Bringing Economy Back from the Brink

What will it take for the new government to fix the economy?

the HRM

The first quarterly review of the Monetary Policy of the current fiscal year was keenly followed by many in the business community. Hard hit by the prolonged liquidity crunch, rising interest rates, import ban on various items, and with most types of business activities facing a sharp slowdown, the Nepali private sector was hoping the Nepal Rastra Bank (NRB) would provide them a breathing space through a review of the monetary policy. However, the hopes of business community members were belied.

Except for reducing the spread rate by 0.4 percent, the central bank continued with the stringent policy arrangements neglecting the demands of the private sector. For example, industrialists and businesspersons have asked the central bank to ease the guidelines on working capital loans. But NRB did not bother to address the demand in any way in the monetary policy review.

As expected, the private sector bodies have expressed their serious dissatisfaction over the apathy of the central bank and the government to the problems they have been facing for the last one year. The three leading private sector organizations – Federation of Nepalese Chambers of Commerce and Industry (FNCCI), Confederation of Nepalese Industries (CNI) and Nepal Chamber of Commerce (NCC) issued separate statements and expressed their discontent.

The FNCCI on November 29, warned that the ongoing “economic crisis” could deepen if the government failed to manage it properly. A day later, CNI in a strongly worded press statement, accused the central bank of “failing to resolve the existing problems of the economy” through the first quarterly review of monetary policy. Similarly, NCC said that the quarterly review of the monetary policy “has failed to keep fiscal stability in the country.”

Huge Drop in Demand and Production
Amid the private sector-government face-off, the worrying fact is the deep slowdown in business and production activities. Most types of business activities have slumped to levels never seen before. “Given the current situation, it is safe to say that the private sector is in depression,” said Shekhar Golchha, President of FNCCI.

A recent FNCCI survey shows industries producing construction materials like cement and iron, and steel are operating at 30 percent of their installed capacity. The sales of daily consumable goods have declined by 18 percent, while the electrical equipment transactions have decreased by 55 percent.

Though there have been slight improvements in the hospitality business and tourism activities, the average occupancy in hotels is just around 30-40 percent, according to the survey report.

The housing and real estate transactions dropped by 48 percent in the first four months of the current fiscal year, while the stock market transactions have declined by 40 percent during the review period, according to the federation.

Similarly, CNI in its recent survey report said new investments have halted in almost all sectors with 70 percent of investors postponing their new investment plans due to rising interest rates, impact on cash flow, and a huge drop in market demand for goods and services.

The CNI survey shows overall demand in the country has shrunk by 28 percent in the first quarter of the current fiscal year. As per the survey, the sectors with the highest decline in demand are automobile, steel, cement, real estate, footwear, engineering, and construction companies. The demands in the automobile sector have decreased by 78 percent, while in the steel sector by 61 percent. Similarly, the footwear industries experienced demand dipping by 45.3 percent while the demand for engineering and construction equipment and services has decreased by 43.3 percent.

According to the CNI, cottage and small industries which contribute 22 percent to the economy and employ 1.7 million people, are the most affected by the current crisis. This sector saw demand plunging by 33.7 percent while turnover declined by 36.3 percent and operators of such businesses have reached a situation where they cannot pay the loan interest and installments.

Along with the demand, the turnover has also decreased in the first quarter of FY 2022/23. The CNI survey says as the demand in the automobile sector decreased by 78 percent resulting in a 71.1 percent decline in the turnover of automobile importers. The same is the story of the steel sector where the turnover of steel manufacturers has declined by 53 percent.

The slowdown in demand and weakening market activities have forced Nepali steel industries either to completely shut down their plant or stopped production.

According to Nepal Steel Rolling Mills Association, six steel plants have been completely shut down with the other 10 stopping production.

Steel manufacturers said there is no business currently. Earlier, 1.2-1.5 million tons of steel bars used be consumed annually. In the last fiscal year, it has come down to one million tons.

According to the CNI, there has been a sharp decline in the opening of Letters of Credit (LC) for imports. The LC openings have dropped by 22 percent on average. The LC opening by industries related to agriculture declined by 31 percent, automobile importers by 89 percent, cement by 39 percent, and steel by 50.7 percent.

Amid rising imports and depleting forex reserves, the central bank on December 20 last year, made it mandatory for importers to keep a 100 percent margin amount to open a letter of credit (LC) to import the listed goods.

Leadership under pressure
With doing business becoming more difficult lately, the leaderships of the FNCCI and CNI have found themselves under huge pressure from their district and provincial chambers to be more vocal and take a tough stance against the policies of the government and the central bank. Citing November 20 elections, FNCCI President Shekhar Golchha somehow convinced the agitating businessmen not to hit the street before the polls.

