Transcript Global Financial Crisis: Impact and Policy Responses in Nepal

Global Financial Crisis: Impact
and Responses in Nepal
Presented by
D. R. Khanal (Dr.)
14 Jan,2009
Root Causes of Global Financial
Crisis
• Present crisis worse after the great deprecation of 1929
• Proved to be not only greedy but also anarchical
• Most noticeable underlying reasons:
– Financialization a last resort to the greedy capitalists (
speculators) after continued stagnation and declining profit in the
real sectors
– Even the neo-liberalism imposed under SAP and intensified in
the form of globalization through ESAF, WTO and Washington
Consensus could not prevent crisis or stagnation in the Capitalist
countries
• IT bubble although resolved the crisis of early 1990s, stagnating
trends reemerged in the beginning of 21st century in the US
• Increased profits, at the same time, were taken by newly emerging
capitalist countries, thus falling profit in the US and other western
capitalist countries
– This happened despite developing countries with pre, semi and noncapitalist characters integrated into the global capitalistic economic
system.
– The over concentration of wealth and decline in the purchasing power of
the working class amidst stagnation in a situation of overproduction was
preventing to get higher profits by greedy capitalists.
– Then there was deliberate attempt at policy induced financialization for
ensuring higher and overnight profits. The rate of interest was kept 1
percent since 2003 for sub-prime loans, at the same time without any
stringent regulatory rules.
– The havoc created by Wall Street Meltdown and its contagion is before
us.
– One feature of financialization has been such that it widened the gap
between the production or output value in the real sector and the
increased monetary value of wealth or profit in the hyper financial sector
amidst too much income disparity in society in few years.
• For instance: In 1982 the profit of USA financial companies
accounted for 5 percent of total after tax corporate profit. In 2007
they made up 41 percent of corporate profit, rising six-fold as a
share of GDP.
• Another example: Hedge funds president John Paulson took in
dollar 3.7 billions in 2007 (by betting collapse of the sub-prime
mortgage market) and the top fifty Hedge funds manager netted a
combined sum of dollar 29 billions.
• At the same time, the growing consumption demand amidst
enormous rise in trade deficit in the US was met by purchasing
almost $ 2 billion every day from the market. There was some sort of
siphoning of funds from surplus countries to the US at a low interest
rate. Today US debt has reached more than $10 trillion.
• The persistence of huge budgetary or trade deficit additionally
constraints bail out or recovery plan of the US.
•
Rescue and bailout plans
– Several bailout plans have either been implemented or they are in offing.
Discarding the neo-liberalism principles, state interventions, nationalization and
direct support scheme are underway. Both easy monetary and fiscal stimulus
packages are the major components to address financial as well as real sector
crisis
– However, crisis is further deepening along with rising unemployment in US and
other countries. Credit crunch and other problems are affecting real economy
very seriously
– There are policy gaps and at the same time asymmetries are persisting
• For revival purchasing capacity of workers has to be enhanced in addition to reducing
income inequality considerably which will take albeit longer time
• In an integrated world, any reduced external demand of US will further aggravate crisis.
• Similarly, as noted above, US has many constraints and limitations. For instance, rise in
$ will encourage imports requiring siphoning of reserves from the surplus countries. On
the other hand, without a bubble, like in housing, there will be less attraction for
investment in the US.
• Along with rise in unemployment in capitalist countries, the class contradiction is bound
to trigger.
• Therefore, crisis will prolong and in a transition, a big push for correcting US dictated
global economic system essential which has a big prospect as well
Probable Impact in the Nepalese
Economy
• So far no bigger impact has been felt. The impact will depend on the
prolonged crisis in the global economy and slowdown in India. But
the vulnerability of the economy is high with some bubble type of
characters in some sectors of the economy
– One of the highly liberalized country in South Asia.
• Trade is completely deregulated and no trade and non-trade barriers
including no support measures are there in exports
• Expect transportation and fertilizer subsidy in remote areas (now limited
irrigation subsidy also), no subsidy is there
• In large and medium industries up to 100 percent foreign equity participation
is allowed with repatriation facilities
• In banking three fourth and in insurance 100 percent foreign equity
participation has been already allowed even if in a selected basis
• The actual average tariff rate has reduced to 5.13 percent in 2007 from 6.1
percent in 2003. Likewise, the imports tariff rate has gone down to 6.23
percent from 7.72 percent during the same period.
