TOPICS : Economic diplomacy and financial sector
Sundar Panthee and Niraj Adhikari
Though economic diplomacy is now considered a new dimension of dip-lomacy in Nepal, it has always impliedly formed part of conventional diplomacy. But Nepal formally stressed economic diplomacy after a high level task force submitted its report in 2052 BS.
As the financial sector cannot be separated from the economic sector, economic diplomacy plays an important role in the growth of the financial sector. For instance, a sound financial system is the outcome of vibrant economic condition. After the restoration of democracy, Nepal has liberalised its market and financial sector. During the years 2049 BS to 2059 BS, 12 commercial banks, 27 development banks, 20 co-operatives, five rural development banks, and more than 60 finance companies emerged in the financial market.
The direct impact of economic diplomacy on the financial sector is also quite visible in the present context as remittances have played an important role in supporting the economy. Remittances are estimated to account for 30% of Nepal’s GDP, and 50% of it get into the country via banks and the rest through non-official financial means. Because of the lack of investment opportunities, the remittances have created excess liquidity in the market, causing decreasing interest rates. The problem of managing liquidity effectively has arisen. Effective economic diplomacy seeks better employment opportunities abroad for Nepali citizens. In 1991 105,872 Nepalis went abroad, mostly for the purpose of employment, whereas the figure doubled in the year 2004 to 268,000.
In the context of globalisation, foreign direct investment (FDI) is quite indispensable for Nepal. The impact of FDI on the financial sector is quite visible. After the adoption of open market policy, several joint venture banks have emerged in the Nepali financial market. From 1989 to 2004 the government approved 890 projects with total project cost of Rs. 87,413.38 million and foreign investment constituted Rs. 25,155.49 million. Likewise foreign assistance also directly or indirectly affects the financial sector. Foreign aid helps to foster the economic development of the country.
Promoting tourism is also the main agenda of economic diplomacy. This is a main source of foreign currency for Nepal as it covers around 10% of total foreign currency earnings. But in recent years the numbers of tourists have gone down because of the conflict in the country. Tourists accelerate the financial transactions in the country.
Financial sector could benefit from this new dimension of diplomacy in the context of globalisation and privatisation. But so far economic diplomacy has become the concern of the government and this is ironic. The private sector and other institutions should also go hand in hand with the government to pursue effective economic diplomacy. Financial institutions, if they wish to be competitive in the international arena, have to be involved in this coordinated effort not only internally but externally too. For instance, to collect remittances they can establish liaison offices in foreign countries and provide reliable service to Nepalis abroad, as well as correspond with foreign banks and deal in inter-bank transactions, which promote foreign trade. This effort should be coordinated with the Nepali missions abroad.