Now, they are in no mood to listen. Three business bodies from Province-1, in a joint press conference, warned of street protests if the central bank does not immediately amend the monetary policy review. Issuing a joint press statement, Morang Merchant Association, Chamber of Industries Morang, and CNI Province-1 chapter demanded spread rate should be reduced to 3.5 percent, and guidelines on working capital loans should be deferred for at least three years.

In Kathmandu, the NADA Automobiles Association of Nepal on December 2 announced a street protest against the government and central bank. Hard hit by the import restriction on automobiles, the automobile dealers demanded the lifting of import restrictions.

FNCCI President Golchha accepts whole private sector is in agitated mode but people in the government are is still in denial mode. “They (Finance Ministry and Nepal Rastra Bank) are not accepting how bad is the shape of the economy and how hard it has become to operate a business in the country. The economy is absolutely on the downturn,” said Golchha, adding, “The data tells this fact.”

According to Golchha, declining VAT collection in this fiscal, reduction in diesel consumption, and a slump in the auto business clearly shows the worsening of the situation.

Government and Central Bank in Defiance
Even as the private sector upped its ante, the central bank has remained firm in its stance. The central bank governor Maha Prasad Adhikari on December 1 said that the NRB is ready to amend the guidelines on working capital loans but will not roll back the earlier decision as demanded by the private sector.

Similarly, Finance Minister Janardan Sharma has claimed that Nepal’s economy is not facing a crisis. Speaking at a program organized on the occasion of the 26th Foundation Day of the Nepal Economic Journalists Society (SEJON) on November 1, Sharma said that those making arguments that our economy is in a crisis ‘do not understand the economy’. “We are not in crisis, but we are facing challenges,” he said.

However, private sector leaders say that neither the government nor the central bank seems to understand the gravity of the situation. Anjan Shrestha, Vice President of FNCCI, thinks the policies of the central bank and the government to control the rising inflation rate and check the depletion of the forex reserve as lopsided. “They failed to think about the broader impacts of the policy measures on the country’s economy. While the policies have been aimed to suppress the higher market demand to reduce external sector imbalances, the measures have also taken a heavy toll on domestic industrial and business activities,” he said, adding, “The money cycle in the market has contracted significantly and businesses are unable to borrow money from banks as interest rate has skyrocketed to 17-18 percent lately which used to be 7-8 percent over a year ago. We fear that if this situation continues, there will be more problems in the economy in the coming days. I would like to call this situation created by ‘policy overdose’.”

He stresses that replicating the policies of big economies such as raising interest rates to bring down the inflation rate is not going to work in Nepal’s context. “Theirs and our economy are vastly different,” he opined. He also points to the wrong timing of the policy initiatives that will do more harm than good for the economy even though the implementation of the policies carries good intentions. “For example, the guidelines on working capital have come at a time when business activities have slowed down drastically. So, we have asked the central bank to defer the guidelines for at least two years,” he said.

Declining Govt revenue, no new investments 
How severe the slowdown is can be gauged by the fact that VAT collection is down by 11.6 percent, excise duty by 13.5 percent and customs revenue by 31.5 percent in the first three months of the current fiscal compared to the same period of the last fiscal.

High-interest rates and a slowdown in the economy have put a brake on new investment expansion. Due to the declining demand for goods and services in the market, most industrialists have stopped investment expansion altogether. Golchha says that given the losses incurred by businesses, the government will have less money to collect in revenues. “The government revenue collection has declined dramatically. And, our calculation shows it will further decline by mid-January,” he said.

The more worrying fact, according to business leaders is a surge in non-performing assets in the banking sector. With growing NPAs, there will be less lendable funds as banks to provision more money for such assets, they say.

New investments are essential for industrial and business activities. But the current macroeconomic situation of the country has forced Nepali businesspersons to stay away from investing money. The statistics of the Department of Industry (DoI) show only 98 industries have been registered in the first four months of the current fiscal year. There were 116 industries registered in the department during the same period of the last fiscal year.

The department’s data shows investment worth Rs 108.12 billion have been pledged in the first four months of FY 2022/23 compared to Rs 134.86 billion in the same period of FY 2021/22.

With Nepal’s economic problems becoming more pronounced with each passing day, business community members say that the new legislature and the government have a big responsibility on their shoulders to get the derailed economy back on track and raise the confidence of businesspersons as well as consumers. They hope that the government will realize the urgency needed to bring the economy back from the brink. “We have clearly stated our demands and have suggested ways to end the current slowdown. We hope the new government will work seriously to take the country’s economy out of the slump,” said FNCCI Vice President Shrestha.

Leave a Comment

Scroll to Top