Rapid Assessment
Impact of Global Financial and Economic Crisisin Nepal
By
Dilli Raj Khanal (Dr)
Submitted to
ILO Office
Kathmandu
March 2009
Table of Contents
Table of Contents 2
Section I: Introduction 3
1. Introduction 3
Section 2: Recent Trends in the Economy 5
2.1 Major Income Sources to GDP 5
2.2 Overall Sectoral Composition, Trends and Employment 5
2.2.1 Overall Growth Trend and Sectoral Composition 5
2.2.2 Pattern of Employment 5
2.3 Specific Trends in Finance/Banking 5
2.4 Social Development and Poverty Trends 5
Section 3: Probable Impact and Measures Taken 5
3.1 Probable Impact in 2008/09 and 2009/10 5
3.1.1 Exports and Tourism 5
3.1.2 Foreign Employment and Remittances 5
3.1.3 Banking and Financial Institutions 5
3.1.4 Foreign Direct Investment 5
3.1.5 Exchange and Interest Rates 5
3.1.6 Revenue, Foreign Aid and Budget 5
3.1.7 Overall Growth and Employment 5
3.2 Steps Taken to Cope with Continued Crisis 5
3.3 Responses from the Donors 5
Section 4: Some Suggestive Measures 5
4.1 Short Term Measures 5
4.2 Medium to Long Term Measures 5
4. 3. Parallel Initiatives 5
4.3.1 Support of Development Partners 5
4.3.2 Involve Social Partners in Policy Formulation 5
References 5
Appendices 5
Section I: Introduction
1. Introduction
The world wide financial crisis of enormous magnitude continues. It has spread to the developed, middle and low income countries alike, threatening years of progress in poverty reduction (IEG, 2008). Defaulters on securitized sub-prime mortgages as a result of a real estate market bubble burst led to failures of several financial institutions and a collapse of inter-bank and commercial paper markets. A tightening of credit, combined with declining consumer confidence has brought on worldwide recession. There is a fear of prolonged recession in the global economy as recently revised forecasts of IMF indicate (IMF, 2009). The forecasts show that the growth in the global economy will be just 0.5 percent on the average in 2009 with negative growth rate in most of the developed countries. Despite un-certainty, there is some hope that the recovery will begin from 2010 as a result, among others, the positive impact of bail out plans and fiscal stimulus packages which are underway in both developed and developing countries.
Most worrisome phenomenon of deepening of recession is that companies or enterprises are increasingly laying off workers in huge numbers every day. This is manifesting at a time when there is already a declining employment trend amidst structural problems in the labour market of many developing countries. Recently published ILO report shows that in 2008, an estimated 6.0 percent of the world’s workers were not working but looking for a job, up from 5.7 percent in 2007. More pressingly, in many developing countries, well over half of the workforce is employed in conditions that fall short of decent work, leading to growing vulnerability in employment (i.e. unpaid contributing family workers and own-account workers) characterized by low and insecure employment, low earnings and productivity (ILO, 2009). In such a situation, the global recession has added a big challenge to many developing countries to minimize the vulnerability in the labour market and safeguard the workers working right.
The economic and labour market conditions of Nepal indicate on the possibilities of increased crisis in various fronts of the economy as well. Nepal is one of the most liberalized countries in the South Asian region. Both tariff rates and openness indicators corroborate this (Khanal, 2009). The total trade share in GDP is fairly high at about 35 percent. There is also high trade concentration with a single country-India. With some yearly fluctuations, the share of trade with India is more than 60 percent. In that the export share is equally high. On the other hand, only few commodities constitute the highest share in exports to other countries. Fragile export base, a few commodity concentration and high dependency on a single country for trade shows that any slowdown in exports due to economic crisis in trading partners would have wide-ranging impact. So much so, almost 60 percent of total tax revenue comes from external trade. Similarly, tourism industry is one of the principal sources of foreign exchange earnings and employment. It contributes almost 2.5 percent to GDP with more than 0.8 million people directly engaged in it. Despite relatively low level, the role of foreign direct investment is extremely important owing to low size of total investment and domestic savings[1]. Any disruption in the FDI will have far reaching negative impact on the Nepalese economy at a time when Nepal is engaged in harnessing abundant water resources for rapid socio-economic transformation. The foreign aid is the principal source of development budget as almost 60 percent of it is funded by the external aid. In addition, billions of Rs. comes through NGOs and INGOs. The contribution of technical assistance is also equally high. The reduction in aid, thus, would have both near and long term adverse effect on ongoing development endeavours.
The structure of the economy and employment pattern further shows that the Nepalese labour market is characterized by high vulnerability. The reduction in the contribution of agricultural value added to the total GDP has not accompanied by similar reduction in the dependency of people in the agricultural sector. The agriculture sector’s contribution to GDP has now reduced to about 32 percent where as people’s dependency in agriculture is still in the neighbourhood of 66 percent. The pattern additionally conceals some serious structural problems persisting in the Nepalese labor market. When the employment status is examined it is found that the ratio of self-employed in total employed is still 62.7 percent. Moreover, as revealed by the labour survey (CBS, 1999), out of the total self-employed, 78 percent are engaged in agriculture related works. Among them 43.3 percent are engaged in own-family works without any pay. This is persisting at a time when underemployment in the agriculture sector is still very high at about 32.3 percent (NPC, 2002). Similarly, of the 23.9 percent labour force in the non-agriculture sector, 73.3 percent is employed in the informal labour market. Assuming the entire agriculture sector as informal sector, job ratio in the formal sector works out at a mere 6.4 percent (UNDP, 2004). About two-third of the workers in the informal sector do not receive any kind of training whatsoever from any organization. The ownership pattern of informal sector is dominated by male proprietorship (87 percent) (Mainali, et al 2002). At the same time, wage differentials between the male and female workers are equally high (ILO, 2002). Although improvement in the wage level has been reported by the NLSS survey of 2004, wage differences between the skilled and unskilled workers is increasing with reduced real wage level of the urban non-agriculture unskilled workers. In the informal agriculture also despite increase in the real wages on the average the share of wage income of the poor workers reduced considerably during the same period (CBS, 2006).
