Nepal's target down

The faith Nepal's youth have in the state of the economy is amply demonstrated by the fact that millions have left the country in search of employment. Growth statistics in recent years show that although the country is not stagnating - growth rates of around 3.5 per cent are not abysmal - but it is not dynamic enough to absorb Nepal's growing workforce.

Two facts about the growth rates must be noted. The first is that although rates of around 3.5 per cent are healthy for an advancing economy, for a country starting out with low income and low levels of investment, much higher rates are possible. Further, growth statistics appear grim when compared to the rates achieved by our neighbours to the north and the south - both India and China are growing at almost double-digit rates. Their growth rates are fuelled by high levels of investment from the private sector (domestic and foreign capital) as well as government spending.

That, unfortunately, hasn't been the case in Nepal. Due to the perennial political crisis, the flow of foreign capital has been negligible. The private sector, too, has been unable to inject investments to lead to any noticeable surge in growth. As in previous years, agriculture has remained the bedrock of the Nepali economy. In this light, the recent downward revision of the target growth rate by the Ministry of Finance comes as no surprise. The Ministry revised the target rate from 5.1 per cent to 4.1 per cent. The revision puts the government's target rate closer to what was predicted recently by the International Monetary Fund.

It is also worth noting the reasons the IMF gave for its projected growth rate of 3.8 per cent. It predicted that the Nepali economy will underperform primarily due to three factors - bad weather, low capital expenditure and the slowing Indian economy.

Of the three, how the Indian economy performs is out of Nepal's control. But the two other reasons need more scrutiny. Nepal's weather-dependent agriculture means that growth rates are undoubtedly affected by rainfall patterns. More needs to be done to mitigate the dependency of agriculture on the gods of rain by, for example, investing in wide-scale irrigation projects. The economy, and the farmers, will also benefit tremendously if fertilisers and other input necessary for agriculture were available on time. Furthermore, investing in agricultural education and modern farming practices, in addition to the identification and cultivation of cash crops suited to Nepali soil, can boost agricultural production significantly.

However, increasing the Nepal government's capacity to spend capital expenditure will have a much greater impact. In the third quarter of last year, total capital spending was only 15 per cent - 7.66 billion Nepalese rupees (US$87.1 million) - of the total allocated amount. In a country that is crying out for investment and employment creation, this kind of gross ineffectiveness contributes significantly to stifling the economy's potential. For this, of course, a timely budget is necessary.

There is absolutely no economic sense in preventing the government's capital expenditure (no matter whether it is run by the Nepali Congress, the Maoists or some other party) and simultaneously blaming the government for its inability to spur growth through investments.

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Article source: http://www.thethailandlinks.com/2013/02/26/nepals-target-down/