INTRODUCTION

Nepal is a small landlocked country in South Asia with the total area of 1,47,181 square

kilometers. Also known as the Himalayan kingdom, this recently declared Republic

kingdom has faced a lot of change ups and downs in economic growth. The geographical

vulnerability along with the political unstability and lack of manpower have a great impact

in the economy. Almost one-quarter of its population is still below poverty line. Agriculture

which covers 1/3 of the total GDP is providing livelihood to 3/4 of its total population.

Though a considerable potential in hydropower with an estimated 42000 MW of feasible

capacity but political instability has played a vital role in hampering foreign investments.

Along with that challenges like frequent strike of natural disasters, brain drain and

landlocked location has been hurdles in the growth of Nepalese economy.

Though it was believed that after the establishment of Democracy Nepalese economy would

make quantum jump but everything was just like in the past and even worse. Fight for

power and rights led to strikes, and demonstrations paralyzing the private as well as public

sectors. Industries were forced to close and the foreign investors withdrew creating a havoc

in the Nepalese market. The government run corporations lacked supervision and Nepalese

market was completely depended on India for imports. Furthermore the global meltdown in

2008 added fuel to the fire.

BACKGROUND

Started from United States this crisis engulfed the economy of both developed and

developing countries which decreased the global output by 0.75 percentages to hit 2.2

percent in 2009 as per the International Monetary Fund's latest World Economic Outlook

update. The primary cause for this crisis is US Sub- Prime Mortgage lending which is

lending to households who have high risks of default as a result of no previous exposure to

housing credit; or not having a condition of financing a long-term loan.

Maintaining low interests in US in order to cope up with 2001 recession led to the housing

boom. So, in this situation the lenders accessed sub- prime borrowers thinking that the real

estate price would rise and the borrowers would be able to refinance and Americans would

place their home beyond everything and would work to any extent in order to save their

castle. When housing market crashed the real estate value tumbled resulting in household

bankruptcy and decline in investment in the sector. Due to the decline in investment and

heavy imposing of interest rates buyers had a tough time refinancing and the housing prices

were down to 30 % of the sales price.

Consequently, banks and financial institutions faced liquidity crisis with the decrement in

cash flows. Now the fear that was confined only to Wall Street was spreading to the main

streets as a result of recession and mass unemployment.

Objectives

The main objective of this research is to study the effect of 2008 global meltdown on

Nepalese economy.

Methodology:

The research started with the search on websites, journals annual report of Nepal Rastra

Bank and other financial institutions.

Limitation:

Due to the difficulties in accessing the journals and newsletters of financial institutions the

research mainly focused on the major setbacks on Nepalese economy.

Effect on Nepalese Economy

Nepal did not face any direct impact from the financial crisis as Nepal is not open to the

global financial market and big investments from abroad. But in the contrary there had been

a drastic fall in the oil prices from $149 to $60 per barrel as the government was incurring

huge losses adding to the fiscal deficit which was Rs 10 billion at its peak. Similarly the

Nepalese banks have more funds than they are required to(in mid-June 2009, the gross

foreign exchange reserves stood at Rs 271.68 billion an increment of 27 % compared to the

level as at mid- July 2008.)

But Nepalese economy wasn't safe from the indirect remarks of the crisis on United States

and Europe. The economy could feel the impact of global financial crisis through four

different routes-

Slowing down in inflow remittances

Unemployment is one of the serious problem in Nepal as most of the youths are deprived of

the employment opportunities due to lack of resources, industries and economic revolution.

It is extremely difficult to describe the actual unemployment situation due to the lack of

reliable sources and most of the data available are skewed. Every year 400,000 Nepalese

enter the market so we can imagine that the unemployment rate is very high.

