Nepal, after the induction of privatization, liberalization, and market economy in 1990, has seen the role of government increase further, especially with reference to poverty alleviation. With a per capita income of $470 with GDP of $12.69 billion, its average current rate of inflation is 14.1 percent. According

to IMF report, the macro-economic outlook is also challenging as real GDP growth rate is expected to decelerate to 3 percent in the current fiscal year, compared to the GDP growth rate of India and Bangladesh at 7.5 percent and 6.5 percent respectively.

The Nepalese economy is in a state of quagmire. Hindered by an insurmountable power crisis, double digit inflation and internal mayhem, a strong scrutiny at the macroeconomic indicator level is imperative. A review of the macroeconomic indicators available for the first six months data of Nepal Rastra Bank (2009/10), in the external sector indicate that the merchandise exports declined by 12.1 percent. At the same time, the merchandise imports registered a growth of 40.8 percent. Nepal’s trade deficit with foreign countries is going to rise in the current fiscal year, with the gap in its business with India, the biggest trading partner, is expected to rise to 57.3 percent. On the price front, the inflation measured by the consumer price index is 11.8 percent in mid-January (2010). In the first six months of 2009/10, the overall balance of payments recorded a deficit of Rs 19.79 billion. Similarly, the merchandise trade deficit grew by 60.7 percent in the first six months of 2009/10. Workers’ remittance went up by only 12.6 percent compared to its significant growth of 65.3 percent in the corresponding period previous year. The gross foreign exchange reserves dropped by 14.0 percent. The government budgetary deficit recorded a decrease of 7.1 percent in the same period.

Tinted by a depressing scenario of the economy and reduction in the GDP growth to 3 percent, the situation has become very hazardous considering the rising risks in the domestic financial sector. Vulnerable situation in the financial system is developing and the government should take instant steps to mollify possible impacts of threatening financial crisis. While inflation is under control or even lowered down all over the world, it has increased by leaps and bounds in Nepal. Remittance remained the only concrete foundation of Nepalese economy in the last decade. But, after the impact of global recession there are indications that remittance will stagnate or even go downhill that will have grave consequences for the economy.

While exports to India and foreign countries fell significantly, the total import is growing vastly. Along with this, the trade deficit has also been massive in the midst of waning foreign exchange reserves creating an adverse impact on the economy. Another major crisis that has evolved is the shortage of liquidity. The lackluster flow of remittance coupled with increased imports due to growth in domestic consumption has compounded the problem of cash crunch. Risks in the financial sector are on the rise, therefore, to alleviate possible unforeseen serious consequences of scary financial crisis, it is advised that the short and long term economic steps be taken: a) Exports must be promoted in which new products should be identified and at the same time traditional item be sustained. b) Points of interest in the tourism industry should be diversified aggressively covering the whole range of the industry. c) Foreign employment must be explored to benefit our indigenous labor market through diplomatic missions. d) In the sphere of bio-diversity especially the herbal products should be enhanced. e) Production of high value cash crops should be emphasized. f) Employment opportunities should be created in the domestic front by attracting indigenous investment along with the participation of the private sector. g) The Government should formulate improved public distribution method. A fixed provision of utmost necessary goods for the citizens should be adopted. The Government has to make constant supply at affordable price. h) Regulate import of gold and vehicles. i) Cash deposit ratio should be maintained in order to solve liquidity crunch. Stringent financial disciplines should be adopted by the concerned agencies to focus on enforcement of directives. j) There should be more supply of goods which are of acute shortage in the short run to combat inflation and increase the production in the long run. k) The expenditure should be oriented towards investment that requires enhancing implementation capacity..

Beside these there are other non-economic factors to follow suit. All national consensus on major political and economic issues should be reached in order to ensure political stability addition to this investment security must be guaranteed; prohibition on strikes, bandhs and agitation must be regulated in an effective manner; and the government should address the labor and entrepreneur issues properly to give fair treatment to both the sides promptly to allow the industries to run smoothly.

Dr. Rana is a former senior economist of APROSC