Bishwambher Pyakuryal

There is a need to harmonise the exchange rate system for debt servicing to reduce the cost.

War is known to be one of the potent causes of human suffering and underdevelopment. However, economic analysis in less developed countries is relatively rare. Roughly fifteen million deaths were caused by wars of all types in developing countries between 1950 and 1990. From 1989 to 1995, there were between 31 and 54 internationally recorded conflicts each year, and an average of 15 major wars occurring at any time (Stuart, Frances, Valpy Fitzerald and Associates (eds), Work on War and Underdevelopment, Vol 1, 2001). There is increasing concern about the interlinkages between low human development and conflict. Statistics show that war and human development are closely linked in a two-way vicious cycle. Among the ten countries with the lowest Human Development Index, eight have suffered serious civil wars in recent years—Mozambique, Eritrea, Ethiopia, Rwanda, Sierra Leone, Niger, Mali, and Guinea. Surprisingly, half of the fifty countries classified by the UN as ‘least developed’ have experienced major armed conflict in the last 20 years. This has necessitated the need for identifying appropriate economic policies to be undertaken by the donors and countries at war.

Economic implications of the conflict should refer to the economic cost. Quantifying economic cost is, however, pretty difficult in the absence of institutionalised record keeping and inexperience in using appropriate methodology. However, a modest attempt must be made to provide some alternative methods to calculate the cost in the expectation that a cost estimate may help decision makers to manage and allocate scarce resources in a way that reduces economic cost on the state and individuals. Because of the conflict, it is virtually impossible to achieve the Tenth Plan targets since the country is experiencing increasing regular expenditure, declining private sector investment, and lower growth than the revised GDP estimates. Increasing debt-servicing liability, low level of savings and investment, inefficient accounting system, unproductive public enterprises, absence of record keeping on government assets and liabilities and non-existence of consolidated public expenditure policy have threatened the capacity of the government to balance between conflict and growth.

The foreign aid dependency with stringent covenants is likely to pull the country into the debt trap. There has been 7 per cent growth in the net outstanding debt beginning FY 1997/98 through 2002/03. Such debts constitute 51 per cent of the GDP of the same year.

There is a problem in harmonising exchange rate system for debt -servicing. We do not have definite policy to pay either on the basis of the exchange rate during the time of agreement or the rate existing during final payment. Clarity in this respect is necessary to reduce debt-servicing liability. The exchange rate of the Nepali rupee against the US dollar was Rs.68 in 1997/98 when the government entered into the loan agreement with ADB and the World Bank but was Rs.78 during 2001/02 by increasing the cost of national treasury. The internal security and defence expenditure has doubled between the FY 1997/98 and FY 2001/02. Currently, the percentage of expenditure in defence and the police force of total expenditure is 16.59 and of total revenue is 23.80, indicating the possibility that revenue may just meet defence and police expenditure by the end of the Twelfth Plan by increasing foreign loan dependence to meet even the regular expenditure. This endangers stipulated social development targets by increasing chances for violent conflict.

There is a need to develop shared understanding and improved analysis of those factors which increase the risk of violent conflict. The ability to monitor and respond to the social, economic and political impact of the ongoing policies on existing and evolving situations is a necessary condition for conflict resolution. It necessitates the proper understanding of the cause for conflict. The experience shows that even post conflict reconstruction will not be successful unless the root causes of war are correctly addressed. The political parties, if they miserably fail to avoid the potential costs from the conflict for a prolonged period of time, this may be enough reason for the people to suspect their motives on the ground that some influential group of people may be benefiting from the uncertain political situation. This suspicion can be substantiated by the recent conflict study entitled “War and Democracy” conducted by Gregory D. Hess and Athanasios Orphanides in 2001. The priority for peace is found to be extremely high among most people. Some studies have shown that individuals would give up a significant per cent of their current consumption to live in peace. The failure to manage conflict can injure public support in the longer run. This has aroused interest in shedding some light on the potential welfare gains from reducing warfare.

Prof. Pyakuryal is president, Nepal Economic Association