Necessity To Tackle Financial Crisis

Economic crises across the globe have negatively affected many countries. The growth rates of fast emerging economies like India and China have declined in recent years. Financial crisis can transmit to developing and emerging economies via a number of ways such as trade and financial linkages. Financial vulnerabilities evidently contribute to the severity of growth impact. Those countries that export advanced manufacturing products are more severely affected by the crisis as compared to the nations exporting agricultural products. 

Financial crises have a significant and permanent impact, reducing the long-term output. Especially developing countries are severely affected by the crisis as compared to the developed ones. Fiscal policy is the most efficient tool to deal with financial crises whereas monetary policy is considered to be modest. Likewise, flexible exchange rate helps reduce the impact of crises in the short and medium term but aggravates the problem in the long run. For the appropriate treatment of financial crises, injecting adequate liquidity, stabilising interest rate and inflation as well as providing fiscal stimulus are essential.  It is frequently argued that global economic downturns have negative and significant impact on export flows of developing countries. Globally various policy responses have been taken to control the impact of such adversities.  

Lack of integration

Nepal’s lack of integration with the global economy means that it has largely been protected from global financial crises. There has been no direct impact on GDP, income, or employment rate. However, decline in tourism and a reduction in foreign aid may have a negative effect on our nation economy. Nepal is reliant upon remittance for a significant portion of its GDP ultimately creating a situation of the Dutch disease. Nepali workers often seek employment in Arab countries as well as India, Malaysia, South Korea and other nations. As a result, remittance flows into the country declined significantly during and after the financial crisis and is now slowly recovering as the global market goes back on track. 

This shows that as Nepal does not host multinational corporations that employ thousands of domestic workers and therefore do not feel the shockwaves of a financial crisis in this manner as more developed countries do. Nepal also traditionally exports items such as readymade garments, carpets, handicrafts, pashmina shawls, among others exports items. These are exported to the USA, the UK, Germany, and Russia. But such volume of exports does not constitute significant share of GDP. Therefore, once again a global financial crisis has minimal impact on our country. However, due to the large number of workers abroad and their importance to the economy as a whole, any negative situation globally will reflect on Nepal as well. 

Additionally, as a developing country, Nepal is highly reliant on foreign aid and assistance to achieve its development goals. Financial crisis means that donor nations are less likely to provide financial assistance to developing countries. Foreign aid from nations such as Japan, the USA, the UK, and multilateral organisations like the EU significantly decreased. During crises, developing countries prioritise domestic financial recovery rather than overseas aid. Financial crisis also means a reduction in disposable income for the populace of developed countries which in turn leads to a reduction in tourism, a sector that Nepal is very reliant upon. 

Nepal is highly affected by the economic downturn of the USA and EU. Firstly, it tends to affect the export potentiality of developing economies. Any developing economy will suffer from declines in terms of trade and commodity exports. Developing countries will reel from the declining of foreign aid and assistance from the donor countries and multilateral institutions. The developing nations in South Asia are dependent on remittances. But the countries are unlikely to get employment opportunities abroad during these times which lead to adverse effects on their economy.

Amicable solution

To furnish an amicable solution to such crisis, Nepal's macroeconomic policy needs to be strengthened. Better management of its foreign debt is also highly essential. Appropriate decisions should be taken to protect banking sectors locally. Nepali financial sector that had faced a liquidity crisis in the last decade is still going through this problem. Such crisis was mainly due to the reckless lending from the banks in unproductive sectors such as real estate. It resulted in increased interest rates in deposit and lending products. 

To overcome this problem, Nepal needs to collaborate with her close neighbours for strengthening intra-regional trade. In the absence of greater economic integration through regional cooperation and sustainable economic growth in Nepal as well as in the region is impossible. Regional trade promotion strategies that help enhance regional connectivity and cooperation have been crucial for the nation to come out of such vulnerabilities. With meaningful collaboration with the potential investors, the natural resources could be explored and utilised for the financial betterment and prospects of the country. 

(The author is a former Secretary of Government of Nepal.)