By Gender

Employment Unemployment Inactive Total

Male 73.3 3.1 19.6 100

Female 71.7 2.7 25.6 100

By Development region

Eastern 74.9 2.9 22.2 100

Central 72.4 3.3 24.3 100

Western 73.2 2.7 24.1 100

Mid Western 77.0 2.8 20.2 100

Far Western 80.4 1.4 18.2 100

By Geographic Region

Mountain 86.7 1.3 12.0 100

Hills 76.0 2.1 21.9 100

Tarai 71.1 3.8 25.1 100

Nepal 74.3 2.9 22,8 100

Because of lack of opportunities in Nepal foreign countries have been a lucrative alternative

for many of the Nepalese youths. The trend of going abroad has provided a great help to

boost Nepalese economy through the remittances. The number of people who left for

overseas employment has been rising significantly until it dropped from 249,051 to 217, 164

mainly due to the global economic meltdown. While most of the immigrant workers are

uneducated and unskilled the major destinations for them have been Malaysia, Qatar and

other Middle-East Countries. Meanwhile, a slowing down of the construction and service

sectors in the Middle East, the other major source of remittances, and in countries such as

South Korea, Malaysia, and Japan, will result in lowering demand for Nepali labor abroad.

Put simply, fewer workers leaving the country in days ahead will decrease remittances

inflow in a number of ways. According to figures for fiscal year 2009-10, the global

economic meltdown is having its impact on Nepali migrant workers. This is indicated by (a)

the declining number of people leaving for foreign employment, and (b) a substantial

number of migrants are returning home before the termination of their job contracts. Data

from the Department of Foreign Employment reveal that the number of Nepali migrant

workers going to Malaysia has declined from 50,554 in fiscal year 2007-08 to 35,070 in

2008-09. Similarly, the number of Nepali migrant workers leaving for the United Arab

Emirates declined from 45,342 to 31,688 during the same period. This declining trend is

also substantiated by a decline in the demand for Nepali passports, a major indicator of

migrant labor movements. In Mahottari district, for example, a 25% drop in the application

for passport was reported.

The remittance which accounts for 19 % of the Gross Domestic Product declined in the year

2008 by a massive 12 % as a result of economic slowdown in most of the developing

countries. There is still the process of returning of immigrant workers which has a

significant impact on the inflow of remittance in the coming years. It will consequently have

an impact on household income and poverty reduction.

Impact on Service Industry:

A global slow-down and recession in Western economies will also affect the Nepali service

industry, which contributed 50.9% of GDP in 2007. Global recovery is not expected any

time soon as the Western financial crisis steadily worsens. This means potential tourists are

likely to postpone or cancel travel plans. One may expect long haul, inter-continental

tourism to decline significantly given the financial distress being faced by the global

aviation industry. It should be underscored the high revenue yielding tourists are either

India- or China-bound with Nepal as a stopover destination rather than a direct one. So, the

huge effect of meltdown in these countries has ultimately decreased the amount of tourist in

Nepal. Similarly, recently we celebrated Nepal Tourism Year 2011 in which the 1 million

tourists were expect to visit Nepal but it may be due the financial crisis and no signs of

recovery the expectation was not met.

Impact on aid and manufacturing Industry:

A lot of NGOs/INGOs have been working on Nepal since a lot time. Most of the donations

come from the rich Western countries and United States. The global slow-down limited this

funding forcing the organizations to scale back the development initiatives. This had an

adverse effect on the fight against poverty and other development challenges. Many

development initiatives were in halt to the lack of funding and skilled resources.

Similarly the manufacturing industry was also affected. Nepal exports carpets, garments and

other household products to Western countries and due to the financial crisis there has been

decreased in the exports. Manufacturing industry covers the 8 % of the total GDP of Nepal

so it is estimated that Nepalese economy suffered a loss of about Rs 256 million due to the

global meltdown Similarly Nepal imports the machinery goods and other products due to

which a loss has been suffered due to the tumbling of exchange rates. Nepalese currency

policy is linked with the Indian Rupees due to which the indirect remark of the financial

crisis has been faced due to the overwhelming increase in the dollar exchange rate.

Present situation of Nepal

The whole nation is going through transitional phase and we believe that it is the best

excuse for the present economic condition in Nepal. With the success in overthrowing more

2 centuries long monarchy Nepalese population has proved that they are capable of

revolution of any kind. But in case of economy neither the government nor the people seem

to be serious. The vulnerability of present economic crisis hasn't grabbed the attention of

political parties, government and individuals and have been left somewhere between

increasing inflation and diminishing economic growth rate.

After 1990 the hype of privatization grew like forest fire. But again the feeble and unstable

government couldn't determine the fate of ill-stricken public enterprises with extreme

inefficiency and rampant corruption. It is estimated that the irregularity in government

owned enterprises in FY 2011/12 was massive 162 billion. In fact according to

Transparency International Nepal grabbed 27th position in corruption among the 180

countries.

