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Brief summary on the Global Financial Crisis impact on the Nepal economy and society at large The impact of the Global Financial Crisis has spread to the Asia Pacific region, with an average economic growth for this year predicted around 3.6% for the entire region (ADB: Asian Development Outlook 2009) and the IMF forecasting a modest recovery in the global economic growth for 2010. For Nepal, since the country and the banking system are s not really connected to global financial markets, it has been mostly insulated from the direct effects of the financial crisis thus far. It is, however, vulnerable to possible second round effects resulting from the general economic slowdown. This would be felt mostly in the tourism receipts, remittances, reduction in exports to the US and European markets, a further reduction of FDI, etc. all of them having a more direct impact on the rural areas and the most vulnerable groups. While tourism declined globally, Nepal- has been able to regain part of its tourism receipts, following the signing of the Peace Accord in 2006, with an average of 500000 tourists a year in 2007 (up from)383,926 in 2006. However eight month data of mid 2008/2009 shows increase of only 2.1% in tourists arriving in Nepal by air. In the first quarter of 2009 a decline in tourists by as much as 15% has been experienced , negatively affecting foreign exchange earnings. This trend will adversely impact employment in the tourism industry and indirect employment generated from the tourism sector, most severely felt in the rural areas where job scarcity and poverty are adding to the burden. Nepal receives close to 18% of GDP from remittances, ( in 2007/2008 RS 142.7 Billion) a significant and necessary foreign income earner for the country, with ODA accounting for some 20.3 % of government revenue. Around 2.5 Mio migrant workers are estimated to work abroad, among which 1.26 in the main countries– i.e Quatar, Saudi Arabia, UAE . Malayasia.. Around 45% are employed in the construction industry, more sensitive to the economic downturn. Iin the first eight months of mid 2008/09 the current account registered a considerable surplus of Rs. 28.9 billion primarily due to the surge in net transfers by 53.5 percent over the previous year ( workers' remittances soared by 58.9 percent in the first eight months of mid 2008/09). However, a decline could still be recorded if the receiving countries are severely impacted by the Global financial crisis and the stimulus packages some of them have launched are not fully effective. Already in December 2008 demand for Nepali workers in UAE was of 1129, but in January demand dropped to 813. A drop in around 1/3rd in outgoing numbers per month have been experienced in the past few months . As result on the slower demand on male laborers, especially the unskilled ones, women seem to have been encouraged to go and work abroad. The government is actively engaging with receiving countries to keep the numbers up. The impact on a slowing or decline in remittances will have adverse impact to poverty and growth in all regions of the country but will be most negatively felt in rural areas where remittances account for a large percentage of local income. The situation could be aggravated by the return of migrant workers who are either let go or whose contract are not renewed, and who will not find a job back in Nepal Contrary to the global trend, exports rose by 17.1 percent in the first eight months of mid 2008/09 in contrast to a decline by 2.9 percent in the corresponding period of the previous year. Exports to India rose by 3.6 percent in the first eight months of mid 2008/09 and exports to other countries went up significantly by 46.1. rise in the exports of pulses, pashmina, woolen carpets, herbs and Nepalese paper & paper products. While Exports to USA, Germany, Italy, and Japan continued to decline in 2007/2008, according to the available Export data (TEPC) there has been a significant increase in export to Bangladesh by almost 800 percent compared to the previous year. However, exports only accounts for 7% of GDP with a very narrow export product platform and key export products such as pashmina and woolen carpets being especially vulnerable to volatile markets. Since most of the raw material for these items are agricultural based and products manufactured by rural workers, any decline in export earning could have serious adverse effects in rural economies. Equally, decline in these exports would create further unemployment and increase poverty and trigger more seasonal migration to India. The fragility of exports can further be aggravated by the prevailing energy crisis, labor unrests and increasing lack of rule of law and order in the country and in particular in the Terai belt which is the main gateway for exports While UNDP’s strategic focus is duly aligned with the Governments policy priorities, the four interlinked UNDAF outcomes are also effective tools in coping with the emerging challenges from the global economic down-turn: 1.) National institutions and processes strengthened and initiatives to consolidate peace encouraged; 2.) Socially excluded and economically marginalized groups have increased access to improved quality basic services; 3.) Sustainable livelihood opportunities are expanded, especially for socially excluded groups in conflict affected areas; and 4.) Respect, promotion and protection of human rights are strengthened for all, especially for women and the socially excluded, for sustained peace and inclusive development. The above four key areas will to some extent provide the government as well as affected communities with a response to upcoming challenges and the CO shall continue its focus in support of the below four key areas, while in parallel seek to minimize implications to Nepal’s economy through a dedicated focus on minimizing implications to policy and impact on remittances, tourism, exports and generally interdependence with the rest of the world. Some of the potential entry points in support of the Government response to the global crisis are listed below where the CO may aim to ensure increased focus including the following areas of particular relevance. - Trade expansion, Nepal’s low volume of export is partly caused by Nepali exporters’ lack of competitiveness in the global market place. Low levels of foreign investment and constraints to trade have caused the loss of employment and economic growth. With little new entrepreneurship and innovation being introduced into the Nepali productive sector, there is limited scope for the current situation of trade deficit to be mitigated quickly. A committed effort is called for in terms of identifying new areas with export potential, combined with high employment potential, low dependency on energy and sensitivity to climate change and a responsive productive sector with the full involvement of the private sector. - Local economic development and diversification. Further engagement in more holistic area based development especially in the poorest and most vulnerable and conflict prone areas. Supporting the government in its National Action Plan of Adaptation and working hand in hand with specialized agencies and partners, could contribute to giving a new impetus to agriculture and improving food security as well as creating a new export base. - Micro-Enterprise and Business Development, with some 80% of Nepal’s population living in the rural areas, there is today a serious shortfall of income-earning opportunities causing widespread poverty, unemployment and worsening food security. Even the Terai areas is witnessing problems of widespread food shortage. Lack of training and educational opportunities for the youth, not to speak of the absence of jobs, call for the establishment of sustainable models of micro-entrepreneurship and larger businesses and the promotion of an enabling environment, including access to finance and enhanced linkages to the markets, institutional strengthening and support in the implementation of innovative strategies and business models. The approach could be used to promote the investment of part of the remittances in self-employment and small business formation for migrant workers relations back home and for themselves when they return to Nepal. - Public Private Partnerships. Today’s socio economic shortfalls can only be addressed by a sound commitment on behalf of the government to involve the private sector more rigorously. The private sector is urgently required for the expansion and rehabilitation of major physical infrastructure as well as at the local level bringing together the strengths of the private and public sectors to improve access to services and in the creation of jobs. Effective service delivery with emphasis on social development and employment generation can due to the current magnitude of the socio economic problems only be tackled in partnership. Initial steps have already been taken to promote these partnerships in urban centers and should be scaled up. While large infrastructure projects are not UNDP’s niche, developing with the private sector and the government different PPP modalities and packages could contribute to creating a more favorable investment framework. - Energy, without sufficient electricity, the productive sector will not be able to take off and the economic sector will remain stagnant. Only with sufficient power generation can the investment environment & economic sector be developed. At the local level, UNDP has started to tackle this with its rural energy development programme demonstrating pilots of micro-hydro power plants, community driven systems of grid management and local level participation in developing new alternative sources of energy, to sustain progress and create future job opportunities. This should be further pursued , scaled up – taking advantage of Nepal’s high hydro power potential and continue to be linked to micro-enterprises or new livelihoods development, pending the expansion of the grid, which will depend on the development pace of the larger hydropower plants.
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