Amidst these, the youth unemployment is also relatively high. Unemployment rate among the 15 to 19 age group is 5.7 percent against 3.8 percent national average. In the age group of 20 to 24 the unemployment rate is even higher at 6.4 percent (CBS, 2004). Due to rising youth unemployment coupled with job insecurity in the predominant informal market characterized by very low wages, the outflow of people to seek job has risen enormously in recent years. Now foreign employment has been a major source of people’s livelihood. Although there is a long history of Nepalese people going to India for employment, in recent years the outflow to Malaysia, Gulf countries and South Korea has risen markedly. The tendency to go to Europe and US is also increasing. The earnings from such sources have risen to more than Rs 142 billion in an annualized basis (NRB, 2008). Although the magnitude is unknown, the unrecorded inflow is also considered to be equally high. Understandably, any adverse effect on such an employment would be quite large and overwhelming from both near to long term perspectives.
Indeed, the massive inflows in remittances have contributed immensely to the proliferation of banking and financial sectors in Nepal. Amidst more opening up and liberalization policies, now the share of financial assets has outstripped the total GDP of the country. The inflows have enhanced the capacity of both deposits and lending of the financial institutions. The big increase in urban centric financial investment, most predominantly in business and real estate related activities, have had strong spill over effects on consumption induced economic activities with some near to medium term positive impact on both income and employment. A study (Khanal, 2007) on the role of banking in growth shows that financial deepening has had positive impact on growth in the Nepalese context. The study also shows that despite some reduction of employment in state owned banks as a part of financial sector restructuring, the employment in non-state banks has expanded rapidly with more positive contribution on gender mainstreaming. Therefore, the adverse impact on foreign employment, followed by the reduction in remittances inflow, could aggravate the economic crisis in Nepal with more pervasive adverse effect on the labour market conditions.
The increased economic activities in organized sectors, in turn, have had some positive impact on some structural transformation of the economy. Now the employment in the agricultural sector has reduced to about 66 percent in recent years from 81 percent in 1991. The contribution of non-agricultural sectors in the total GDP has increased to more than 67 percent. However, despite these positive developments, the informal sector employment is extremely high at almost 94 percent (UNDP, 2004). Amidst this, the vulnerability in the labour market is added by new entrants as more than 0.3 million labour forces come into the labour market every year. The increased migrants to the urban centres seeking jobs and other opportunities add to the enormous pressures to the labour market in the urban areas posing problems for decent employment. Thus, any down turn or recessionary trends in the economy would have very adverse direct effect on the living condition of the workers.
Against these backgrounds, the rapid assessment study concentrates on examining the ongoing and likely trends in the major areas of the economy in the aftermath of global financial crisis. The study also attempts to evaluate various steps taken by the government and other concerned agencies. The responses of the major donors have also been taken into account in the course of the analysis. The employment implication forms the principal basis of the analysis. Secondary data, focussed group discussions and assessments of concerned stakeholders on the outlook of the economy are the methodological approaches followed in the study.
In the next section, the general economic trend of the Nepalese economy has been discussed. The third section is devoted to assess the likely impact of financial and economic crisis in various fronts of the Nepalese economy. The fourth section examines the policy responses of the government. This is followed by a brief discussion on the interagency coordination. Some suggestive measures are proposed in the last section.
This is a part of the study initiated by the ILO office in New Delhi. The ILO has commissioned rapid assessment studies in South Asian countries to examine the impact of financial and economic crisis with the aim of assisting member countries to cope with enormous challenges faced by them.
Section 2: Recent Trends in the Economy
2.1 Major Income Sources to GDP
A drastic shift in the income source of a household has taken place during the period 1996 to 2004 (CBS, 1996 and 2004). In 1996 the share of farm income in total household income was 43.4 percent. It reduced to 29.5 percent by 2004 (Table 1). The share of agricultural wage income has also reduced considerably during the same period. Conversely, a phenomenal rise in the share of remittances income has taken place in the same period, from 7.6 percent in 1996 to 13.8 percent in 2004. There has also been rapid rise in the share of non-agricultural enterprises and wage income. The income source and its composition thus indicate that any adverse effect on employment induced wage income and remittances would have very adverse effect on a household’s livelihood and economic wellbeing.
Table 1: Sources of Household Income in Nepal, 1995-96 and 2003-4
(average per capita income at 1995-96 prices)
In NRs
1995-96 / % / 2003-04 / %Farm income / 3,122 / 43.4 / 2,983 / 29.5
Agricultural wage income / 672 / 9.3 / 547 / 5.4
Nonagricultural wage income / 1,016 / 14.1 / 1,880 / 18.6
Nonagricultural enterprises / 859 / 11.9 / 1,489 / 14.7
Property income / 55 / 0.8 / 111 / 1.1
Remittances income / 544 / 7.6 / 1,401 / 13.8
Housing income / 757 / 10.5 / 1,282 / 12.7
Other Income / 167 / 2.3 / 437 / 4.3
Total / 7,191 / 100.0 / 10,129 / 100.0
Source: NLSS of 1996 and 2004, CBS
With gradual openness of the economy, the external income sources to GDP have increased considerably. Among the major sources, exports of goods and services including tourism, foreign aid, FDI and remittances are most noticeable. As obvious, these sources are affected by the ups and downs in the global economy.