Nepal has encountered a number of expected and unexpected shocks in its economy. Several factors have contributed to this including natural disasters, political changes and financial crisis. No doubt, the great earthquake and border blockades in 2015 were an unexpected shock for Nepal. The earthquake destroyed important infrastructures, human settlements and about nine thousand people lost their lives all over the country. Thereafter, in response to the political change and promulgation of a new constitution in Nepal, India imposed a border blockade, which created a state of catastrophe with lack of food, medicine, fuel and necessary items for many months until the blockade ended.
As Nepal was still in process of its recovery, the COVID-19 pandemic landed another great shock which hit the country hard. To make the matter worse, after five decades Nepal suffered the most devastating rainfall during the monsoon this September. This caused excessive floods and landslides, killing over two hundred people and damaging infrastructure and properties equivalent to billions of rupees.
In addition, Nepal is also suffering from other economic and financial shocks. Nepal’s poverty and underdevelopment are directly interlinked with the economic slowdown. Our economic growth has a tendency to fluctuate with unexpected ups and downs, which could hardly support the required level of development and cope with the businesses, unemployment and recession as well. The next factor, which is less supportive and creates shock to the economy, is the financial sector. As a result of weak growth rates, high fluctuations in interest rates, elevated debt levels and exchange rate volatiles, the contribution of the financial sector in overall investment in productive sectors is not encouraging. Rising inflation has also made life of people more difficult.
Nepal's financial sector sees significant reforms, focus shifti...
The next shock has been brought on by the global trade disruptions through growing number of trade restrictions, trade barriers and protective policy of developed countries especially neighboring countries are to be blamed, to great extent for widening the trade gap of Nepal. Manufacturing and Agricultural sectors, which were previously performing better for import substitution and export promotions, now have been undermined by shocks of global trade fragmentation. As Nepal’s agriculture sector is not performing well, and if India lacks foodstuff itself and stops exporting it for long periods, Nepal might fall prey to a crisis of food insecurity shock.
Another shock, which has both positive and negative consequences, is Nepal’s high dependence on policies and dictations of international financial institutions. One cannot ignore that the external assistance is going to be more political and strategic rather than only economic. The world financial system has been divided in many blocks with their own financial institutions and Nepal’s overall investment climate has been suffering from their power play with increased complexities as investment shock.
Likewise, the next shock for Nepal has been the conflicts in the Middle east countries as Nepal's GDP heavily relies on remittances with two third of Nepalese laborers being employed in the Middle east. Nepal receives more than fifty percent remittances from the region. A strong shock is expected in the Nepalese economy as conflicts continue for long periods.
Nepal is unprepared to manage these shocks and its effect would create further waves in the other sectors of the economy. For example, with its effects, the production across the economy would be more difficult, costly, or some industries would heavily curtail the production or import limitations may create severe supply shocks to the economy. Moreover, it may also introduce shocks to the financial sector with a stock market crash, a liquidity crisis in the banking system, unpredictable changes in monetary policy, or the rapid devaluation of a currency as well. Lastly, a technology shock could result from the level of use of advanced technology in productivity such as modern computers, advanced technology and efficient machinery in production across different occupations and industries. It is essential to have shock absorption capacity to deal with these shocks
Shock absorption capacity is the ability of an economic system to resist both expected and unexpected shocks through effective and efficient plans, programs, policies and performances. Why is the Nepalese economy having a lower capacity and inability to resist the shocks? There could be many reasons. However, the main blame goes to politicians who often reprioritize policies that deliver immediate results for their personal and political advantage, even if they have long-term negative consequences. Similarly, the powerful special interest groups lobbies can influence policy decisions to benefit specific industries or groups. In many cases, even good policies can be difficult to implement if they are not widely supported by the public.
In addition, economic policies in Nepal often also fail to function well due to complex economic systems, inadequate data, implementation challenges, conflicting interests, and the inherent difficulty of predicting future economic conditions. This leads to policies that may not be effectively designed, targeted, or executed to achieve the intended goals. Rapid changes in market conditions can also quickly render policies obsolete. Moreover, the government often lacks accurate information about the economy, making it difficult to accurately assess the impact of policies. Besides, it also lacks the necessary bureaucratic infrastructure and stability of leadership to effectively implement policies. The complex tax systems with loopholes can lead to unfair tax burdens and reduced government revenue.
Nepal must work to minimize economic shocks through a variety of policy changes, such as - improving fiscal discipline, strengthening the financial sector by adjusting interest rates, changing tax policies, diversifying the production and export base, improving the business climate, providing financial aids to affected industries, focusing on areas of comparative advantage as well. It is important for Nepal to introduce second-phase of economic reform to accelerate growth momentum by reforming critical areas such as infrastructure, governance, human capital development, and developing an environment which encourages and supports the private sector as well,