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Remittances is the major source of external inflow exceeding more than Rs.
140 billion. The increased inflow induces urban centric consumption
expenses and unproductive investment in real estate activities. It also
induces imports which again provides 60 percent of total tax revenue.
The proliferation of banking and financial institutions is partly linked to the
increased remittances inflow
Trade is highly volatile with fragile bases and no diversification
Foreign aid is major source of development budget. Nepal has implemented
all conditions led aid programs including SAP, ESAF and PRSP. Increased
aid partly is the outcome of this
Labor market is predominated by informal sector employment which is
almost 94 percent
Income inequality is very high with increased tendency in recent years
Recently price rise has been a major concern at more than 14 percent in an
annualized basis
• More specifically, the impact will be
transmitted through
– Trade
• Goods
• In a situation of fragile base, high volatility and high
country and commodity concentration, weakening of
demand in India as well as other countries will affect
exports including employment in exportable industries
Share of Trade in GDP
40.0
30.0
20.0
10.0
0.0
2004
2005
2006
2007
Years
Export
Import
Trade
2008
Share in Total Trade
30.000
25.000
20.000
15.000
10.000
5.000
0.000
2004
2005
2006
2007
Years
Export
Eport India
Export Other Countries
2008
Share of India and Other Countries in Total Export
80.0
70.0
Share in %
60.0
50.0
40.0
30.0
20.0
10.0
0.0
2002/03
2003/04
2004/05
2005/06
2006/07
Years
India
Other Countries
2007/08
Exports of Major Commodities to India
45000.0
40000.0
35000.0
Rs in millions
30000.0
25000.0
20000.0
15000.0
10000.0
5000.0
0.0
2003/04
2004/05
2005/06
2006/07
2007/08
Years
Total India Export
Cardamom
Chemicals
Ghee (Vegetable)
Juice
Jute Goods
Polyster Yarn
Readymade garment
Textiles*
Thread
Wire
Zinc sheet
Others
Exports of Major Commodities to Other Countries
25000.0
Rs in millions
20000.0
15000.0
10000.0
5000.0
0.0
2003/04
2004/05
2005/06
2006/07
2007/08
Years
Others
Handicraft ( Metal and Wooden )
Nepalese Paper & Paper Products
Pashmina.*
Pulses
Readymade Garments
Silverware and Jewelleries
Tanned Skin
Woolen Carpet
Totals
• Services
– Most adverse effect would be through services
– tourism
• In 2008 more than 8 lack tourists ( from India only tourists via
air) came to Nepal. They provide employment to more than
83000 people directly. Tourist earnings is around 2.5 of GDP
• Foreign Employment
– Major adverse effect would come through reduction in
foreign employment and remittances
Remittances Inflows
NRs in millins
160000
140000
120000
100000
80000
Remittances (RRTN)
60000
40000
20000
0
2003 2004 2005 2006 2007 2008
Fiscal Year
Share of Remittance Inflows in GDP
20.0
15.0
10.0
Share
5.0
0.0
2003
2004 2005 2006
2007 2008
Country-wise Flow of Foreign Employment
Malaysia
300000
Qatar
250000
Saudi Arab
UAE
Number
200000
Kuwait
150000
South Korea
100000
Oman
Others
50000
Total
0
2005
2006
2007
Fiscal Year
2008
Share in Total Foreign Employment
50.0
45.0
Malaysia
Share in Percentage
40.0
Qatar
35.0
Saudi Arab
30.0
UAE
25.0
Kuwait
20.0
South Korea
15.0
Oman
10.0
Others
5.0
0.0
2005
2006
2007
Fiscal Year
2008
– Symptom of reduction in out flow is already there. In 4
to 5 months, the adverse effect is most likely in Nepal
– That will have wide-ranging impact
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Employment
Remittances
Imports
Government revenue
Banking and Finance
Real estate prices and transactions
Stock market
Economy wide growth and domestic employment
• Banking and Finance
– Some pressures on interest rate is already
there as reflected by inter-bank and treasury
bill rates.
