The International Monetary Fund (IMF) is popularly known to use mild comments even on a serious situation, especially in the consultation report with member countries. In Nepalâ€™s case in the current year, it, however, took an exceptional approach. In the meeting of the Executive Board held on May 16, 2008, to discuss the report of the staff that visited Kathmandu in March, 2008, they started the report stating that â€œPer capita GDP has barely risen in the last decade and the country remains one of the poorest in the worldâ€. It was not a popular observation for the policy makers. It did not surprise the public, however. Almost the similar observations were made by non-government economists from time to time; it was, however, always ignored by the government on the grounds that they are â€œpermanent criticsâ€.
The data recently published by the Central Bureau of Statistics shows that the per capita GDP in the current century has barely increased by about one percentage point per year. It did confirm the observation of IMF and non-government economists, myself included. On the contrary, the price has continued to increase as if it has its own momentum of growth.
I have the suspicion that limited growth was also instrumental in increasing the inequality of income due to (i) concentration of investment in the capital city and (ii) lack of responsible democratic government because of continuous political conflict. Statistics also suggest that Nepal has the second highest inequality of income in the world after Brazil. (see IfDS Bulletin, October, 2007). There is no reason to expect that the trend has been reversed. The employment opportunities in the country are almost nil. The young people are, therefore, migrating abroad in search of jobs. The remittances sent by them have vitally helped (i) to reduce poverty; (ii) to finance trade deficit that now totals 17 percent of GDP; (iii) to maintain surplus in the balance of payments; and (iv) to help increase government revenue by financing rising imports. The country has survived because of remittances, and the development is still not the priority issue for the government.
The economic situation, in fact, has got worse after the royal takeover. Not only the growth in per capita income almost stagnated, the rate of inflation also almost doubled in the fiscal year 2005/06 compared with a year earlier. The trade balance deteriorated, and there were indications of capital flight. Still, the foreign exchange reserve continued to increase. This was, however, due to rising receipts from remittances.
The massive peopleâ€™s participation in Jana Andolan II was partly the result of
deteriorating economic condition. The general expectation was that the economic situation that has almost hit the bottom will improve, almost reversing the trend soon. To express it in technical terms, the expectation was that the economy will follow a â€˜Vâ€™-shaped growth pattern.
The experiences of the past two years show that the economy has not followed the â€˜Vâ€™-shaped growth pattern as expected. It has continued to follow past trends. The average annual growth in per capita income after Jana Andolan II is 1.8 percent or even less compared with 1.5 percent with a similar period two years earlier. The export of goods and services as percentage of GDP that had reached as low as 13.5 percent (16.7 percent in 2003/04) before Jana Andolan II has continued to decline to reach 12. 0 percent in 2007/08. In some areas, for example, price, specially of food prices, that absorbs 53 percent of consumer spending, the annual rate of inflation has reached almost 15 percent! The rate of inflation may go up further due to unavoidable rise in the price of oil and oil products. The foreign exchange reserve has, of course, increased, again due to rising remittances which was expected to reach Rs. 130.4 billion in 2007/08, more than double the value of national export of goods.
What type of growth pattern are we following? It is definitely not â€˜Vâ€™-shaped as expected by the general public after Jana Andolan II. It is â€˜Lâ€™-shaped, that is, the economy, rather than springing back after Jana-Andolan II, has followed the old pattern.
What are the prospects now, given the current difficulty in forming a stable government? The past trends clearly show where we are heading. If I am allowed to rewrite the finding of Prof. Krugman, the inventor of L shaped growth pattern for the US economy, for Nepal, the prospect for the economy is not â€˜Vâ€™-shaped, it is L-ish: rather than attaining double digit growth or â€œrecord growthâ€ we will have a prolonged period of stagnant or slowly improving performances. That period will last until 2010/11, when we will have a stable government under new constitution.
This finding should be taken note of by the new Minister of Finance to reverse the trend, though we donâ€™t know yet who he will be: Dr.Mahat, Dr. Baburam Bhattarai, Mr. Bharat Mohan or Dr. Tilak Rawal.
Dr Pant is executive director, Institute for Development Studies