The World Bank’s Global Economic Outlook 2023 report forecasts global economic growth of just 1.7 percent, marking the third slowest pace of growth in the last 30 years. The previous two instances of weak growth were in 2009, following the US housing market crash, and in 2020 during the Covid-19 pandemic. The world economy is currently experiencing its second consecutive year of significant slowdown, and economists anticipate a difficult future, with challenges such as high inflation, protectionist trade policies, the ongoing Russia-Ukraine conflict, energy shortages, and the negative effects of climate change looming.
The world economy is in a precarious state, one major economic shock away from falling into a recession. According to the World Bank, small nations are particularly vulnerable due to their reliance on external trade and financing, lack of diversification, high levels of debt and susceptibility to natural disasters. Investment growth in emerging markets and developing economies is expected to remain below the average rate of the past two decades.
Countries in South Asia will not be immune to this trend and will likely be affected by the spillover effects of the Russia-Ukraine war, rising global interest rates, weakening growth in key trading partners and uncertainty surrounding Covid-19 policies in China, which accounts for approximately 18 percent of the world economy. However, the World Economic Forum’s Chief Economist Outlook presented at the Annual Meeting in January 2023 predicts a lower likelihood of stagflation in South Asia compared to the rest of the world, but amidst the current global economic crisis, this does not guarantee a secure and stable path forward for individual countries.
The growth forecast for 2023-2024 in Nepal is 4.9 percent, which was estimated to be 5.8 percent in 2021-22 and projected to be 5.1 percent in 2022-23. The decline in growth is evident from the data, and the overall outlook for the country’s economy is not particularly positive. The Nepal Rastra Bank has always advocated policies and measures to guide the economy on a better path, but this has been difficult to achieve due to the political climate and alleged crony capitalism.
Individual interests are prioritized over the overall welfare and needs of citizens. Although Nepal is a federal republic, it is closer to being an authoritarian regime, as per The Economist’s Democracy Index 2021, which rated Nepal 4.4, anything below 4 is considered authoritarian. This speaks volumes about how Nepal functions as a state. In an effort to improve the current account, balance of payments, trade deficit and foreign currency reserves, the NRB scrutinized imports, and was successful. However, government revenue suffered as a result, with the then PM acknowledging difficulties in even paying salaries of government staff.
This interplay between imports and government revenue is taking a heavy toll on the economy, and it will continue unless sustainable measures are taken.
Remittance plays a crucial role in the GDP of the country and injecting money into the market. It accounts for around 22 percent of the GDP, highlighting the high dependency of the economy on it. A large proportion of remittance comes from countries like Saudi Arabia, Qatar, the UAE, Kuwait, Bahrain and Malaysia. However, the World Bank has forecasted lower economic growth for these countries as well.
The decreasing growth in these countries will have an impact on the economy, aggregate demand, businesses, and job market. Seventy-eight percent of the economists at The World Economic Forum’s Annual meeting estimate that companies around the world will cut costs by laying off workers. This will affect Nepali workers abroad, potentially resulting in a decrease in inward remittances and a negative impact on the domestic economy.
Inflation is expected to rise globally due to factors such as the ongoing Russia-Ukraine war, OPEC’s decision to reduce (oil) production, economic struggles among major powers, and the interconnected global trade economy. Nepal’s CPI-based inflation could also increase, and the NRB may use interest rates to try to curb it. Businesses may be affected this year as well, and financial institutions may struggle to recover and have high non-performing assets (NPAs) if appropriate measures are not taken in time. However, if private sector financial institutions prioritize the overall health of the economy over excessive profit, it could provide a significant buffer for businesses and the economy, which is unlikely to happen.
An article published by IIDS Nepal states how the credit size of the BFIs has become as big as the GDP of the country. If this growth rate is to continue, the loan disbursed to the private sector is estimated to become twice the size of the GDP of the country within 11 years. The heavy dependence on credit puts both financial institutions and the economy at a high risk.
Additionally, the oversight of loans and the promotion of investment in productive industries must be greatly improved. The uncontrolled growth of the real estate industry, driven by the pursuit of high returns, could prove problematic for the country in the long run. Many cooperatives are facing difficulties due to investments in land and this is just the tip of the iceberg.
NRB implemented a strict policy on working capital to promote investment in productive industries, prevent loan misuse and combat tax fraud. However, this policy faced resistance from stakeholders, leading to its revision, which led to a more lenient approach. To improve the overall economic situation, it is important for national interest to be prioritized over individual gains.
It is essential for this coalition government, new ministers in particular, to be aware of the gravity of the situation and make well-informed decisions. They should avoid making hasty decisions for the sake of popularity. In difficult times like these, well-evaluated decision-making is crucial to improve the economy. Progressive decision-makers, who prioritize the welfare of the state, possess strong governance skills, make unbiased decisions and effectively coordinate with organizations like the NRB are needed, rather than those who make decisions solely for popularity.
Investment in productive sectors and fostering domestic entrepreneurship is necessary to decrease heavy reliance on imports. Developing entrepreneurship will have a significant impact on the balance of payments and trade balance in the long run. Tourism and agriculture are sectors that have a huge potential for Nepal.
Investment must be made in these areas and policies to promote these sectors implemented. Different governments have frequently proposed a one-window solution for foreign direct investment (FDI) but have not been able to implement it. FDI commitments are not being realized due to bureaucratic obstacles in the system. Improving the education system should be a priority.
In the period of Jan-June 2022, the government issued 82,000 NOCs (No Objection Certificates) for students seeking to study abroad. A large amount of money is spent on higher education abroad. Stopping brain drain and providing quality education for the young population, where the median age is 24 years, is crucial for Nepal’s future.
The current global political, economic and trade climate as well as the state of the country highlight that the economy is in a precarious position. Preparations for difficult times are necessary. Every government decision should be made with caution. This can be challenging, especially with a coalition government composed of polarized ideologies, but it is still possible to achieve.
Economic growth of remittance source states
e=estimated, f= forecasted (in percent)