Jagannath Adhikari

The Nepali economy is currently facing a difficult dilemma. The Nepali rupee is in free fall but the country has not been able to take advantage of this devaluation to promote its own economy. This situation reveals the predicament of a country whose economy is based on remittance. If there were adequate local production activities, whether, in manufacturing or agricultural production, the present situation would have encouraged Nepalis to produce more for local consumption as well as for export.

Economists have already predicted that the general life of the common people will be difficult in the coming days. This is especially so for families that have no members earning their income in foreign currency. As consumer goods, including transportation, are going to get more expensive, the present level of income in Nepali rupees will not buy the same basket of goods and services. This will lead, most probably, to cutting back the consumption level. If consumption levels of poorer families are reduced, they will surely be pushed into the poverty trap again. Nepal, which has made some progress in poverty reduction, may face another hurdle, leading to the erosion of gains made so far in this area. There is some consolation that the devaluation of currency will increase the receipt of remittances but this marginal increase will be outweighed by the increase in the price of goods and services bought from foreign countries.

When data on poverty reduction was released in 2003-04, based on the Nepal Living Standards Survey (NLSS) II, two questions were raised. The first was on the validity of data. Subsequent socio-economic surveys, on a larger or smaller scale, including the NLSS III in 2010-11, revealed that poverty reduction based on consumption was really happening in Nepal. Another question or suspicion raised at that time was that this type of poverty reduction, underpinned primarily by remittance, is not sustainable. This question seemed valid and the present crisis has given further credence to it.

We surely should not blame remittance for the difficult dilemma that the economy is facing. The real problem is the decline in production—both industrial and primary production like agriculture and allied enterprises. How far foreign labour migration or the whole enterprise of generating remittances is responsible for this decline in production is another question. Certainly, there are a host of factors for this decline and the migration of labour for remittance could be one factor. But remittances could have been a source of the much sought-after source of capital for investment in agriculture and other enterprises.

The time has now come to understand or question why local production has declined and why remittances could not act as a source of capital for investment. If there were adequate and sustainable productive enterprises, it can be logically argued that these enterprises would have flourished under the present circumstances to meet local consumption and substitute imports. The ‘balance-of-payment’ situation would have been impressive. Sadly, this has not been the reality for Nepal.

There are several reasons for the decline in local production. These relate to both sociological and political-economic conditions. The habit of generating wealth through hard work has been replaced generally by a rent-seeking attitude under political patronage. Young people in rural areas are now led to believe that it is more prestigious and beneficial to undertake city-based jobs or seek political patronage to get access to the public or extorted funds. Businesspersons and industrialists too do not want to make investments in real activities that could produce goods and services and generate employment. In most cases, they also tend to make more money by gaining access to public funds through the help of politicians in terms of tax concessions or benefits from government programmes. In spite of this generally dismal situation, there are a few showcase activities. But these are few and far in between to reach critical mass and bring positive change.

We know that the present devaluation in Nepali currency is partly linked to the problems in India. Indian economists validly argue that ‘jobless growth’ in their economy for the past two decades is the main cause of the present crisis. Despite India’s rapid growth—often in double-digits—the economy, with only a few skilled workers in specific locations took the benefit of this growth. The overwhelming proportion of the population was somehow cut out. The government tried to soothe the problem by heavily investing in welfare activities for the unemployed, draining public funds and increasingly resorting to deficit financing. On the other hand, capital continued to flow out as the US economy began to improve. Hence, this pattern of jobless economic growth eventually led to the present currency crisis.

It seems that India lost out in not making economic growth inclusive. In Nepal’s case, there is neither absolute economic growth nor inclusive growth, i.e., growth with employment generation. In the absence of economic growth, Nepal is also constrained to implement welfare programmes like guaranteed employment schemes, cheap food or subsidies for farmers. Therefore, Nepal faces formidable problems, as compared to India. In the absence of these welfare programmes, Nepal has lost its competitiveness vis-à-vis India. As a result, more and more goods and commodities are now imported from India, including rice and other food products.

India’s recent experience can be a lesson for Nepal. Nepal needs both economic growth and employment creation within the country. The sustainability of a remittance-based economy is only possible if remittances, economic as well as social, are linked to internal economic growth. As the political system has more leverage to improve the economy through the creation of an investment-friendly environment, there are a wide range of benefits to be gained by cleaning up the present political mess. This will also be conducive to encouraging the investment of remittances in productive sectors.

Adhikari is a social scientist researching various aspects of development

Published on: 5 September 2013 | The Kathmandu Post