Impact of Economic Crisis to Nepal?

Source: Wiki Answers.com, ID 3537141287

There is a school of thought, supported by the IMF, that the rest of the world can pull the world economic engine despite the likely slowdown in the US. Current economic data from Europe and Asia support this view. The Fed presented an optimistic outlook for the US economy as recently as August 7 but has now changed its prediction. The housing market slowdown has escalated into a liquidity crisis of global proportion.

I believe that the US economic growth during the rest of 2007 will be lower and led by weakness in consumer spending. Going forward, a consumption-led slowdown in the US economy should have an impact on its trading partners.

The Indian economy has grown at more than 9 per cent in 2005-2006 and projections indicate robust performance in the coming years. India's exports may record a decline if the US slows down. In 2006, roughly 18 per cent of India's exports - about 15 per cent of India's GDP - was directed to the US. The negative impact can be partly offset by exports of services.

As the US slows down, an effort to reduce costs could boost outsourcing of services. The IT sector has made and will make impressive strides. Possible setbacks from weakness in capital spending in the US may be insignificant.

On the financial side, equity markets have posted losses and are likely to move in tandem with events in the US. The Sensex for instance posted declines in 2001 when the US was in a recession. Institutions in India holding US mortgage-related securities are likely to suffer losses. On the credit side, the Indian corporate sector raised about $15 billion from external sources in the first five months of 2007.

At the extreme, Indian corporations could face higher costs of borrowing through this channel due to increasing credit market spreads. Firms would have to tap into the domestic credit market as an alternative, thereby exerting upward pressure on domestic borrowing costs. This could whittle down the economic growth rate.

These are the possible channels through which the US crisis could affect the Indian economy. Precise estimates of these repercussions would need a more thorough analysis, which is premature given the short life of the crisis. In sum, the spill-over effects of the US financial crisis to the Indian economy may not be significant enough to overwhelm the positive economic momentum already in place.

Nepal is as back as Sri Lanka was in 1960, says ADB

Kathmandu, June 15

Asian Development Bank in a study said that Nepal has underperformed all other South Asian economies and is now where Sri Lanka was in 1960.

"In terms of per capita GDP, Nepal is now where Sri Lanka was in 1960, Pakistan was in 1970, and India and Bhutan were in 1980," the ADB said in its latest study.

In 2007, per capita GDP at the 2000 prices for Nepal was estimated at USD 243, compared with USD 439 for Bangladesh, USD 660 for Pakistan, USD 686 for India, USD 1,144 for Sri Lanka, USD 1,277 for Bhutan, and USD 3,668 for Maldives, it said.

The study has also concluded that Nepal have been held back due to weak governance, slow recovery from the civil war, inadequate infrastructure, labour market rigidities and inability to address market failures.

"Moreover, the global recession threatens to drastically reduce the inflows of remittances and tourists," the ADB said in the study "Nepal: Critical Development Constraints" conducted jointed by the Asian Development Bank, DFID & International Labour Organization.

"Economic performance has been lacklustre, despite some important reforms in 1990s and 2000s and reduction in below-the-poverty line population from 42 per cent in 1995-96 to about 31 per cent in 2003-04." highlighted the report.

Cautioning the further deterioration of economy, the ADB said that despite poverty reduction, evidence suggests that Nepal’s recent economic growth has had limited inclusiveness with social, geographical and economic dimensions.

Besides, it said poverty may remain high and climb if the global recession reduces remittances. An emerging concern is the sharp rise in inequality, the bank said. It said expanded employment opportunities may not lead to major poverty reduction unless growth is inclusive and inequalities in access to development opportunities and jobs are reduced.

Overcoming inadequacies in infrastructure and inequalities will need substantial increases in expenditures, requiring creation of fiscal space, the bank said.

"The challenges Nepal faces in achieving its growth potential are compounded by the slow transition from a kingdom to a republic and the related political processes," the study said.

Effective governance, the rule of law, control of corruption, and accountability can climb back to their levels prior to the civil war only after political stability comes, the international lending agency concluded.