Global Financial Fall-out Assessing impact on Nepalese economy - - PDF document

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Global Financial Fall-out Assessing impact on Nepalese economy

Professor Bishwambher Pyakuryal Central Department of Economics Tribhuvan University Kathmandu

Wednesday, 30 September, 2009, UN/ESCAP

Outline Outline

• Context

Context

• The crisis of late 2007

The crisis of late 2007

• Mortgage

Mortgage-

• backed securities: Priority business in

backed securities: Priority business in the US the US

• How long and how deep?

How long and how deep?

• Two approaches for combating crisis

Two approaches for combating crisis

• Nepal & global economic crisis

Nepal & global economic crisis

• Linking crisis with agriculture

Linking crisis with agriculture

• Conclusion

Conclusion

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Context

• Once

Once-

• in

in-

• a

a-

• lifetime crisis

lifetime crisis

• Linked with

Linked with recession

recession (a business

(a business cycle contraction cycle contraction-

• reduction in GDP at

reduction in GDP at least for two consecutive quarters); least for two consecutive quarters);

inflation inflation (higher prices & fall in

(higher prices & fall in purchasing power); and purchasing power); and depression

depression

(high unemployment rate & loss of (high unemployment rate & loss of trade) trade)

The Crisis of late 2007 The Crisis of late 2007

• In USA it is

In USA it is sub prime loan

sub prime loan and in

and in UK, UK, fall in output

fall in output

• There was a dramatic decline in the

There was a dramatic decline in the US house prices for the first time US house prices for the first time since 1930s since 1930s

• Big lenders were dangerously

Big lenders were dangerously exposed to the high risk loans exposed to the high risk loans market market

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Mortgage Mortgage -

• backed securities:

backed securities: Priority business in the US? Priority business in the US?

• US Census Bureau states a person who

US Census Bureau states a person who bought a new home in Jan 1996 for bought a new home in Jan 1996 for $155,000 made a profit of $100,000 after $155,000 made a profit of $100,000 after selling in August 2006. selling in August 2006.

• A safe mortgage is a maximum of 3 times

A safe mortgage is a maximum of 3 times the buyer the buyer’ ’s yearly income, but it happened s yearly income, but it happened between 5 to 10 times. between 5 to 10 times.

• There is a limit to excess demand

There is a limit to excess demand – – as a as a result, excess property lost its value, result, excess property lost its value, refinancing stopped & borrowers became refinancing stopped & borrowers became defaulter. defaulter.

Mortgage Mortgage -

• backed securities:

backed securities: Priority business in the US Priority business in the US Contd. Contd.

• The value of occupied property by the bank

The value of occupied property by the bank was less than the value of loan amount (the was less than the value of loan amount (the global bank have written global bank have written-

• off $1 trillion in sub
• ff $1 trillion in sub-
• prime loans.

prime loans.

• As mortgage

As mortgage-

• backed assets lost their value, the

backed assets lost their value, the global financial institutions are expected to global financial institutions are expected to have already lost $2.8 trillion from the credit have already lost $2.8 trillion from the credit crunch. crunch.

• The US has established

The US has established Troubled Asset

Troubled Asset Relief Program Relief Program for purchasing and ensuring

for purchasing and ensuring troubled assets. troubled assets.

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How long and how deep?

• It was believed, usually recession lasts from 6 to 18 months pro

It was believed, usually recession lasts from 6 to 18 months provided vided monetary stimulus plan monetary stimulus plan is put on place to offer cheap rates to is put on place to offer cheap rates to borrow. borrow.

• Great Depression

Great Depression lasted for 43 months beginning August 1929 to

lasted for 43 months beginning August 1929 to March 1933 (unemployment surged to 25% & GDP contracted by March 1933 (unemployment surged to 25% & GDP contracted by 28%). 28%).

• Recession during 1980

Recession during 1980-

• 81 stayed for 16 months.

81 stayed for 16 months.

• During 1990

During 1990-

• 91 and & 2001 it was famously mild & short

91 and & 2001 it was famously mild & short-

• lived. The
• lived. The

average of 10 recessions since WW II lasted for 10.4 months. average of 10 recessions since WW II lasted for 10.4 months.

• In the US, National Bureau of Economic Research acknowledges tha

In the US, National Bureau of Economic Research acknowledges that t recession began since December 2007, which indicates that it has recession began since December 2007, which indicates that it has already lasted for 21 months. already lasted for 21 months.

