Nepal should learn from global crisis

Though the housing market precipitated the financial crisis in the United States of America, the real reasons are rampant greed, ineffectiveness of watchdogs and rating agencies, and belief that shares, stocks and house prices could go up forever. The revolving door policy of high-ranking government officials working for the same company they supervised are also among the underlying reasons behind the debacle. And the United States — more importantly the middle class — is paying the price today. The crisis has affected much of the world.

Sure, things are tough and will get worse before getting better. This brings me to ponder, what if something similar was to happen in Nepal?

Everybody seems to agree that the whole Nepali economy is in doldrums. But the share value of financial institutions from finance companies to development banks to commercial banks seem to be in an upward trend forever. Getting registration and license to operate seem to guarantee big salary and big profit.

The reasons could range from: a) Sagacity to operate in shades of grey with financial statements to satisfy the often conniving personnel of government watchdog agencies like the Central Bank, b) existence of an unseen cartel with vested interests to ensure paper profit, c) Lure by banks to hire government bigwigs and cronies for lucrative salaries, d) absence of independent auditing companies to verify profitability claims, e) Political pressure, and patronage, and f) ignorance and blind trust by the public.

Anything which goes up in an unnatural way in free market economy will come down. We have seen this happen in every sector and country irrespective of size or location. The rich and the highly paid will get away as they always do. But what will happen to those who have deposited their life savings? What could happen is such a situation?

Long lines of harried customers for withdrawal will replace the long lines we see during public offerings of shares. The nascent financial market could be severely disrupted. The Nepal Rastra Bank will not be able to rely on old gimmicks for “bank turnaround” as it has done with some in the past. Prices of basic commodities will skyrocket, credit and cash will be non-existent and we could also see the storming of banks and riots if it gets worse.

This is not an improbable scenario. Global recession could hasten the process. Remittance is not recession proof as some have opined in Nepal. The copious number of financial institutions in a tiny area could have a contagion effect even on the stronger players.

Assets could turn toxic and “highly profitable income statements and bank shares” be reduced to just nothing. This is happening with many banks in United States and Europe right now. There will be little help internationally unlike with the Asian financial crisis in 1997 and the Latin banking crisis in the 1980s.

We cannot let it happen like we did with water and electricity shortages. But, it could happen and be much more devastating if steps are not taken immediately. Anything could trigger it sooner or later if status quo is tolerated.

Authenticity, accuracy and transparency should be the guiding paradigms for avoidance. There will be no cure, so prevention is the only solution. It is time to get started and save ourselves from this probable catastrophe.