief of Nepal Bureau of Standards and Metrology – for their involvement in the black market in fuel. This is only the tip of the iceberg. The controversial firm Birat Petroleum has openly sold petrol at inflated prices, without the government's approval. The government fixes the price and quality of fuel before it is sold to consumers. But Birat Petroleum sold petrol directly from its tanker at Dilli Bazaar, Kalikasthan without fulfilling the legal procedures. This would not have been possible without high-level political patronage. The current market-distorting scenario is a clear indication that the black economy is going to cause wide-ranging damage to not only economy but also to the democracy in the long run.
Likewise, corruption is yet another plague that is pushing the country towards an underground economy. The public has little choice in the matter since almost all the political parties have been caught indulging in corruption. According to a Transparency International (TI) report, Nepal is ranked 139th out of 174 nations in the Corruption Perceptions Index (CPI). The TI report has also exposed the increasing inefficiency of the bureaucracy, something that is costing the country dear.
An economy that has the potential of growing at 7 percent per annum has been crawling at an average of 3 percent per annum in the last decade due to black economy. The year 2015 will, thus be remembered as the year that promoted black economy as the Prime Minister KP OLi and his cabinet is full of ministers of suspicious back-ground. The 40-member cabinet is also adding more pressure on state coffer for their salaries, when the revenue generation is going down.
Likewise, the year 2015 is going to pull down economic growth to almost negative but people are making money through smuggling and black marketing. The unemployed youths of Tarai-Madhes are earning handsome money selling fuel they bring from across the border. The impact of drop in fuel import from India could not be seen as the people are riding on fuel bought in black in inflated price. The government is losing Rs 3 billion – in revenue per month – that it could have earned from Nepal Oil Corporation (NOC) – if NOC had been able to import fuel through the formal channel.
The black economy has pervaded life at the social, political, economic and cultural levels alike and individuals are overnight able to buy houses, land or cars with their ill-gotten gains.

Increasing poverty
The increase in poverty in a very short span of time – eight months from April to December in 2015 – is going to render the country the poorest in the South Asian region.
According to the PDNA report, the devastating earthquakes of April and May will end up pushing an additional 2.5 per cent to 3.5 per cent into poverty trap. It translates into at least 700,000 additional poor in the country of 16.5 million population.
Similarly, the Tarai-Madhes unrest and the Indian blockade have pushed another 4 per cent of Nepalis into the poverty trap, which translates into some 800,000 additional poor due to losses in agriculture, industry and service sector. The protracted political transition in the last four months made people in Tarai-Madhesh lose their employment and incomes.
Currently, one in four Nepalis is under the extreme poverty line, according to the Central Bureau of Statistics (CBS). But the number will rise and one in every three Nepalis will be poor, thanks to 2015.

Adios 2015!!!

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