After that, the global economic crisis hit the world economy in 2008 and early 2009, and thereafter, it started to show a delayed impact on the Nepali economy as well since the beginning of FY 2009/10. The balance of payments (BOP) started to record an alarming deficit due to sharp decline in exports and steady rise in import and unexpected decline in remittance income which constitutes around one fourth of the gross domestic products. During the first nine months of 2009/10, the BOP deficit reached a record Rs 22.1 billion. Around the same time, liquidity crisis appeared in the financial sector mainly due to hefty loan investment made by the banks compared to the deposits they were mobilizing and a provision of declaring income source while depositing deposit worth more than Rs 1 million in the banks. Alarmed by the deepening financial crisis, Nepali Congress backed CPN-UML-led government’s proposal requested the IMF for the new lending window called Rapid Credit Facility(RCF), a program that Nepal adopted in January 2010. Thus, in order to address the BOP problem, the IMF provided total amount of US $42.05million in May 2010. The RCF, which will be repayable in 10 years time with grace period of 5.5 years at zero interest rate, does not need any program-based conditionality but the government needs to adopt sound economic policies by maintaining fiscal balance and keeping inflation within the desirable level.
IMF program is expected to help Nepal address major burning economic problems, including BOP and maintain macroeconomic stability and implement structural reform. However, government should be alert enough to make sincere efforts in maintaining macroeconomic discipline especially fiscal as a precondition for entering into the ECF program.
Nevertheless, the budget for FY 2010/11 was announced four months late through the ordinance after main opposition party-UCPN (Maoist) disrupted the house and barred the government from presenting a fiscal budget. Unfortunately, the budget also could not address the current economic problems and it also incorporated some populist programs unbearable to the economy. The fiscal balance has been under pressure as both revenue collection and development expenditure have been far below the target, while the current expenditure has already exceeded the target. As a result, prudent fiscal policy has been in trouble as non-budgetary expenditure increased by more than 80 percent in last fiscal year and it has continued. Recently formed Maoist-backed CPN-UML-led government unveiled a white paper that announced a number of populist programs, which will ultimately lead to fiscal imbalance. Financial sector reform launched mainly in the two public banks, namely Nepal Bank and Rastriya Banijya Bank has lost its direction after DFID of UK government and World Bank withdrew from the project mainly because the central bank’s could not move ahead in appointing CEOs of those banks through international bidding in June 2010. Along with weakening financial sector reform program, there have been some attempts to reverse financial liberalization regime, as some of the recent central bank’s regulations seemed to have favored control regime. Liquidity crisis is further deepening leading to declining private sector credit, the major factor creating economic activities.
On the external front, the BOP deficit has further deteriorated, registering about Rs 16 billion BOP during the first seven months of the current fiscal year. With this trend, the BOP deficit likely to shoot above Rs 30 billion by the end of current fiscal year. Foreign exchange reserve in terms of imports of goods and services has declined from nine months’ level to about five months. Inflation so far is above 10 percent, far higher than the target of 7 percent and with recent price hike in petroleum products, inflation is likely to further shoot up. GDP growth this year has been at.3.5 percent, despite favorable weather situation. Capital market is in a crisis with the NEPSE index falling down to a five year’s lowest of 357 points level in last March-end, 2011. Investor has strong doubt in the continuity of the market economic policy with the change of government and that has been instigating a huge capital flight from the country. Labor unrest and the heavy load shedding have further affected the investment climate in general and industrial environment in particular. Current transition period with political instability has aggravated the situation. In a nutshell, the Nepali economy is in a crisis, to say the least if not on the verge of a collapse.
In such a gloomy scenario of having so many economic problems/challenges, the best way is to enter into another new IMF program i.e. Extended Credit Facility (ECF) introduced last year. Under the ECF, Nepal needs to implement a set of policies which are prepared as a consensus documents that support reforms for achieving progress toward a stable and sustainable macroeconomic position of the country while the ECF supported program should be consistent with the country’s poverty reduction and growth strategy. Nepal under this program, not only receives up to 100 percent of Nepal’s quota i.e. SDR71.3 million (equivalent US$104.8 million) every year, totaling 300 percent of the quota (US$314.4million) at zero interest rate but also opens the door to all the donor agencies including the World Bank. Repayable period for the ECF is similar to that of RCF. It is also understood that above 10 LICs have so far participated in this ECF program since its inception last year.
As Nepal enters into this IMF program which is more flexible and concessional than that of PRGF, most important thing is that there will be continuity of the prudent macroeconomic policy and program which is expected to restore the confidence of the investor. This program is expected to help Nepal address major burning economic problems, including BOP and maintain macroeconomic stability and implement structural reform. However, government should be alert enough to make sincere efforts in maintaining macroeconomic discipline especially fiscal as a precondition for entering into the ECF program.
Writer served NRB and IMF as an Economic Advisor and can be reached at rbkarki@gmail.com
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