• Current length & level of contraction indicates that the recessi

Current length & level of contraction indicates that the recession will

• n will

continue for foreseeable future. continue for foreseeable future.

How long and how deep How long and how deep contd. contd.

• The economists believe there is a sluggish recovery.

The economists believe there is a sluggish recovery. However, the question remains unanswered w/regards to However, the question remains unanswered w/regards to the size of global economy and amount of stimulus the size of global economy and amount of stimulus packages? packages?

• How stimulus can be justified when the profit of

How stimulus can be justified when the profit of FIs FIs has has increased from US$65 billion to $232 billion in 2007, within 5 increased from US$65 billion to $232 billion in 2007, within 5 years? years?

• The uncertainty is justified based on (a) contradictory

The uncertainty is justified based on (a) contradictory remarks by the individuals from the same country w/regards remarks by the individuals from the same country w/regards to recovery & stimulus during Sept 4 meet of G20 & (b) to recovery & stimulus during Sept 4 meet of G20 & (b) IMF IMF’ ’s frequently changed projection on business cycle s frequently changed projection on business cycle contraction for 2010 contraction for 2010 – – (from 1.9% contraction in April to (from 1.9% contraction in April to 2.5%; the latest projection is 1.4 against previous 1.3%). 2.5%; the latest projection is 1.4 against previous 1.3%).

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Tw o approaches for combating Tw o approaches for combating crisis crisis

• Two school of thoughts

Two school of thoughts – – (a) (a) stimulating stimulating economy through tax and spending policies economy through tax and spending policies (the US), (the US),

• (b)

(b) financial regulation financial regulation by recommending by recommending more control over markets (The Europeans) more control over markets (The Europeans)

• Under the second approach, it is

Under the second approach, it is recommended that international regulators recommended that international regulators can even reach across national borders. can even reach across national borders.

Nepal and Global Economic Crisis

• The greater the integration, the higher is the possibility

The greater the integration, the higher is the possibility

• f being victimized by speculative factors.
• f being victimized by speculative factors.
• In Nepal, banks have more funds than they are

In Nepal, banks have more funds than they are required to (in mid required to (in mid-

• June 2009, the gross foreign

June 2009, the gross foreign exchange reserves stood at exchange reserves stood at Rs

• Rs. 271.68 b, an increment

. 271.68 b, an increment

• f 27% compared to the level as at mid
• f 27% compared to the level as at mid-
• July 2008).

July 2008).

• Gross foreign exchange reserves went up by 15.8%

Gross foreign exchange reserves went up by 15.8% (US$3.59 b). However, the (US$3.59 b). However, the decline in the aggregate decline in the aggregate demand demand in the real sector and in the real sector and weakening consumer weakening consumer spending spending is a sign to justify the vulnerability of such is a sign to justify the vulnerability of such reserves. reserves.

• To cushion the impact,

To cushion the impact, contingency plan contingency plan needs to be needs to be initiated. initiated.

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Nepal and Global Economic Crisis Contd.

The challenge Nepal faces is to balance between inflation

and growth. Surprisingly, inflation rate is increasing and growth declining.

Interest rate is still high, there is no significant flow of

international capital and no cheap credit available. The therapy to the economy is real estate business because of the excessive loan money available.

The average real estate lending is 10%. However, it is scary to note that the average loan exposure of top three banks in real estate is almost 31% of their total lending volume. This This should be closely monitored. should be closely monitored. The time will come soon to fight

against the declining property price and reduced bank lending.

One of the indicators is sharp fluctuation in capital market

and devaluation of rupees. Other affected areas are tourism & FDI.

Nepal and Global Economic Crisis Contd

• The depreciation has increased budget deficit

The depreciation has increased budget deficit by by Rs

• Rs. 1.9 billion. Since manufacturing sector

. 1.9 billion. Since manufacturing sector is contracting and export is declining, it is is contracting and export is declining, it is difficult to realize export gains from currency difficult to realize export gains from currency depreciation. depreciation.

• It is suspected that Nepalese business

It is suspected that Nepalese business community suffered huge loss since India community suffered huge loss since India’ ’s s share market index declined by six thousand share market index declined by six thousand points between October 2007 and October points between October 2007 and October 2008. 2008.