– The earnings of more than Rs 47 billion
balance in foreign banks will also be affected
as a result of drastic cut in interest rates in the
US
– The weakening of lending capacity will have
effect on entire money and capital market
Share of Total Deposits and Loans and Advances in GDP
60.0
Rs is in million
50.0
40.0
30.0
20.0
10.0
0.0
2003
2004
2005
2006
2007
Fiscal Year
Total Deposits
Loans and Advances
2008
Trends of Sectorwis e Credit Flows of Commercial Banks
40.0
35.0
Share in %
30.0
25.0
20.0
15.0
10.0
5.0
0.0
2003
Agriculture
Cons turction
Wholes aler and Retailers
Real Es tates
2004
2005
2006
2007
Years
Production
Metal, Trans poration
Finance, Inus rance and Fixed As s ets
Others
2008
• Foreign Aid/Debt Servicing
– Foreign aid contributes almost 60 percent in
development budget
– Nepal does not face so much aid constraint
as Nepal has implemented SAP,ESAF and
PRSP under donor conditions.
– During the SAP and ESAF period, loan
component was high and increased rapidly.
Now there is some increment in grants
Trends of Direct External Debt
Total Borrowing
14000
NRs in millions
12000
Borrowing - ADB
10000
Borrowing - IDA
8000
6000
Repayment of Principal
4000
Payment of Interest and
Fees
2000
Interest - ADB
0
1987
1990
1993
2000
Years
2004
2007
Interest - IDA
Net Flow of Loan and Grant
NRs in Millions
20000
15000
Debt Servicing
Foreign Loan
10000
Foreign Grants
5000
Net Grant
Net Loan
0
2001
2002
2003
2004
-5000
Fiscal Year
2005
2006
2007
• So far aid commitments is continuing. But it may
also be gradually affected with direct effect on
budget, more so on social services and
infrastructure development programs
• Instantly the rise in $ rate would have direct
impact on debt servicing. In this fiscal year it will
have additional liability of more than Rs 1 billion.
Since July, $ has appreciated by more than 20
percent.
• Foreign Direct Investment
– Nepal had high expectation on foreign direct
investment
– There are announcements of generating 10
mw electricity in two years primarily through
FDI
– Indications are that FDI will be highly affected
Foreign Direct Investment
Trends of Approved FDI
12000.0
Rs in mlns
10000.0
Total
8000.0
India
6000.0
China
4000.0
Others
2000.0
0.0
2003
2004
2005
2006
2007
2008
Years
• Some studies indicate that only 40 percent of approved FDI projects
come into operations.
Growth, Employment and Wages
-Slowdown in trade, banking and finance, industry and government
budget would have adverse effect on domestic employment too.
-More unskilled workers will loose their job and predominant
informal labor market would have adverse effect on the wages of
unskilled workers.
-Apart from drastic reduction in cottage and small scale industry in
recent years, there is decline in the employment of manufacturing
industries hiring 10 and more than 10 employees as well. The
employment in this will be further adversely affected.
-The budget has targeted 7 percent growth rate. The IMF projection
shows 5.5 percent. It may be in the range of 4.5 to 5 percent. As our
assessment indicates, next year in may be further reduced.
Comparison of Inter Census Persons Engaged and
Employees
Year
2007
2002
Total number of
employees
1992
Total number of
person engaged
0
100000 200000 300000
Number
• Responses ( Donors)
– Multilateral donors are advising to follow the same old
policies
– Advising to adopt tight monetary and fiscal policies
– Advising to pursue flexible labor policy
– The conditions imposed are enact- best case is hike
of water services charge two three days ago
– The increased aid flow most noticeably the grant is
outcome of the continuation of donor led condition or
otherwise policies by the present government
• Responses( Internal)
– Formation of special committee-no actions or plan so
far
– Truly, in the budget expanded safety net, social
security and grass root programs following UML
budget of 1994/95.
– In terms of policy regime change, no breakthrough is
visible. Some stress on private public partnership
which is vague
– The government is arguing time and again that the
economy is strong means no overhauling of neoliberalism/donor led policies is essential. This has
raised many big question marks.