Glum prospect

Ballooning deficit in the balance of payments, rising inflation and, as usual, a protracted political mess -- add all that up and the product is a grim economic outlook. This was the synopsis of Nepal Rastra Bank’s monthly economic report, with the indicators spelling doom and gloom and reinforcing fears of a prolonged economic slowdown at a time when the global economy is striding toward the healthiest growth in years. The report, released at the end of the third quarter of the ongoing fiscal year, also contains hints that the central bank is increasingly worried about the risk to financial stability and the way that may lurch toward further complexities still.



A closer look at the report gives one the sense that few vital indicators are performing in a satisfactory manner. But one concern -- a worsening balance of payments (BOP), which indicates that more foreign currency is flowing out of the country than is flowing in -- towers above all. Though the central bank has blamed slow foreign aid mobilization and lukewarm engagement in drawing reimbursements from donors, the problem lies in entrenched trade deficit, which has scaled to Rs 240 billion despite a moderate rise in exports. The foreign currency reserves have also shrunk by almost 6 percent, thanks to the runaway BOP deficit.



Problems in the banking sector are worsening at a much faster pace than many had expected. The provisions for possible loan loss have seen an alarming rise of over 49 percent, clearly indicating that the banks are having a tough time recovering their loans. Bankers say the bulk of their troubles arise from the realty sector bubble, wherein copious amounts of investment have resulted in a crippling bust.



Although remittance, the backbone of the economy that has helped greatly to keep demand afloat when growth was floundering, went up by 10.3 percent by mid-April, it was a worrisome 11 percent less than the remittance received a month earlier.



Yet, behind the grim scenario, some bright spots lurk, and the astonishing growth in the amount of foreign direct investment (FDI) is one of them. According to the central bank report, Nepal received FDI worth Rs 5.6 billion by the end of the third quarter in the current fiscal year, particularly in hydropower and tourism-related service industry. Encouragingly, this has come at a time when a toxic mix of power shortage and labor militancy have turned Nepal into an unsavory place to do business. Likewise, rising credit flow to the private sector is an indication of reviving private sector confidence. But make no mistake, the economy is still fragile enough to spark another downturn.

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