Binod K. Karmacharya and Shyamal K. Shrestha

Sustained rapid economic growth leads to rising living standards for a country’s population. In this context, the announcement made by the Central Bureau of Statistics (CBS) last month that Nepal experienced a rapid growth in per capita income during the past year has created confusion and the claims deserve scrutiny. What is moot is that much of the ‘gro-wth’ experienced by Nepal owes not so much to accretion in factor endowments or productivity increases as to exchange rate fluctuations that have raised the value of national income.

A few caveats are necessary here. First, even for something as vital as national accounts, uniform figures are unavailable. Two leading English dailies quoted the CBS as saying that GDP per capita rose from $250 in mid-2003 to $276 in mid-2004 in one case; and from $242 in mid-2003 to $269 in mid-2004 in another case. However, the hypothesis would be that output per head grew by 10-11 per cent, which is unjustified given that growth of real GDP was only 3.6%. But, according to sources at the premier statistical body itself, real GDP per capita rose from $242 in 2003 to $257 in 2004, reflecting a 6.2% growth rate. GNP per capita was $254 in 2003 to $266 in 2004; growth was 4.7%. The corresponding figures in terms of domestic currency are as follows: GDP per capita rose from Rs. 12,365 during mid-2003 to Rs. 12,552 in mid-2004 depicting a 1.5% rise; GNP per capita experienced a much lower rate of increase of 0.2% as it increased from Rs. 12,984 to Rs. 13,013 during the period. It is assumed that population grew at the rate of 2.24% during the previous year.

The second striking feature (closely related to the first) is the discrepancy in statistics published by HMG and the international institutions like the World Bank (WB) and the International Monetary Fund (IMF) with national figures showing an upward bias. According to the World Development Indicators published by the WB, Nepal’s GNP per capita grew from $220 in 1998 to $240 in 2001, declined to $ 230 in 2002 and reached the 2001 level of $240 in 2003. In the World Bank’s estimates, given the total GDP of $5.7 billion in mid-2003 (Rs. 285,061 million, according to Economic Survey 2002/03 of HMG), GDP would be $5.9 billion in mid-2004 (Rs. 295,323.2 million). Assuming that Nepal’s population, which was 24.2 million in mid-2003, reached 24.7 million in mid-2004 at 2.24% growth rate, GDP per capita would have risen from $235 in 2003 to $244 in 2004, suggesting a rise in output per head by 3.8%.

The source of the growth, according to the CBS, lies in the appreciation of the Nepali rupee vis-à-vis the US dollar leading to an increase in the reserves of foreign exchange in the banking system. A weak dollar is primarily a result of global decline in its value and not the result of strong performance by Nepal in trade with the US. The implications of an appreciating domestic currency are different for producers and consumers. It is good for the government as it lowers the value of debt service, makes imports cheaper and strengthens macroeconomic stability if a nation is experiencing balance of payments problems. In an era of competitive devaluations, exports would be adversely affected especially for low-cost producers like Nepal.

According to the National Planning Commission (NPC), real GDP growth was projected to grow at either 6.2% per year for the normal case or 4.3% per annum for the base case during the Tenth Plan (2002/03 to 2006/07). The corresponding figures for per capita growth are 4.1% per annum and 2.2% per annum. It is obvious that low growth would hamper poverty alleviation efforts during the Plan unless growth rebounds during the next four years. With the economy growing at 3.6% during mid-May 2003 and mid-May 2004, agriculture grew at 3.73%; industry at 2.48% and the services sector at 4.19%. Although agriculture and services comprise around 80% of the gross national product and growth in these sectors may benefit most of the workforce, the absence of industrial growth has effected economic growth.

Much growth in the 1990s has been in the service sector whereas since 2001, overall growth has suffered due to the conflict that shows no signs of abating and has led to sub-optimal resource use, capital losses and displacement of workers with economy-wide welfare losses. The current conflict does not promise any scope for rapid income growth, at individual, household, sector and macroeconomic levels. Addressing existing development strategies has become urgent. Nepal’s per capita income is the lowest in Asia and only half of the average among all low-income nations. Among others, the existing nature of production relations, low-productivity of resources as well as institutional factors hamper development endeavours. With the persistence of horizontal inequality, unbalanced regional development and nearly three-fourths of the Nepali population living below the poverty line at $2 a day, the time has come to review policies that have failed to usher in rapid growth with neither equity nor stability. Poverty alleviation has to be matched with measures to address deep-rooted inequalities. No wonder growth has been concentrated among the few rich sections in the non-agricultural sector and urban areas as opposed to agricultural sector and the vast rural hinterlands. This has created fissures that threaten the country’s stability. Karmacharya is associate professor of Economics, TU and Shrestha is with IIDS .