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Linking Crisis w ith Agriculture: Linking Crisis w ith Agriculture: w /special reference to Nepal w /special reference to Nepal

• Global economic downturn has made both

Global economic downturn has made both positive as well as negative impact. positive as well as negative impact.

• Food as a non

Food as a non-

• discretionary item of HH

discretionary item of HH expenditure, demand for expenditure, demand for ag

• ag. commodity has

. commodity has been maintained benefiting farmers. been maintained benefiting farmers.

• On the downside, recession has led to high

On the downside, recession has led to high cost of imported inputs. Because of cost of imported inputs. Because of devaluation of $ the cash flow of the farmers devaluation of $ the cash flow of the farmers was negative was negative ‘ ‘cause of high import costs. cause of high import costs.

Linking Crisis w ith Agriculture: Linking Crisis w ith Agriculture: w /special reference to Nepal w /special reference to Nepal Cotd Cotd. .

• For decades macroeconomic policies did not support

For decades macroeconomic policies did not support agricultural productivity growth. Low investment in agricultural productivity growth. Low investment in agricultural research & inadequate technical advances agricultural research & inadequate technical advances failed to increase sustainable yields. failed to increase sustainable yields.

• Such constraints led to the decline in global stocks of

Such constraints led to the decline in global stocks of cereals and escalating cereal prices in 2008. cereals and escalating cereal prices in 2008.

• The recent decision of G8 leaders to allocate $20 b

The recent decision of G8 leaders to allocate $20 b three three-

• year investment in developing countries is actually

year investment in developing countries is actually in response to 2008 price spikes. in response to 2008 price spikes.

• WB research shows economic growth from agriculture

WB research shows economic growth from agriculture generates three times more poverty reduction than generates three times more poverty reduction than growth in any other sector. growth in any other sector.

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Linking Crisis w ith Agriculture: Linking Crisis w ith Agriculture: w /special reference to Nepal Contd. w /special reference to Nepal Contd.

• Financial crisis has diverted attention away from

Financial crisis has diverted attention away from food crisis. FAO estimates, cereal stocks food crisis. FAO estimates, cereal stocks-

• to

to-

• use

use ratio in 2008/09 is at its second lowest level in ratio in 2008/09 is at its second lowest level in three decades. three decades.

• About 40% increase in production is required to

About 40% increase in production is required to return to their pre return to their pre-

• crisis levels to feed an

crisis levels to feed an estimated 960 million hungry people in 2009. estimated 960 million hungry people in 2009.

• As 1 in 8 people have experienced extreme food

As 1 in 8 people have experienced extreme food insecurity, the governments must put agriculture insecurity, the governments must put agriculture first to ward off the impact of the global financial first to ward off the impact of the global financial crisis on poor rural communities. crisis on poor rural communities.

Conclusion Conclusion

• The recession has obstructed smooth functioning of

The recession has obstructed smooth functioning of safety safety-

• net programs such as access to health,

net programs such as access to health, education and nutrition services, building infrastructure. education and nutrition services, building infrastructure.

• The continuation of bail out packages in developed

The continuation of bail out packages in developed countries and inability of developing countries to countries and inability of developing countries to expand financial packages may prolong the crisis. expand financial packages may prolong the crisis.

• Financial rescue simultaneously with human rescue

Financial rescue simultaneously with human rescue services is required. services is required.

• The World Bank has urged developed countries to

The World Bank has urged developed countries to pledge the equivalent of 0.7 per cent of their stimulus pledge the equivalent of 0.7 per cent of their stimulus packages to a global packages to a global vulnerability fund vulnerability fund to rescue to rescue developing countries. developing countries.

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Conclusion Conclusion contd. contd.

• Too much emphasis on saving banks and

Too much emphasis on saving banks and companies and efforts to stimulating companies and efforts to stimulating consumption by giving less emphasis on the consumption by giving less emphasis on the labor market policies to save jobs and protect labor market policies to save jobs and protect wages may back fire stabilization. wages may back fire stabilization.

• when unemployment keeps rising and wages

when unemployment keeps rising and wages keep falling, who would be there to consume? keep falling, who would be there to consume?

• As the cost on the global economy is increased

As the cost on the global economy is increased three aspects of globalization three aspects of globalization – – capital flows, capital flows, trade flows trade flows and and economic management economic management may may not be the same in future. not be the same in future.

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