Due to the ongoing political crisis economy has been jeopardize due to lack of

simplified, transparent and competitive tax system. But it seems like government is in no

mood to address these severe problems. Even the government is turning out to be

incompetent . Nepalese government came up with diminutive budget of Rs 385 billion

and it is also being underspent due to lack of peace and stability along with poor

investment friendly environment. Talking about the industrial sector most of the

industries' operation has been halted due to energy crisis, feeble labor law, problems

caused by Labor unions and lack of tax regulation supporting manufacturing. In 2011

more than 32 industries along with Bhrikuti Paper Mill were compelled to leave the

market. Due to this there has been increasing fear in the mind and heart of investors.

Private sector is the main body whereas government is just a moderator. Nepalese

economy can't support the policy of privatizing the profit and nationalizing the loss to

government. So, there seems the requirement of a good initiation from the private

sector. But in today's scenario both of them are extremely vulnerable in terms of

capacity and governance. Prolonged liquidity crisis is still prevailing due to the lack of

financial discipline and effective corporate management along with poor supervision

of Nepal Rastra Bank. Private sector stills lack institutionalization and

professionalism. Most of the

Enterprises are owned by a small group of people and controlled by family and

friends. Due to this professionals are merely assistants and are not provided with real

responsibility. Nepalese stock exchange Index NEPSE crashed from 814 in mid

February 2008 to anywhere between 200-300 now. This is the indication diminutive

investment and improper regulation of enterprises. Nepalese economy is just limited to

establishment of some multinational companies and expansion of few family owned

businesses. Still 40% of the total population is under the poverty line and 67 % of the

independent age group is unemployed or underemployed.

Though our location prevents us from having quantum jump in economy we can still

benefit a lot from our neighboring power blocks. Implementing a zero tariff zone would

certainly decrease the custom earnings but will help to globalize our trade which will

have prolonged effect in our developing economy. Everyone's eye is on our national

resources. Though we have immense natural resources we must be ashamed that we

couldn't utilize it properly. Hydropower and tourism are the building blocks of Nepalese

economy. First of all it is our priority to develop investment friendly environment and

lure the investors. For this political parties and government should be directed. I would

request the government for proper negotiations with India for Pancheshwor Project which

I believe would boost our economy

and energy level. And of course the tourism sector should be managed in a better way.

Though the government's goal to attract 1 million tourists was not fulfilled but still we

were very close to that mark. But still there needs improvisation in traditional tourist

management. We should go beyond the regular destinations like Pokhara, Kathmandu

and Chitwan and try to find possibilities in various places of Nepal. And obviously

there is need of competitiveness in the market. This will enable the production of high

quality goods and will certainly increase the economy. Along with that local people and

investors should be encouraged in small and medium scaled industries as these will

help in making ourselves

independent and decrease the amount of

import.

Lastly most of the Nepalese population depends on agriculture for livelihood.

Nepalese traditional subsistence farming should be discouraged and we should try to

get maximum profit from crops. For farming on small fragmented land won't help and

we should try to manage big estates and help in the rapid growth.

Conclusion:

Though there has been a significant decrement and downfall in Nepalese economy the

economic backwardness is due to the political instability prevalent in Nepal. Unless the

Maoist led government veers away from it populist economic policies and produce some

concrete measures to cope up with this problem Nepal is still in the dark side. Nepal has

been isolated economically due to which big investments aren't on the door to uplift the

economic bar. Moreover the closure of public and private enterprises due to lack of

leadership and the labor unions has ultimately supported the vulnerability. Nepal produces

unskilled labor and relies completely on foreign countries for importing most of the goods

consumed and the weakness of Indian currency to US dollar has halted the way of economic

development. This will put the whole burden on the flow of remittances and service

industry. Most of the middle class families depend on the cash flows from abroad and

Nepal’s financial services sector will be forced to reduce its margins because of the crisis.

Nepalese stock market has been equally affected by the crisis. The lack of regulation and

ongoing insider trading has an adverse impact on the economy due to the lack of capital and

cash flows in the market.

So, it's all on the hand of government and Nepal Rastra Bank to implement the policies in

order to cope up with these problems.

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