Conflict occurs when there are incompatibilities. Discontent in terms of violence is manifested when we ignore the growth of society, which is fragmented by caste and community, and by linguistic, regional and cultural differences. In Nepal, it is the pending nature of the development agenda to deal with extreme poverty, gre-ater unemployment, low level of quality education, limited access to basic health services, negligence to overcome problems of livelihood and failure to boost governance.

Since the policies for economic adjustment often conflict with political adjustment toward peace, an integrated approach between politics, economics, and peace agenda is important. Therefore, economic restructuring should go side by side with political restructuring. Alarming public expenditure and continued state involvement through loss-making public enterprises (PEs) was the main cause for initiating cuts in government spending, speeding up privatisation of PEs and deregulating financial markets during liberalisation. These adjustments in selected sectors were economic restructuring. There is, however, a great pain in structural adjustment. The government should judiciously decide the distribution of such pain especially in non-tradable sectors like military spending, expenditures in health and education. At present, the governance is eroded. State machinery is fragile. If we ignore our inefficiencies and if the burden is disproportionately imposed on certain classes, regions and ethnic groups, violent conflict will result.

Unless there is consensus on national priority agenda and uncertainty exists with widening horizontal inequality and formation of indirect beneficiaries, it will only help regional or global powers secure their strategic interests. The perfect understanding of the cost of conflict is very important. Conflicts have shown that indirect cost of conflict far outweighs the direct destruction and death. The need for in-depth analysis to investigate economic and social consequences of conflict is therefore important.

The impact of conflict in Nepal can be seen in the falling of aggregate output, falling exports with a tendency to shifting towards domestic markets to sustain domestic consumption, sectoral shift from tradable to non-tradable sectors and increasing aid dependency. The consequences of such changes have negatively affected development. A fall in output has multiplier effect on income, employment and price. The diversion of foreign exchange towards security expenses and essential goods slows down productive activities. Nepal experienced arbitrary cuts in public welfare projects because of diversion of funds to unproductive sectors.

The statistics from the Office of Comptroller General indicate that the outstanding foreign debt of Nepal as of July 16, 2006 is over Rs. 234 billion. This figure is 40 per cent of the country’s total GDP of Rs. 583 billion. During 2001 and 2002, the percentage of foreign loan to total GDP stood at 50 per cent. Since Nepal exceeds normal debt servicing threshold of 10 per cent, the situation becomes more complicated as it seeks loans for reconstruction and rehabilitation, which increases debt-servicing liability.

Similarly, Nepal’s debt service ratio has remained around one third of the annual regular expenditure during 1990s. The conflict has escalated this problem. The principal repayments of debt increased by 25.4 per cent in FY 2004/05 as compared to 12.9 per cent in FY 2003/04.

Price system functions poorly during prolonged conflict, conventional conditionality to tie up loan by the donors with measurable outputs may not be a good policy choice. Considering inadequate assets creation or inefficient institutions to enter the international market directly, the development policy of market orientation of donor communities may not help reduce horizontal inequalities. Our experience reveals that import liberalisation ahead of developing export capacity and financial sector reform before making long-term credit available for investments, has not helped structural adjustment much.

Restructuring needs in-depth analysis to investigate economic and social consequences of conflict. The impact of conflict in the economy should be understood by analysing if there is any link between low level of economic and social achievements and conflict. A review of literature indicates the availability of macro-level analysis; the result from micro level analysis is however, inadequate. Therefore, the reprioritisation effort should be supported though micro-level impact and need assessment.

The fragile environment in terms of effectively implementing standard macroeconomic policies has its limitations to adjust socio-economic costs of stabilisation in post-conflict setting. Since economic, social and political issues have strong and positive correlationship, the priorities in macroeconomic stabilisation and social inclusion should be simultaneously reconsidered with political restructuring initiatives.

Dr. Pyakuryal is professor of Economics, TU